California Affiliate Marketers Are In The State’s Crosshairs

The goal, a small and possibly phantom amount of California sales tax income.

In California, up to 25,000 small businesses are directly at risk. Some of these small businesses employ many people and some are still growing and employing additional staff, even in this down economy.

“The state will not get the money they think they will, because vendors will just dump their affiliates. … small businesses will be harmed in the process.”

Earlier proposed legislation in AB178 was shelved in April. Now the State is getting desperate for money and clutching at straws, this legislation is being resurrected and may be squeezed into another bill.

The estimated additional income to the state is not likely to materialize. Worse than that, it could turn into a net loss for the state. The harm to tens of thousands of small California businesses, and a several large ones, could be irreparable. Collateral damage to other California businesses that support the directly affected businesses is also likely.

At issue is the fact that the legislation would unbalance the playing field, handing California’s advantage over to other states and locking California businesses out of the running.

Affiliate Marketing, also called Performance Marketing has been a real boon to vendors large and small. It allows them to sell their products across the USA and around the world, even if they are based in a small town in the middle of nowhere.

How it Works
An out of State merchant creates a banner ad with a tracking code. Internet publishers (like NewsBlaze or savings.com, ebates.com) place the ad with its tracking code on their website. A website visitor clicks on the ad and is sent to the merchant’s website. Once there, they may or may not buy something. If they do, the merchant knows which site sent the visitor and compensates them at a pre-defined rate. The publisher doesn’t know who the visitor was or even if a sale was made by the merchant, until much later, when they check stats at the merchant tracking site. The publisher has no part in the sale.

The legislation says this loose relationship constitutes the presence of the merchant in California, the state of the publisher, which it obviously is not. If it became law, the merchant would have to collect California sales tax on the sale. The merchant has options. They can modify their system software, manage the myriad of California sales tax rates and pay California; or they can easily terminate their relationship with this now irritating California publisher. If they terminate the relationship, the publisher makes no income and the state collects no tax.

Many small businesses rely on their relationships with vendors or with middlemen such as Linkshare, Commission Junction, Google and the new CPAPark. The middlemen form relationships with multiple vendors and multiple small businesses, who are publishers of information. Commission Junction has a simplified way for merchants to find relevant publishers and helps publishers find relevant merchants.

The middlemen act as a very important “gateway” between the publishers and the vendors, allowing the publishers to advertise products from vendors they would not be able to work with otherwise. Vendors gain by not needing to find and vet an army of small publishers who would run their ads.

After operating for many years, affiliate marketing has created many jobs. A lot of innovation and many side industries have sprung up around it. These small businesses are not organized as a group and they generally don’t have a lot of money to throw around on lobbying, they just get on with the job of surviving, growing and employing.

A good sized chunk of that business could soon come to a screeching halt. First, the small California businesses would lose their affiliate income, as the vendors cut them off for the sole reason that they are based in California. The vendor business would go to competitors based in other states that don’t have this legislation. The vendors would lose business for a while, because the other businesses wouldn’t be able to pick up the slack immediately. Some California businesses will only lose a small percentage of their income, while others are 100% exposed.

California businesses all circulate their money in California. Money circulates in mortgages, rent and office leases. Most of us buy business cards and stationery, printer supplies, PCs, packaging. We eat in local restaurants, use local accountants, local temp services and otherwise buy locally. We advertise locally in newspapers, on websites and at Google, another California company. Several small businesses in this group employ 20 or more staff and lease office space.

The next wave of losses will hit businesses that provide advertising services for any of these businesses. Many websites that use google AdSense for income will suffer a loss because many of these California businesses use AdWords to advertise, looking for new members or buyers. If they can’t make money, their advertising will stop. Businesses in other states could pick up the slack, but with thousands of advertisers stopping campaigns, the effect on other publishers would be at the least, disruptive.

Some small businesses may disappear altogether, so cities will lose their business license fees. Banks will lose the cashflow these businesses generate and CPAs, lawyers and temp staff that support them will suffer too.

All of this doom and gloom would sound alarmist and fictional, if it wasn’t for the fact there is recent precedent. New York already implemented similar legislation. By the end of the first week after being enacted, many vendors had dropped all New York-based affiliates. One company, Overstock, reported dropping 3400 small New York businesses – not all were active.

To illustrate some of the collateral damage that could be caused, a coupon company, although not an affiliate, was dropped by Overstock because the fact they created coupons in New York might have been used as a legal argument that the relationship established nexus.

“The state will not get the money they think they will, because vendors will just dump their affiliates. No affiliates, no nexus. Not only will the money not come in, but a lot of small businesses will be harmed in the process.” So says Master Internet Marketer, Declan Dunn. [ Dunn Direct Media ]

California may be desperate, but going after a small amount of state sales tax, at the risk of destroying 25,000 small businesses, part of the engine that keeps us afloat, seems like a way to dig the hole much deeper.

Affiliate Marketers based in California should do two things on Monday morning. First, review the Performance Marketing Alliance website. Second, call your state legislator’s office and let them know what effect this legislation would have on your business.

http://newsblaze.com/story/20090622022647nnnn.nb/topstory.html