A Letter in Opposition to AB 178

I wanted to share my letter in opposition to AB 178. Thanks to everyone who gave me feedback, in particular Angel Djambazov. Writing letters does make a difference, especially on this issue because education is so important. People in decision making positions do not understand what affiliate marketing is or the consequences of this legislation.

March 26, 2009

To Members of the Assembly Committee on Revenue & Taxation
State Capitol (Assembly)
P.O. Box 942849
Sacramento, CA 95814

Dear Assembly Member:

I am writing in opposition to AB 178 (“The Amazon Tax”), which would have negative consequences for online businesses based in California. If this bill passes the state will experience a decrease in business activity and probably a drop in net tax revenue.

The goal of this measure is to force out of state retailers to collect and remit sales tax (use tax) by categorizing their California-based affiliates as nexus. While the desire for increased tax revenue is clear to understand, this is a destructive and ineffective approach based largely on misperceptions about what affiliate marketing is.

Before reviewing the likely short and long term negative effects, it may be useful to review two topics:

1. The current language of the bill is overly broad. Any business which accepts “commission or other consideration” for “directly or indirectly” referring “potential customers” is deemed nexus. This is basically a definition of advertising. While this may be intended to apply to affiliates, it could equally apply to any television, radio, outdoor, mobile, print advertising, or non-affiliate internet advertising, such as Google Adwords.

2. Affiliate Marketing is a form of advertising; affiliates are not a sales force. The retailer who engages with a California company on an affiliate basis has no more direct relationship then if they had purchased advertising from a television or radio station. The term affiliate marketing simply describes one of three main advertising models used on the internet:

a. CPM (Cost Per Impression) – If you buy an advertisement on television, radio, outdoor, mailing list (including email), or in print, you’ll pay based on the number of estimated viewers and the value of those viewers.

b. CPC (Cost Per Click) – If you buy an advertisement on Google Adwords, Yahoo Search Marketing, or Microsoft adCenter, you’ll pay for each individual click that is sent. Many affiliate programs also pay out on a pay per click model.

c. CPA (Cost Per Action) – This is the typical advertising model used by affiliates. If you have a retail affiliate program, you set a commission rate to pay affiliates per sale.

CPA marketing allows the advertiser to engage with a large number of affiliates (better known as publishers) who are rewarded if they can prove their value. In contrast to a sales force, distribution center, or maintenance team, an advertiser enjoys no advantage by working with an affiliate in a particular physical location. As a case in point, many large affiliates are based outside the United States. The affiliate marketing model benefits affiliates by allowing small business to display advertising on behalf of retailers which they normally would not have exposure to without an advertising agency.

If affiliates are considered tax nexus, their ability to charge for advertising on a CPA-basis will be seriously disadvantaged compared to their competitors in other locations and their competitors using different advertising models – CPM or CPC. If California affiliates change their locations or their advertising fee structure, this nexus is avoided.

The following items should be considered in opposition to this legislation:

• Online retailers without current nexus in California have a high likelihood of severing their relationships with California affiliates to avoid nexus. This has already happened in New York, where hundreds of merchants dropped all their New York affiliates – most famously, Overstock.com terminated 3,400 relationships. This loss in revenue greatly hurt small business owners in New York.
• As a form of advertising affiliate programs are only so valuable to online retailers. The average affiliate program might generate, through advertising, about 10% incremental revenue for an online retailer. Small businesses which participate in affiliate programs are widely dispersed nationally and even internationally. If you divide this percentage by the national population, you’ll note that even in California, the most populous state, revenue from affiliate advertising would only account for one or so percent of an online retailer’s sales.
• Tax collection compliance is difficult. Most online retailers could not immediately charge sales tax even if they wanted to because the tax code is complex and the change would have to go through the development queue. Faced with a choice between losing one or so percent of their revenue and a possible lawsuit, they’ll probably choose to end their affiliate relationships.
• The overly broad language will cause confusion and hesitation in the marketplace. If the bill applies to affiliates, it should also apply to Google Adwords, which the vast majority of online retailers advertise through. It might also apply to advertising agencies, such as my own.
• Passage of this legislation would virtually guarantee a costly lawsuit against the state by its own small and large businesses.
• Companies without affiliate programs will avoid launching them. My business makes its money managing affiliate programs so you can see the impact this would have on us. My business currently employees seven people full time. This legislation would put a damper on our expansion plans.
• California will lose current and future jobs because affiliates – highly portable businesses – will move out of state, sell to out of state entities, and not start up in the future.
• The current and future jobs lost will include a high portion of skilled, well-paid, work-at-home jobs. Becoming an affiliate publisher is an accessible business model, requiring very little capital and is a great model for self employment. California’s unemployment rate is currently 10.5%.
• In California, call centers and web hosting companies are granted safe harbor status, presumably because the state realizes many of these relationships would be severed and these businesses damaged. The same is true with affiliate relationships.

Thank you for your time and consideration on this matter that is so important to my business and so many other businesses in California.

Sincerely,

Brook Schaaf

CEO

CC: [Note: this list is comma instead of line break separated to save space.]Hon. Charles Calderon, Hon. Chuck DeVore, Hon. Nancy Skinner, Hon. Jim Beall Jr.,Hon. Joe Coto, Hon. Diane L. Harkey, Hon. Fiona Ma, Hon. Jim Nielsen, Hon. Anthony J. Portantino, Hon. Lori Saldaña

•  

  

• Subscribe to ReveNews

  • Get ReveNews Updates in Your Reader
  • Get ReveNews Updates in Your Email

• The Latest Comments

  • Barry Silverstein on Last Gasp for MySpace?
  • Chad Wilson on MediaTrust Sets the Pace with NASCAR Success
  • Angel Djambazov on MediaTrust Sets the Pace with NASCAR Success
  • John Harrington on MediaTrust Sets the Pace with NASCAR Success
  • Vinny O'Hare on MediaTrust Sets the Pace with NASCAR Success
  • d. p. schmidt on Do Marketers Understand Social Media?
  • Paul on Black Hat Affiliate Tactics in the Facebook Era
  • albert ventura on Last Gasp for MySpace?
  • Daron Babin on Overstock Threatens to Terminate Colorado Affiliates Over Pending Legislation
  • Angel Djambazov on Overstock Threatens to Terminate Colorado Affiliates Over Pending Legislation

• ReveNews Readers

• Archives

  Select Month March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 2006 May 2006 April 2006 March 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005 July 2005 June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004