The End of Affiliate Marketing or the Rebirth of CPC?

i’ve often thought that we should also have a subsection of our community efforts that is lobbying for the streamlined national sales tax measure, once the states agree to collect and remit taxes, this nexus issue will completely go away.

if you (or Amazon) think the internet will remain sales tax free foreever, i do think you’re fooling yourself.

as it is, we are being played as sacrificial, token pawns in the tax issues that are in play here. this isn’t about affiliates constituting a nexus, or the argument would be about taxing just those sales consummated thru an affiliate link. rather, they are using our presence as justification to tax all sales.

and think about the number of entities someone like Amazon works with on a performance basis… and none of it has to do with location of transaction. nexus is a principle being abused, and its use should be questioned.

for example, the credit card transaction handlers make a percentage of every sale, does their location matter?

online ad agencies are often compensated on a volume basis, does their presence consitute a nexus?

Amazon ships from many locations, they profit from drop shippers who are authorized resellers within the Amazon framework… if those resellers are located in the state where the goods are delivered, is that shipper a nexus for all sales that occur there in that state thru Amazon? further, by today’s argument, that shipper is compensating Amazon on a volume basis, so since Amazon is in Seattle, should that drop shipper pay sales tax for all of it’s sales in Washington?

in today’s wired world, location within the US is irrelevant, opaque and specious as a foundational tax argument.

Pat, thanks for your comment. I cannot say what Amazon thinks. As for me, I'm not sure why you write that I think the Internet will remain free of sales tax.

I have not written any opinion on sales tax on the Internet. I don't care if it is collected by the 10,000+ taxing jurisdictions in this country.

What I care about is the changes in the definition of nexus to use a loophole in a Supreme Court ruling. What I care about is that AB178 will hurt 25,000 entities in California alone. What I care about is that this is bad legislation and the legislators don't seem to care due to the absence of a better plan (other than a national solution). What I care about is the government claiming to help a group that is perceived to be harmed (brick-and-mortar stores) while it harms an innocent and unrelated group (affiliate marketers).

I briefly thought that a compromise would be to have the bill go into effect only after 35 states had enacted similar legislation. The problem with that is it might mean the end of affiliate marketing as retailers still will terminate.

Thus I propose the solution of switching to CPC, if not as a means of survival, as a way to show the futility of bills like AB178.

Not that your point, David, about the ridiculous nature of the loophole and the shortsighted move on the part of various state legislators isn't well taken. But I also think lobbying for a national tax initiative that levels the playing field is a smart idea, especially if we can help shape the discussion now.

Angel, that's a fight for another day. The problem with that is no one at the state level is willing to discuss a national solution. They view it as a non-starter as they've been through it before.

The math on it from my perspective is that there are 43 states with sales tax. That's 86 votes in the Senate. California has the Speaker of the House and 20% of the votes needed to pass a bill in the House. When you add in NY, NC, RI, HI and other states considering nexus altering bills, that is enough for passage.

But as I have found, we understand our world and not the world of politics and, as we have seen from these bills, politicians understand their world and not ours. Our worlds are supposed to remain disconnected except for when we pay taxes and create jobs, which we do superbly.

This is a fine point but I disagree that this is a loophole – that implies that it may violate the spirit of the law but does follow the letter of the law.

By any reasonable interpretation, I feel that claiming affiliates are the same as salespeople is a violation of both, as found in the 1992 Quill decision.

To Pat's point about credit card companies – a few people have mentioned this in the last few months but I haven't come across any defining cases.

The larger tax issues are fairly complex. Right now our efforts should be focused on defeating tax nexus legislation because it discriminates against our type of advertising.

Brook, you are correct. I agree that affiliates are not salespeople. State legislators are trying to create a loophole by calling us salespeople.

The main point here is that with terminations such as those sent by Overstock.com today to California and North Carolina affiliates, the states will see no new collection of sales tax but they will see a decrease in income tax collections.

The debate about collecting sales tax is irrelevant today, especially to my business and, apparently to Overstock and Amazon who want to stick to the letter of Quill which states that only the US Congress can force collection of sales tax across state borders.

"Thus I propose the solution of switching to CPC, if not as a means of survival, as a way to show the futility of bills like AB178."

I believe that CPC (versus CPA) has sufficient problems to cause grave, permanent damage to our industry. I don't see it as a means of survival nor being impactful on the state's mindset on this issue.

I believe the nexus tax issue is short term only, because the larger tax issue (and loss of revenue), once solved, will make nexus (to us) completely moot. So like you, I was also trying to point out the futility of these bills. They do not solve or address the core issue, in fact, they create new problems for the states (and those affiliates, merchants and networks affected as well).

I am sure you received the notice from Overstock that they plan to drop all CA affiliates in 1 week in anticipation that Arnold won't veto the bill. From a practical standpoint, I am curious to see if Overstock and CJ will test converting CA affiliates to a CPC model as an option. If not, it will force us to look at straight ad agreements.

Merchants move to the affiliate model, in theory, because they are risk adverse. Paying on a transaction makes a lot sense and is an excellent way to control ROAS. It is one of the strengths of the model. Creating a CPC hybrid won't have a lot of appeal and I think will be a hard sell for the affiliate networks.

Ultimately these shortsighted state bills will hurt businesses and not just in affiliate industry.

I disagree that the nexus issue is short term only. It may be short term in focus, but it may well linger a while on the books before the larger tax issue online is solved.

Oh, believe me, I get the benefits of Affiliate Marketing. But when politicians kill the best form of advertising yet invented, then the issue becomes a practical business decision. As a "risk adverse" advertiser, if you have a site that has been generating sales profitably for you for 8+ years through advertising, do you really want to cut off your nose despite your face? Just to prove a point? It would stand to reason that a payment model of some form that closely resembles the historical pattern of payments (whatever metric you feel next most comfortable with) is not that hard to imagine. Plenty of risk adverse advertisers seem ok with the search CPC model. Is this really that much different?

It is short-term if you look at the next decade. The pain that we will feel and the potential destruction of an industry are not short-term.

The problem is that very few people in DC are interested in fixing this problem. Why? There is no money for Congress to control once this is fixed. Other people get to decide how to spend this new-found revenue.

Personally, I think that I have sent Sen. Boxer, Sen. Feinstein and Rep. Waxman to DC to represent the interests of California and my district. I'm not so sure of that based on the way the California caucus does not work together.

There also appears to be a disconnect between the State legislature and our representatives in DC. Shouldn't they be working together?

Overstock's letter to terminated affiliates echoed Amazon's letter to our state officials that the nexus provisions are illegal and they will not tolerate this illegal action. It doesn't matter if you think that sales / use tax should be collected on Internet sales. We still have the rule of law and must abide by it.

As for the budget stalemate, the Governor has stated all along that he will veto any budget that has a tax increase that is passed by anything less than a 2/3 majority. Again, it doesn't matter if you agree with him on not increasing taxes or if it makes sense to require a 2/3 vote. California is one of only 3 states to require that and the Governor is upholding the will of the people. The real test for him will be if some Republicans jump ship and there is a tax increase with a 2/3 vote. I think that he will sign the bill in that case.

I just hope that the #advertisingtax has been removed by that point.

As for CPC, I would think that Shopzilla's model helps ease that. In addition, I sure that Google Affiliate Network can get help from Google AdWords/AdSense on fraud protection for CPC.