Armageddon arrived two weeks ago in the fight against online sales taxes. California signed their version of the affiliate sales tax into law and Amazon, along with many other online merchants, responded by terminating their CA affiliate programs. But as the dust begins to settle, who are the winners and losers? And where does the affiliate marketing industry go from here?

  1. There is too much money at stake for this issue to go away.
    It’s not just that many individual states are desperate for tax revenues at the moment. It’s also that the large bricks-and-mortar retailers are frantic to level the playing field with online merchants. They have deep pockets and can pay for a lot of lobbying in state capitols and in Washington. They won’t stop anytime soon, because they see their profit margins being eroded by (from their perspective) unfair competition from online etailers. What this means is that the pressure to introduce new sales and use taxes on online transactions will continue for the foreseeable future.
  2. Amazon have been gaming the system for a long time.
    They must know that things will have to change – they’re just playing out their hand for as long as they can. Amazon cares primarily about it’s price advantage against offline retailers and they will seek to maintain that as long as they can. In addition to their dispute with California, they have also recently closed a distribution center in Texas as a result of receiving a bill for uncollected sales taxes. In Nevada, where they have two of their biggest distribution centers, Amazon doesn’t even have to collect in-state sales tax. As a result, they face calls by politicians there for relevant laws to be changed. The bottom line: Amazon is fighting the tax issue even in areas where they clearly have a physical nexus. Where there is a local loophole they have exploited it. That’s a great business strategy, but it won’t last forever. And in the meantime, publishers and affiliates are the ones who are seen to be expendable.
  3. A Federal approach to this issue is the right one. Probably.
    It is probably the approach that a disinterested onlooker would choose as the rational long-term solution. It’s much better than having a patchwork quilt of different tax rates and rules  across 50 states. It’s not a perfect solution for the performance marketing sector because it means taxes will have to be collected where there are none now, but these things always work themselves out and the trend towards online sales would continue regardless. And affiliates would not be in a position of uncertainty about the future, as too many of them are currently.
  4. Some advertisers aren’t going to know what hits them if they don’t get good tax advice.
    As someone who has run a business in which we had to track sales tax across 50 states, I can vouch for the time, cost and complexity involved. Sales taxes are a real administrative burden and the current changes in the law represent an enormous business opportunity for sales tax consultants and software services. If merchants or networks ignore the sales tax issue and then suddenly receive a tax demand, they had better have good records. Sales tax is a very complex area of tax law.
  5. CPA isn’t the same as CPS, but a tax collector might see it differently.
    Affiliate marketing (in the sense of cost-per-sale) is easy enough for a politician or taxman to understand, especially where there are physical goods being sold and shipped. CPA deals, where often there is no real “sale” at all to an end-customer, seems intuitively to be an entirely different kettle of fish. But on the other hand, tax law is all too often only clarified case-by-case. as the case law accumulates, so the rules become solidified. That means that whatever our intuition tells us, the advice of a tax professional is required. And even he or she might not have a definitive answer. You really do not want to be a test case for new tax law if you can avoid it.  Be careful out there, folks.