Thinking of venturing into the US, but unfamiliar with the current Affiliate Nexus Tax saga? Executive director of the US Performance Marketing Association, Rebecca Madigan, gives PerformanceIN.com the lowdown:
The performance marketing industry is facing some unique legislative challenges in the US, which has in fact, wiped out 76,000 affiliate marketers, or about one-third.
It isn’t because these small business owners did anything wrong. It’s because they were caught in the middle of a three-way battle between internet retailers; who have been largely immune to having to add sales tax onto online purchases, and brick and mortar retailers; who feel the sting of that competitive pricing disadvantage - because they have to add sales tax, and from 46 states who crave tax dollars generated by all those e-commerce transactions.
This issue is commonly called the ‘Amazon Tax’, which exposes the political intentions of retail giants like Walmart to get their online arch-nemesis to have to collect sales tax like they do.
Making Sense of it All
In an attempt to make sense of all this (which is ridiculous actually, I’ve been in the middle of this for nearly five years and very little about it makes any sense), let me give the briefest of explanations about how our country and tax policy is structured. We have 50 states, which continually strive to be as independent as possible, wrapped up under an umbrella we call the Federal Government, which oversees things that are common to all states or are in the best interests of the country as a whole (this is an entirely idealistic and naïve statement).
Each state controls how it raises money to fund state responsibilities, like schools, police forces and public works. Of the 50 states, most use a combination of taxing its citizens’ income and taxing purchases made in the state. In fact, 46 states have sales taxes, which can vary wildly in the percentage rates of the purchase price they charge (ranging from 2% to more than 10%), and on different kinds of items (in some states, clothing or textbooks are tax-exempt, in other states, it’s types of foods). The rate of sales tax is determined by where the purchaser resides.
Retailers must collect sales tax on items sold within the state, but only if the retailer has a physical presence in the state (called ‘nexus’), like a storefront, a warehouse or a sales force. States can’t require retailers in other states to collect sales tax from purchasers in their own states. Here’s where it starts to get sticky. Most internet retailers have physical presence in only one state or a few states; as a matter of fact, initially Amazon deliberately limited its expansion to only a few states so they wouldn’t have to collect sales tax from most US customers.
This irritates brick and mortar retailers, who have an unfair pricing disadvantage because they have to charge sales tax, making total purchase prices up to 10% higher. And it frustrates states, which are desperate for the potential revenue if sales tax was collected on internet purchases. In 2008 the state of New York passed the first “Amazon Tax” law, which unintentionally hit the performance marketing industry directly, and here’s how...
This law said that if out-of-state retailers are working with affiliate marketers in New York, that’s the same as having stores or sales people, so those out-of-state retailers must now start collecting sales tax on purchases made by New York residents.
First of all, it is completely illogical, because we all know that affiliate marketers are simply running ads; they are nothing like a sales force or storefront for their retailer partners, because affiliate marketers don’t sell anything, they don’t collect money from customers nor deliver any product – they don’t even know who clicks on their ads!
Second of all, we have something called the US Constitution, our core federal governing construct, which in part prevents states from overreaching their jurisdictions, and the constitution and supporting court cases say ‘advertising does not constitute physical presence or nexus.’
Thirdly, this law was a complete failure. It caused out-of-state retailers to simply terminate their affiliate agreements with New York affiliates; to avoid having to collect sales tax. By our estimate, about 1,000 out-of-state retailers cut off 15,000 New York-based affiliates, which devastated the incomes of all those affiliate marketers.
Forced Out & Financial Devastation
The law didn’t force internet retailers to collect sales tax as intended; the state never saw increased sales tax revenue. And the state lost revenue from income tax, because we estimate about 1/3 of New York affiliates were forced to move to other states, about 1/3 downsized and caused lay-offs, and about 1/3 went out of business altogether.
Despite this failure, 10 other states have enacted similar laws in the past five years since the New York law went into effect. The Performance Marketing Association has waged more than 70 grassroots campaigns in that time; so while we have had statistical success, there are still 76,000 affiliate businesses that have experienced financial devastation.
You might ask why other states pass or attempt these futile laws that only end up killing small business segments in their states. A few years ago, states really thought this was a way to pressure internet retailers to collect sales tax. In the past couple of years it became clear this is a political move to pressure the federal government to reform sales tax rules for the whole country.
Levelling the Playing Field
Fortunately, there is now a bill before the US House of Representatives that will do just that. Known as the Marketplace Fairness Act, it reforms sales tax laws for the states by removing that physical presence requirement. The bottom line means that all retailers, whether online or offline, will have to collect sales tax for all states. This means retailers can no longer avoid this obligation by terminating affiliates – so those 76,000 affiliate marketers can get back in business.
The PMA supports the Marketplace Fairness Act, as do most. It levels the playing field for all retailers. It allows states to collect much needed revenue. And it restores affiliate marketing relationships in all states. We think it has a good chance of passing this year; it has succeeded in two of the three hurdles (the US Senate passed it and President Obama announced his support).
Only the House is left to pass it, and it is larger and more politically volatile, so it won’t be easy. But there are prominent supporters in both parties; we just need avoid the political stalemates we saw last year. Hah, no problem!