If you’ve been keeping up at all, California just passed an affiliates nexus tax, effective immediately. Governor Brown signed the legislation on Wednesday, June 29th, and there have been hundreds of articles and outcries against this budget trailer bill. The PMA has been fighting nexus tax proposals all over the country, already winning several battles and losing some others, but California is certainly the biggest domino to fall.
Yesterday, Amazon announced they’re shutting down their affiliate program in California as a result of this legislation, almost instantly ending the incomes of thousands of affiliates in that state. My first reaction is to feel bad for Amazon, losing all that revenue, but I stumbled on this article by Danny Sulivan claiming that Amazon is giving affiliates less than 10 hours notice and then they’ll stop getting affiliate payments. Terminating their contracts won’t immediate impact Amazon’s traffic though, and Danny proposes that Amazon is really not that upset about ending their affiliate obligations since many of their most lucrative affiliate links will stay in place and continue to send traffic (a ton of work for affiliates to change them). It’s a pretty interesting theory. Almost as if Amazon was looking for a reason to start fresh.
“Dear Jeff Bezos…I’m not sure how many affiliate links I have on the blog. Not that many, maybe 25 to 50 in all. But until about an hour ago, those links were worth something to you (Amazon). Now, because of your squabble over the sales tax issue, you’ve decided to just take for free what you’d previously paid for. If I don’t find time to track down and kill those links, you keep grabbing orders that get made through them and keeping the cut I previously received.” – Danny Sulivan, Search Engine Land
How far can nexus go?
That aside, I wonder where this is all heading. Do we just apply this legislation to direct affiliate relationships? What defines a direct affiliate relationship? According to this ruling, customers who purchase from out of state companies but were influenced by an affiliate that is in-state must pay sales tax, and the out of state company is responsible for collecting it. So, what if the advertiser (like Amazon) was not actually paying affiliates. In fact, they were just paying a set marketing budget to an affiliate network, who was in turn arbitraging and paying affiliates on their behalf. If that company is located in-state, does that mean the advertiser has a business presence in that state. What if the affiliate network is out of state but their affiliates are in California?
What about traffic giants like Google?
I think we’re dealing with a much more complex problem. For example, Google Adwords certainly influences user buying decisions in the state of California, they also happen to be located in the California. If an out of state advertiser is paying Google for traffic (even if it is on a per click basis vs. a per conversion basis), isn’t Google basically one big affiliate working on their behalf to bring in new customers? Do businesses have to collect sales tax from all sales that result from their PPC efforts in other states like California?
What if I broadcast television commercials in California with a syndicate located in CA? or maybe I have a simple partnership with a business in another state that refers business to me, does that mean I have a presence in that state and have to collect sales taxes for that state?
It seems to me that if politicians want to require out of state companies to collect sales tax for sales in their state, then that should their policy across the board, not this very strange and slippery ruling that unclearly defines the meaning of marketing and advertising relationships and basically targets affiliate marketing.
The only reason this is even an issue is because unlike many marketing channels, affiliate marketing can actually be tracked, easily revealing the source of influence. That is what even makes it possible to credit an in-state affiliate/publisher with an out of state sale.
A digital marketer by background, Peter is the former CEO of TUNE, the enterprise platform for partner marketing. In 2018, he sold TUNE’s mobile measurement product to Branch, unifying measurement and user experience. He led TUNE’s efforts to bring better management technology and automation to marketing partnerships, across affiliates, influencers, networks, and business development relationships. Follow @peterhamilton