Practical Ecommerce

Affiliate Marketer on Sales Tax ‘Nexus’ Legislation

The efforts by state governments to collect online sales taxes is impacting affiliate marketers. Several states are attempting to expand the nexus definition to include Internet affiliates in those states, and thereby force retailers with those affiliates to pay state sales taxes.

To learn how evolving sales tax laws are affecting ecommerce merchants, we spoke with affiliate marketer Oliver Roup. He is the founder and CEO of VigLink, an affiliate marketing management company, and he talks about how affiliate nexus laws are impacting his business.

Practical eCommerce: About a dozen states now have affiliate nexus sales tax laws in place or are considering enacting them. How is this affecting the affiliate marketing business?

Oliver Roup

Oliver Roup

Oliver Roup: “It’s certainly problematic in that it introduces a lot of uncertainty. Merchants run affiliate programs to get people to talk about their products and that promotion drives new business to them. If a state passes one of these laws, a merchant typically stops doing business with affiliates in that state. But there remain (and we expect there will always remain) states that don’t enact these laws, and so those affiliates can still have readers and do business nationwide.

“So, really, what it’s doing is it’s shifting jobs and commerce out of the states that enact these laws and shifting them to the other states that don’t, rather than changing the size of the pie overall. We have not found that the size of the pie is shrinking at all as a result of these laws, but it’s also certainly not resulting in any sales tax flowing to the states either.”

PEC: What will happen if, say, half the states have these laws in place and half don’t?

Roup: “Generally, there is an air of uncertainty. And, as these laws have progressed, that has worsened. So, that does make it more difficult to, for example, raise investment for an affiliate-related business. But really, all we’re seeing that happens is the affiliate business shifts between the states rather than being overall grown or shrunk.

“So, if California — which is where we’re headquartered — enacts a law like this, it might cause us to move out of state. In a worst case, it can ruin our business, but the other affiliates who are located in other states will in fact take up the slack and benefit from that move. So, all the states are really doing is driving affiliate-related jobs out of their state. It’s not really affecting the ultimate bottom line of the business.

“So, I think half the states [enacting affiliate nexus tax laws] would not really change the status quo so much. I think if it ever got to be all the states, or substantially all the states where tech workers could be found, that would negatively affect the industry. But we suspect, much as with tax laws of other kinds, there will always be states that choose not to enact those laws for the comparative advantage it offers them, or even in fact international affiliate companies that will take up that slack.”

PEC: As more retail sales migrate to online venues, local tax revenue from physical retailers in each state will continue to decrease. How do you think state legislators and policy-makers should address that?

Roup: “It’s certainly a challenge. I would likely try to address it through cost-cutting rather than increasing revenue. The reason for that is not merely a political statement. It’s that, unfortunately for the state legislators involved, a nexus doesn’t exist just because you say one does.

“The Supreme Court actually weighed in on it back when this very issue was surrounding mail order companies and J.Crew was taking business from out of states. When your local residents were buying from mail order companies, there was the same temptation to try and tax business that was occurring with out-of-state companies. It went all the way to the Supreme Court, and the Supreme Court said a nexus doesn’t exist just because you wish one did. So, as a state legislator, I would say your local residents are supposed to report their purchases and remit their taxes on their own. You can certainly take a number of steps to make sure that happens more often.

“There are other places to cut costs and increase revenue, but this one [affiliate nexus legislation] is not raising the taxes they’d hoped for. If you look at the states that have passed these laws, none of them have increased tax revenue as a result and it is driving jobs out of state, which in fact drives down revenue. So, I would say, let’s start by enacting the policies that drive up revenue rather than drive it down.”

PEC: Where do you get the information that states that have enacted these laws have seen no revenue increase?

Roup: “Performance Marketing Association is the trade group of performance marketers and affiliates, and those are the facts they are reporting. Really, it stems from the online retailers that have immediately cut ties with all the affiliates in a state that enacts these laws in order to prevent even the argument that a nexus exists. Rhode Island, for example, has gone on record as saying their affiliate tax law did not in fact raise any tax revenue.”

