Drs. Foster and Smith Close Down Affiliate Program

Today’s news from Drs. Foster and Smith has already produced quite a resonance in the affiliate marketing world. The company, which has removed Virginia-based affiliates from their affiliate program 5 days ago, has now decided to shut their affiliate program down altogether.

Mike Nunez broke the news:

Then Trust posted on ABestWeb.com:

Drs. Foster and Smith & LiveAquaria shutting down affiliate program completely because of these nexus tax laws… Think this is the first one to shut down completely because of this.

I don’t remember of any such instances (of “preventive” affiliate program closure in expectation of the affiliate tax bills becoming a major business problem) in the past either.

Let’s look at the text of the email that they have sent to affiliates (underlining mine):

It is with great regret that we have to inform you that we are shutting down affiliate marketing at Drs. Foster and Smith & LiveAquaria effective immediately February 22, 2010. This closure is across the board in all states with all affiliates and is not related to you only as one of our affiliates.

We regret having to do this for a variety of reasons, not the least of which is that so many of you have done a great job for Drs. Foster and Smith and will be adversely affected by the loss of revenue from Drs. Foster and Smith sales. Thank you for all you have done to promote our company on your web sites. We apologize for the hardship and inconvenience that this creates for you.

The single reason for the decision at this time is the moving target of the ever-growing patchwork quilt of state legislatures that are considering nexus legislation relative to affiliate marketing and sales tax. It has become increasingly difficult to determine who is considering such laws, where they are in the process and what the ramifications are in each state. What affiliates may not be aware of is that such nexus situations do not only relate to sales tax collection, but potentially state income tax for a corporation as well.

We wish there was clarity on this issue from state to state and nationally, but there isn’t. So until this matter is cleared up nationally, we are shutting down all affiliate marketing. We apologize for any hardships this brings to you and your team. We have greatly appreciated the work that you have done on our behalf. The sudden nature of the move by California to reintroduce legislation late last week and to push for a quick vote, emphasized the ever-changing nature of this issue and our need to be ahead of such votes and decisions.

Three quick observations:

1) Shutting the whole affiliate program down without giving any advance notice to your marketing partners (affiliates) is not spelling out any respect to them. Many are still running marketing campaigns that entail monetary expenses (e.g. paid search ads, paid link and banner placements, other advertising campaigns, etc), and by so doing you are hardly showing them how much you “appreciate the work” they have done for you. Neither the California, nor the Virginia tax bills will make you collect the tax right away. Why not give at least affiliates some advance notice?

2) There is a way to program the system to make affiliate-referred transactions subject to sales tax (different percentage depending on the state). As I have tweeted a few days ago, some merchants are already doing it:

Why not look at this as an option as opposed to cutting the whole affiliate marketing channel off? There is evidence that customers are actually okay with paying the sales tax. I am.

3) I have not heard much on the “affiliate tax” potentially extending into a “state income tax for a corporation as well”, but talked to Melanie Seery briefly about it, and apparently there are talks about this too. I’ll be monitoring the situation, but regardless of whether point #3 is potentially dangerous or not, point #1 should have been handled differently.