Yesterday (July 24) in his Sacramento Bee column Bruce Maiman provided his viewpoint of the whole “Amazon tax” situation. Among other things in his article he made a statement of affiliate marketing which I simply cannot miss.
Maiman wrote:
…Another claim: The law punishes thousands of California small businesses affiliated with Amazon.
To explain: Affiliate marketing is basically the Internet equivalent of a referral. When you click an Amazon link on, say, Mary’sQuilts.com, Mary gets a cut of the proceeds from whatever you buy on Amazon. In reaction to the new law, Amazon cut its ties with California affiliates. Result: No more referral fees for California online businesses. They lose money, go out of business, maybe leave the state. “Job killer!” cry Internet tax opponents.
Wait: I’m supposed to be sympathetic to businesses that were taking advantage of a loophole that never should’ve existed in the first place? It’s like a gas pump accidentally set at $1 a gallon and motorists lining up to advantage themselves of an existing flaw. You don’t complain when that gets corrected; same thing here.
I disagree. Equating affiliate marketing to “businesses” that are or where “taking advantage of a loophole that never should’ve existed” is both shortsighted and inaccurate.
You are right in your basic definition of affiliate marketing as referral marketing.
You’re also probably right that with Amazon’s actual physical presence in California affiliate terminations aren’t gonna help (I’m not a tax lawyer, so I won’t claim I know for sure). In fact, I too have a big problem with Amazon using affiliates as cannon fodder in this “fight.” As Danny Sullivan wrote in his recent open letter to Jeff Bezos:
You could collect the tax, voluntarily. You could keep your affiliates, give back to the state, be more competitive with those retailers here and not cause all this ill-will that’s more about enriching your company than fighting the good fight.
However, Mr. Maiman, please don’t make affiliate marketers look as some kind of unclean business(men)/(women) dependent on the paradigm “glitch” and imperfections of legislation. Affiliate marketing is not based on “taking advantage of a loophole”. It’s not dependent on the existence or the absence of this sales tax. The problem is that state-specific taxes like these end up targeting specifically affiliates (and not any other types of online advertising that contributes to the final sale), and yes, when, instead of collecting the tax, merchants decide to terminate the relationship with affiliates, both affiliates and the state lose — the former get an income hit, while the latter collect less in income taxes.
As always, this blog post is open to comments and expressions of your opinion(s).
This was a great post. I agree with you on all points. Amazon has options that could implement to help their affiliates and also to help them develop a plan to move forward. Eventually Amazon will need to address how to continue to do business. California will not be the last state to implement tax laws that govern affiliates.
I don’t understand how he thinks the affiliate business is a “loophole.” I mean, businesses have had affiliates helping them out for a long time, even before the internet. They are an extension of the brand. Many businesses wouldn’t be successful without the help of affiliates. So I’m not sure how doing that online is a flaw and a loophole. The example of the gas station doesn’t even make sense. I don’t think he fully understands how the affiliate scene works.
I agree, Jason. In reality, this was a pretty insulting (to affiliates, in the first place) misrepresentation of affiliate marketing.
It’s unclear to me from the quote whether Maiman was calling affiliates tax cheats or the merchants. What “businesses” is he referring to? If he meant affiliates, it is a slap in the face.
As far as Amazon’s “presence” in CA, those offices are subsidiaries, which are separate legal entities. So no, Amazon does not have any presence in CA, although several of its subsidiaries do. Tons of companies are structured like this.
Whether or not subsidiaries should constitute a presence in a state is a different question, but as of now they don’t (even with the nexus law).
See Amazon’s offices:
http://www.amazon.com/Locations-Careers/b?ie=UTF8&node=239366011
And subsidiary (see 2nd to last paragraph for separate legal entity):
http://legal-dictionary.thefreedictionary.com/subsidiary+company
The majority of affiliate marketers are not businesses in the traditional sense. This law has taken opportunity to make extra income away from individuals.
Class warfare? I don’t know; I am not an economist. I am angry though, as you can probably tell. This guy does not understand the dynamic of information marketing or the creative industries. It would be great if someone in the mainstream would do some research before they publish.
People making online purchases are required to pay taxes on goods purchased. That’s the law; it’s called a use tax instead of a sales tax and it’s been on the books since 1935, supported by court precedent. Even opponents of the Amazon tax law will tell you this is a requirement.
