Many states in the U.S. are contemplating — or enacting — changes to their sales tax laws to include online affiliates as establishing a physical nexus. New York, California, Illinois, Texas and other states have passed laws that require Amazon and other online merchants that have affiliates in those states to collect and pay sales taxes.
This affects online retailers with affiliates — which are websites that refer consumers to the retailers and receive commissions when those consumers purchase products — but it's also impacting the affiliate marketing business, of course.
A leading affiliate-marketing-management company is VigLink. We first spoke with its CEO, Oliver Roup, last month — see "Affiliate Marketer on Sales Tax 'Nexus' Legislation" — on the efforts by the states to broaden their nexus definitions to include affiliates.
We spoke with him next a few days ago on a federal alternative that he believes will help the states collect online sales taxes, and not impact retailers and marketers that depend on affiliates.
Practical eCommerce: Your company, VigLink, is in the affiliate marketing business. Before we start talking about the so-called affiliate nexus laws, could you give our readers an overview of what your firm does?
Oliver Roup: "We help publishers become affiliate marketers. We have a piece of software that publishers can install on their sites that makes the act of linking out to merchants and participating in their affiliate programs very easy.
"An affiliate marketer is someone who, for instance, has a blog. They write about a book on that blog and link to the book on Amazon. If a reader clicks through from the blog to Amazon and buys the book, Amazon will pay a fee to that blog author. But actually collecting that money, enrolling in all the right programs, and doing all the right things is fairly detailed administrative work that a lot of people just don't do. So, we do it for them and in return we take a cut."
PEC: Our readers are ecommerce merchants. Give us an example of how an ecommerce merchant would use VigLink.
Roup: "Ecommerce merchants often have affiliate programs to promote sales, particularly the smaller ones. The way consumers hear about merchants’ products is that publishers on the Internet promote them, and to encourage that to happen, ecommerce merchants pay what are called affiliate fees or advertising fees to those publishers. It's usually as a percent of revenue. We make it much easier for those publishers to participate in those programs. So, an ecommerce merchant can reach a larger number of publishers by using us, and to do so, all they need is to turn VigLink on in whatever network they use to manage their existing affiliate program."
PEC: Give us a little bit of history on your firm, please. When was it founded, what are its funding sources, who owns it, that sort of thing.
Roup: "The company was started in March 2009 by me. We received some seed funding in June of 2009 from Google Ventures, from First Round Capital, and from a number of great angel investors like Reid Hoffman, the founder of LinkedIn. The company is headquartered in San Francisco and has an office in Indiana. We employ a total of 18 people. The firm is owned by the investors, the employees, and myself. In August 2010, we bought one of our competitors called Driving Revenue, which is why we have an Indiana office. To date, the firm has raised a total of $7.4 million."
PEC: Last month we spoke on the states' efforts to consider affiliates in those states to constitute nexus for purposes of sales tax. Explain what that is and how that impacts your business, please.
Roup: "If any of your readers are situated in California or a number of other states throughout the country, they may notice that if they purchased something on Amazon or a number of other Internet retailers, they are not charged sales tax. The reason for that stems from the commerce clause of the U.S. Constitution, which says one state may not just tax another; only the federal government can tax interstate commerce. Amazon is a company that has no physical presence in California, so they are not required to collect sales tax from California customers on behalf of the California state government.
"These state governments are now attempting to more broadly define what a presence means to force Amazon to collect sales tax from their customers and remit it back to the states. These laws have been passed in a number of states, we believe largely through the agitation of the physical retailers like Walmart and Walgreens that have physical presences in the states and do need to collect sales tax, so they are trying to impose those taxes on their competitors."
PEC: Please put on your public policy hat, rather than the entrepreneur hat that you typically wear. The rise of online retailing is creating a problem for the various states and municipalities that have historically relied on sales tax revenue from the local brick-and-mortar retailers that you just mentioned. There is now less sales tax generated from those local merchants, and that's the issue we're talking about here. What's the answer for those states and municipalities that need the money?
