The recession is hitting many of us hard. We look at our retirement accounts and see that they're significantly smaller than they were before. I've got a few years to go before retirement, but many people don't have that luxury. Today, I was at an office furniture store and met a man, Bill, who, after a very successful career, found himself on the sales floor. He had looked at his 401K and there just wasn't enough there. His wife, who retired after a 20+ year career with IBM, found herself in the same position. Bill works for the office furniture store four days each week and then works with his wife at the antique shop where she works another two days each week. He seems happy about it, and some studies say work may help him live longer. That's a choice that we would hope to make freely at that age, not under duress.
While many, like look to traditional brick-and-mortar type businesses to supplement their incomes or retirement funds, others are stepping out onto the digital frontier. Internet based businesses are sprouting up everywhere. People can make a good living online, in part, through affiliate programs. The Associated Press reports on a man who makes $80,000 each year through affiliate marketing. More than half of that is coming from a single affiliate -- Amazon.com.
Individuals are not the only ones who are feeling the pinch of the recession, though. State governments are hurting for money and looking for places to find revenue. For years, online retailers have been exempt from charging sales tax for online purchases, with a few exceptions. Typically, the exception is for states where they have a physical presence.
Now, legislatures are looking to the affiliate programs as a potential cash cow. Several states, like North Carolina, Hawaii, and Rhode Island, are looking to require online retailers to charge sales tax in any state where they have an online affiliate marketer. For retailers like Amazon.com, there are few states where they do not. As a result, these businesses are cutting their losses and ending their affiliate programs in those states. Where they were once looking to increase revenues, they are losing revenues.
One of Aesop's fables was about a dog to whom the butcher had thrown a nice juicy bone. As the dog crossed a bridge over a pond, it looked down to see another dog, with a nice juicy bone. That bone looked even bigger than the one he had, so the dog barked at the other dog and sprang from the foot bridge after the other dog. When the dog made its way back to the shore, he found himself wet, muddy, and without any bone what-so-ever.
Whether you're an Internet entrepreneur or not, watch your state's legislative agenda carefully. Using affiliate marketers as a way of scaring up revenue will undoubtedly backfire. Small businesses will find themselves without affiliate programs. Along with not realizing sales tax revenues, the states that make these moves will lose the business tax revenues on the small businesses that are in the affiliate programs. When all is said and done, we'll all be wet and muddy.
Don't be shy telling your elected officials what you think about this.
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Though I'm the last friend the tax man will ever have, it's all about fairness. How can you justify one class of people not having to pay taxes while others do? As we further increase our online spending, and traditional bricks and mortar stores generate less local tax revenue, somebody still has to fund our schools (or educate future customers if you prefer), pay for our streets so that Mr. UPSman can have a road to drive on to deliver those goods, etc etc. You didn't really justify your rationale other than, "they've never had to pay taxes so why start now?"
The bottom line of my answer is that "affiliates" are little more than commission-based advertisers. These state legislatures don't have the courage to just go ahead and tax internet sales, so they're trying to claim that having an affiliate in the state means you have a physical presence in the state under current tax law. It's one step shy of them saying, "You advertise on WGN-TV. WGN is within Illinois; therefore, you have a physical presence in IL and have to pay IL sales tax."
The other part of that is that the scheme doesn't end up raising revenues.
Let's say that Amazon.com affiliates in XY make $200,000. State XY collects $0 sales tax from Amazon and taxes on $200,000 in affiliate income. Now, XY implements this scheme to tax Amazon.com because they have affiliates. Amazon cancels the affiliate program, as they have done in states that have tried this, with little to no loss in revenue. Now XY collects $0 in sales tax from Amazon and $0 in sales tax from the affiliates. Additionally, the affiliates have to relocate or find another source of income.
1) I will grant you A) When you tax an activity it likely will decrease that activity or direct it elsewhere geographically. Funny that a fairly liberal person such as yourself is finally seeing the light on how taxation has side-effects. B) It is certainly not fair to target just these affiliate programs instead of all internet sales. But when was the last time any state leg. had the smarts to do something, well, smart.
2) However, if Amazon is not effected (financial or otherwise) by canceling the affil program in state XY, then clearly the program wasn't that valuable to them as a company in the first place. Or the compliance costs simply make it too costly too bother, in which case you have only government to blame (see: the atrociously overwhelming SarbOx act).
3) Your analogy of an advertiser on a TV station is still a pretty big leap from Amazon's affiliate program. If I see an Toro commercial on ESPN, I don't go to ESPN.com and buy a lawn mower from ESPN. I go to Toro.com or Sears.com or Lowes or my Ace Hardware store. Last time I bought something on Amazon from an affiliate, to be clear, it was a nice experience, but far as I could tell I was buying something from Amazon.
I have sympathy for your example of Bill, but it's not that simple.
First, how is affiliate advertising like TV advertising?
I'll grant you that affiliate programs aren't exactly like advertising, but they're close. If you see an add for a Toro lawn mower on ESPN (or ESPN.com), you'd likely go to Sears.com or Homedepot.com to make that purchase. You don't go to ESPN.com to make that purchase. If you see an ad for "The 4-Hour Work-week" on my website, you don't go to RoadToAMillion.com to buy the book. The link takes you to Amazon.com, where you would buy the book.
The difference here is that Toro paid ESPN a lot of money up front to air the ad for the lawnmower. Amazon does not give affiliates money up front for the space on their website. Instead, Amazon pays them referral fees for the advertising, based on its results. That is, when someone follows a link from my website to Amazon.com and makes a purchase, I get paid for the advertising. If the ad on my website doesn't work, I don't get paid. ESPN got paid, regardless, but if the ad isn't effective, they'll lose future revenue from Toro advertising somewhere more effective. ESPN has protection from the fact that those results are notoriously hard to measure, though.
This affiliate advertising model benefits Amazon (sales revenue), the affiliate (ad revenue), and the consumer. Affiliates know their audiences and are able to recommend products that their readers are more likely to enjoy. Because they know the niche, they can market to it effectively. Television advertising is similar. Stations spend a lot of time and money to understand who is watching during a given time segment. They use this information to encourage advertisers to buy during that segment. That's why you tend to see prescription drug ads during the newscast and credit repair ads during daytime talk shows. It's not significantly different online.
Second, is Amazon affected?
Amazon is affected by canceling their affiliate programs, but as a percentage of overall revenue, the impact is not significant. Authors who rely on affiliates for promotion of their books to niche audiences are affected.
Amazon does value its affiliates. The exact value is available on their website (https://affiliate-program.amazon.com/gp/associates/join/compensation.html). Affiliates earn up to 15% of the sale price as a referral fee. Affiliates who refer more business are seen as more valuable (ranging from 4.00-8.50% based on general merchandise volume).
We can only infer that Amazon did the calculus and determined that the negative impact of sales tax administration and sales losses would exceed the loss incurred by cutting the affiliate program.
Amazon, however, is an example of a big business that may be able to take the impact. What about the thousands of smaller businesses that rely on affiliate marketing through blogs? There is a much bigger economy here than just Amazon, Overstock, and the other "big box" internet stores.
Legislatures often seem challenged to do smart things. That is why our debate is important. That is why we need to be watching what they're doing and helping influence their actions. Maybe we have too many sales tax exemptions. Maybe internet sales should all be taxed. Television and radio advertising, currently not taxed, sell time on public resources (airwaves) to make money. That could be another option.