However, the law has been such that you were supposed to do it voluntarily. The loophole is that people haven’t been doing it voluntarily, and there’s been no practical mechanism to deal with that problem given that online consumerism is relatively new –certainly compared to brick and mortar. Lawmakers are only recently coming to realize that tax revenues are shrinking, in part, because more shopping is done online, where taxes aren’t collected, while less is happening in brick and mortar, where they are collected.
There’s essentially little difference between the two forms of purchase except the mode in which the transaction is taking place. If it’s the same product, and under state law, it’s a product that’s taxable, what would you call it if you bought it without paying the taxes? That’s a loophole.
No one’s calling affiliates cheats or “loopholes” or whatever, so cool your jets. It’s quite likely most people –both affiliates and consumers– didn’t know about the California’s legal requirements.
The Amazon law is an effort to catch up with this new consumer paradigm, that’s all. California lawmakers are trying to correct the consequences of this new reality by requiring the seller to collect use taxes on products purchased by state residents. That’s no different than requiring Target to charge sales taxes for the products it sells. Amazon wants to use the “physical “presence” argument as protection from having to collect the taxes because they worry they will lose business, and they are using affiliates as hostages to try and protect their own bottom line –I doubt they give a damn about affiliates.
But remember: The law does not affect any online retailer below a certain income level. I believe it’s $50,000 annually, so if you’re making less than that online, the Amazon tax law doesn’t apply to you. It’s unlikely you’re going to be told that in the upcoming battle once Amazon’s petition drive succeeds in getting a measure on the California ballot challenging the law. In fact, none of the opponents of the Amazon tax law mentioned the $50,000 cap until I raised the question with them, at which point they either said they didn’t know about the cap, or said it didn’t matter.
So you tell me, J Davis: If two merchants are selling an item that REQUIRES by law a tax on its purchase, who is more likely to get the business, the person charging the tax or the one who doesn’t? Where would you shop? Even though both merchants are required to collect the tax, the one who doesn’t has a clear competitive and unfair advantage over the other. Shall we allow that to continue because the government hasn’t figured out how to address the unintended inequities created by a relatively new consumer arena called the internet? I imagine you’d be even angrier if you were the one who had to collect the tax while watching business go out the door to your competitor who wasn’t collecting the tax.
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Bruce, what you say makes sense IF the retailer is located in California. But online retailers located in California already collected sales taxes before the nexus law was passed. What if the retailer is located out of state? Then they do not collect sales taxes.
By the way, I tried to buy a $10 shirt from target.com and have it shipped to Vermont (Target has no presence in Vermont and Vermont charges a sales tax). The sales tax was $0.00. This is how it currently works – it doesn’t only apply to internet retailers.
Carl…
Sorry I haven’t been back here in a bit (which was why I left a contact e-mail) but what you describe is part of a larger problem: Changing economic and consumer realities, and we can no longer address them with 20th century paradigms. As long as we do, there will always be those exceptions, like you pointed out in the Vermont case. That’s why it drives me nuts when people cite the Supreme Court decision known as Quill. That’s ancient history –1992– and not applicable to the internet, which is a far different animal than catalog sales (which was the focus of Quill).
The world is changing; we have to catch up. Amazon has been taking advantage of that gap –unethically, I think, and certain, it’s an unfair competitive advantage, as any brick & mortar retailer will tell you (and I do not own a brick and mortar store). When statehouses try to play catch-up, all of a sudden, Amazon wets its pants. Sorry, the gravy train is over.
Even now, http://www.latimes.com/business/la-fi-amazon-counter-20110901,0,3486071.story
Amazon is trying to make nice by using a bribe of promising to hire 7,000 people in the state if it can get out from under –at least temporarily– the California law. One wonders if the petition drive they’ve spent $5 million on is petering out and not getting enough signatures to get an initiative on the ballot that, if passed, would overturn the law.
And I know what they’re saying: They want the law delayed until at least January 2014, so Congress has time to come up with a federal law on the matter. Ah yes, here we have conservatives hollering about states rights; now, because Republican leaders in California support the Amazon compromise, suddenly want Washington involve.
Meanwhile, Amazon will no doubt continue to pour millions into lobbying efforts to make any such federal law as toothless as possible so that it advantages Amazon as much as possible, even if that means disadvantaging their brick and mortar competitors.