PEC: We understand that in many states there is a minimum threshold before a nexus has been reached. In the instance of Illinois and other states the company that has the affiliate program has to be doing $100,000 worth of business in that state for it to apply. So how do these affiliate tax laws affect smaller merchants?

Roup: “That minimum threshold actually is not something we have heard a lot about. I think we have been most focused on California since that’s where we’re headquartered. And part of the challenge of these laws is that they remain very much in flux.

“At least one version of the bill being considered in California tries to attribute a nexus not just to affiliates, but in fact to the existence of servers in their state, contractors in their state, and subsidiaries in their state. So, really, I think the attempt to establish nexus more broadly goes well beyond affiliates.

“I think it’s ultimately doomed in the courts, and certainly introduces a lot of uncertainty, so I don’t quite know what to tell all your readers. I think that depending on the law, how it actually gets written, and depending on how the courts react to the injunction attempt, I would hesitate to advise them.”

PEC: Tell us about your company, VigLink, and what it is that you do.

Roup: “Many merchants who run affiliate programs get publishers to talk about their products and to promote their products. But despite over a decade of affiliate marketing being in existence, the number of publishers who participate is really small. So, if you look as a percentage of the Internet, how many Internet publishers do any kind of affiliate marketing, it’s certainly under 1 percent. The reason for that is it’s just really hard to do. You need to understand a lot of nomenclature, and you need to sign up for these affiliate networks, which have rather complicated terms, and working with them technically is tough.

“VigLink makes it much easier for publishers to work with affiliate programs. A small merchant can reach many more publishers and have those publishers promote their products because the VigLink technology makes it so much easier.”

PEC: If a merchant has an affiliate program in place, does your service help find publishers to refer customers to the merchant’s products?

Roup: “Well, it’s actually even easier. At the moment, all merchants have to do is talk to whatever network they already are running through and make sure that VigLink is turned on as one of their publishers that has access to their program. Once we get that access, we find publishers that are already talking about related products and we try to get them to talk about more related products and potentially talk about the products of that particular merchant.

“We don’t yet have a direct merchant outreach program. We work exclusively though the networks at this point, but certainly over time we’d like to be able to help the merchant identify exactly which publishers they want to work with and send more specific traffic to them. But for now all they really have to do is ensure that VigLink is turned on as a publisher in their affiliate network and we’re signed up with all these affiliate networks.”

PEC: Has the nexus expansion affected your business in a negative way?

Roup: “It has. We had an office in Chicago and when Illinois passed that law, we closed up shop and moved 15 miles east to Indiana. That was certainly a headache at a time when we didn’t need one.

“More worrisome is the thought of passing it in California. There is no convenient state 15 miles east of San Francisco that we can move to, so if the law passes as is, probably about 30 percent of our revenue would turn off overnight, and we would have the option of moving out of state, which of course would be logistically challenging — doing layoffs.

“Ultimately, if we were not able to move to a different state that didn’t have such a law, potentially our whole business is at risk. We have comprehensive coverage across all the merchants, and if big ones like Amazon and Overstock went away, that would certainly challenge our comprehensive coverage.”

PEC: Anything else on your mind today for our readers?

Roup: “Yes. Even with the negative feeling around the spread of these affiliate tax laws, I would still say the technology behind affiliate marketing and the marketplace is now — in the last year or two — starting to innovate quite rapidly, and there really is the potential to draw incremental business to your company with no risk. The advantage of affiliate marketing is that the fees you pay are only paid on conversion when you know you’ve made a sale, so there’s very little risk in participating.

“So, despite the cloud of uncertainty around the particular states you’re going to be able to do business in, if you last looked at affiliate marketing a few years ago and decided it wasn’t for you, take another look. There’s a real possibility of driving incremental business to your company and we would love to be a part of making that happen.”

Practical Ecommerce

Practical Ecommerce

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Comment ( 1 )

  1. Joeychgo May 30, 2011 Reply

    Well said. And I agree completely.