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Is Government Legislation Killing Affiliate Businesses?

Recently I received an email from a customer that had purchased one of our Amazon plugins. The plugin software we sell makes it easier for people to create meaningful web content on their websites based on the Amazon product listings. By connecting this content to their affiliate program (Amazon Associates as they are called) account, many small businesses can either earn a living or at least offset their operating costs. This is a win-win situation for everyone involved. People surfing the web are typically presented with more relevant product placement ads because these small business operators tend to strive for a quality experience on their site over content-spamming. Amazon generates more sales. The site operator earns a small commission on those sales, helping support his website.

However these days many state governments have decided that they too want in on the action. With the increasing difficulty of meeting their every-bloating expenditures without raising taxes and possibly alienating voters, the state governments are looking for new and creative ways to increase taxes. One way they are doing so is by targeting Internet commerce. Since they can’t come straight out and hit online sales with a sales tax requirement directly thanks to federal and state trade laws, they are looking for loopholes they can leverage to find a way to get a piece of the multi-billion dollar industry. And they’ve found it.

Ever since someone found a way to tap into the online sales revenue and start levying a tax without breaking federal laws, a floodgate has opened. They did this by deciding that any online company that has an affiliate program also has established a nexus within their state so long as at least ONE affiliate resides in their state. In essence every single website that has an affiliate program will thus have a nexus in every single state. WOHOOO! Free tax revenue for everyone!!!!

And to make this REALLY worth their while they have attacked the largest online retailer and affiliate program on the Internet today:

Amazon Has A Clue

But wait, we’re talking about Amazon here. We’re not talking about some small unknown company. And guess what? Amazon does not NEED the affiliate program. Amazon has all the brand awareness they need. In fact I contend that the Amazon Associates program should really be considered a charitable organization more than anything since I believe it does more to help small businesses earn a living than the other way around.

And guess what? Amazon also knows this. Rather than enforce the collection of sales tax in every single state that has passed these “Tax The Affiliates” laws, Amazon has decided to shut down their affiliate program in those states. As such Amazon no longer has a presence there, thus no nexus, and they don’t have to charge sales tax in those states. In my opinion, Amazon has made the right move. Charging sales tax in those states would have a significantly larger impact on their business than not having leads from those dozens of affiliate sites.

Unforeseen Ramifications

The really sad part is that our government is completely clueless about this war they’ve waged. There are so many things that will go wrong now that they’ve fired the first shot and have pushed this to a point of no return. First of all they are going to hurt way more small businesses than they realize. They are killing the revenue streams of thousands of small businesses within their state. They are also killing the downstream businesses like ours. After all, every time Amazon shuts down a state we lose an entire market as they no longer have a need for our plugin products. We are certainly not the only vendors directly impacted by this move.

Secondly the government is going to cause a wave of disruption. Laws cannot single out a company of a person, they must apply to all citizens and corporations evenly. Once they realize that Amazon has thwarted their plans to collect millions of dollars in tax revenue they are going to move on down the chain. Any company running an affiliate program will be impacted. Whether your are running your own private affiliate program, using Commission Junction, Share-A-Sale, Linkshare, BuyAt, or any other service. If you are using affiliate sales to increase market reach you will end up collecting taxes in nearly every state. It is only a matter of time.

It is only a matter of time before this move by state governments is going to have severe ramifications. If a majority of states in the union follow suite, and it appears they will based on the recent wave of state legislation rolling across America, then state governments are going to effectively shut down a billion dollar industry. Amazon’s Associates program will not be the only program to shutter operations in a number of states. Many small businesses built around the affiliate systems will go away. Some small mom & pop websites will go away. Even affiliate industry giants like Commission Junction will become former shadows of themselves.

Someone recently told me that the Chinese culture thinks about problems a bit differently that we do. In America we see a problem and we find a solution. We fix it NOW. In China they see a problem and the think about a solution. Then they ask themselves “what problems are created by our solution”. They take the long view, often looking ahead generations.

Maybe our government needs to start thinking more about the long view.

What do you think?

Are state governments wrong? Did Amazon make the right move shuttering affiliate programs in “Tax The Affiliates” states? What will the ramifications be?