Roup: "We absolutely sympathize with states who feel they need to raise revenue, and I think it's worth mentioning that those purchases are not tax free. The purchaser is supposed to report their purchase to the government and remit taxes themselves. Very few people actually do that, but it has certainly never been a tax-free purchase.
"We think that the correct place for any adjustment of rules that needs to happen is in the federal government. The U.S. Constitution reserves to the federal government the right to tax interstate commerce, and as a practical matter, a federal rule would apply to everyone and avoid these issues of venue shopping and job flight that plague the state level initiatives. So, I think that if California feels the need to raise revenue by changing how taxes on Internet purchases are collected, then California has senators in the federal government, who we believe should address their issues there.
"There are very clear [U.S.] constitutional issues at the state level. This whole battle has been fought once before with the mail order retailers, where physical retailers were upset that catalog companies could mail products to their state without having to charge taxes and that was actually decided by the Supreme Court, who said, — and obviously I'm paraphrasing — that physical presence and nexus are not just what you wish they were. They are actual legal concepts that have a definition. Just because you say that something constitutes a nexus doesn't in fact mean it does. So, I think that's the sort of theoretical reasoning.
"The other side is a very practical fact that none of these laws have actually raised taxes for any of the states that have passed them. As soon as the law is passed, the online retailer breaks ties with all affiliates in the state, and the state still does not collect any taxes. So, every state that has enacted these laws has actually seen a decline in revenue because it still doesn't get to collect any sales tax from the out-of-state purchases, and they drive the affiliate jobs either out of state or destroy them altogether."
PEC: The federal example that you just cited, what sort of law would that be exactly? Is that a federal law that applies just to Internet retailers?
Roup: "Senator [Richard] Durbin of Illinois actually has announced that he intends to introduce legislation in the fall that would tax Internet purchases and require Internet retailers — regardless of where they're located — to collect taxes from purchases in a state on behalf of that state, and then remit it to that state. The federal government has the authority to tax interstate commerce and any rule that passed would apply nationwide. So you wouldn't have this issue of companies and retailers trying to dodge from one state to another to benefit from the rule differences."
PEC: Has Senator Durbin formally proposed that legislation?
Roup: "He has announced that he intends to introduce legislation. I don't think anyone has seen it yet, but he believes this needs to be adopted at the federal level and he intends to address it in the next session."
PEC: And that is the better answer — getting the federal government involved — since it's interstate commerce?
Roup: "Absolutely. And we have no position on the tax itself. I think the idea that affiliates are somehow embroiled in the battle of whether Amazon should have to collect taxes for remission to the states or not, there's no reason we should be tied up in that fight. They're really separate issues, and if the legislation is addressed to the federal level, then it will pass or not pass as that legislative process goes and we will not be at fault in it in any way."
PEC: It does get to be very arcane in terms of the various proposals that are floating around. One of those involves Texas, for example. It applies to web servers and attempts to link a company's business on a Texas-based web server as establishing a nexus. That could be very confusing.
Roup: "Yes. I think the notion that you mentioned, it should be frightening to businesses far wider than just affiliates. If you use a vendor like Akamai — a content distribution network with servers all over the world — and if the government sets up a system where you can't choose a vendor without doing very thorough legal analysis of all the jurisdictions in which their servers sit, that really becomes a huge regulatory burden. Vendors who offer their services over the Internet will find it harder to get customers if those customers are worried about suddenly having to pay taxes in a new jurisdiction, or even just having to study the laws. They just won't do it."
PEC: Anything else on your mind as it applies to ecommerce merchants?
Roup: "Our basic point is that we take no position on whether Internet retailers should be required to collect taxes or not. We just think that lawmakers should enact a solution that will actually be effective and will actually collect tax revenue. The laws that are proposed and that have passed recently, none of them have actually been effective in collecting that tax revenue, and so they just introduced regulatory burden and caused job flight and venue shopping. The correct place for this to be addressed is at the federal level."