California Compromises on Affiliate Nexus Tax

Becky Doles

California appears ready to compromise on the issue of out-of-state companies with affiliates who live and work in the state. The PMA issued a legislative bulletin last week designed to summarize California’s recently enacted Regulation 1684, which provides clarification on what constitutes nexus in California.

The California Board of Equalization (BOE), which is the state agency overseeing enforcement of the Affiliate Nexus Tax law, has established two scenarios which are acceptable:

  • A California publisher can post click-through ads or links to retailers’ sites in return for commissions earned on sales resulting from those ads (including ads tied to search engines, banner ads, CPA ads, and links to retailers’ sites), as long as the publisher doesn’t solicit California purchasers; [Section (c)(9)(A)].
  • A California publisher can advertise its own sites, on other sites or via mail or email, as long as it refers people only to its own sites. [Section (c)(9)(B)].

Advertising Good, Solicitation Bad

The important thing to understand here is the difference between advertising and solicitation.

Advertising, from the perspective of the BOE, is generated as a result of algorithmic functions that are anonymous and passive in nature.

Solicitation, on the other hand, is one-to-one or one-to-many communication with individuals in California with the intent to influence a purchase of tangible personal property from a specific retailer. Regulation 1684 also includes a non-exhaustive list of physical and electronic examples of solicitation.

This definitely means that a California-based affiliate sending email promotions to California residents would be out of compliance with the updated Regulation 1684. Putting a banner on a website that shows for both California residents and any other visitors would not be out of compliance.

It also looks like publishers can use any method of promotion to send traffic back to the publisher’s own website. This is a good opportunity for affiliate managers to do a refresh on some of the offer creative currently available, particularly if offers are traditionally focused on an advertiser landing page, rather than a publisher landing page.

Compliance for Publishers and Remote Sellers

Publishers need to complete an affidavit certifying they are not conducting prohibited solicitation practices. Remote sellers, aka Advertisers in performance marketing-speak, will need to include language in their agreements with California publishers to specify prohibited activities.

Thankfully, neither side needs to submit documentation to any California government agency. If you run an affiliate program, this looks like a step in the right direction. You can safely accept California affiliates to your program again. It might also be a good time to update your publisher agreement.

Challenges Going Forward

Since there’s no suppression list for all email addresses that might belong to residents of the state of California, I’m guessing this new regulation is going to require a ban on California affiliates directly sending any offers via email. The other area where I see a potential complication is retargeting – since a cookie is dropped on a user’s computer as part of the retargeting process, it’s highly possible the California BOE might view that as a one-to-one solicitation, so affiliates may want to proceed with caution.

While this is good news for affiliate programs, what other potential challenges do you see?

Becky Doles

Becky is the Senior Content Marketing Manager at TUNE. Before TUNE, she led a variety of marketing and communications projects at San Francisco startups. Becky received her bachelor's degree in English from Wake Forest University. After living nearly a decade in San Francisco and Seattle, she has returned to her home of Charleston, SC, where you can find her enjoying the sun and salt water with her family.