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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?

3 thoughts on “Is Government Legislation Killing Affiliate Businesses?

  1. First of all, let me say that I am not very educated about the various state tax laws affecting this situation. So my opinion is based partially on a lack of information.

    That said, I feel like it is a tricky situation. As you say near the end, the best course may be to take the time to think of a long-term solution. I believe we will continue to see the rise of small businesses based around online retail, “Ma & Pa In’ernet Stores.” Now federal law prevents online sales tax, but I can understand how states are frustrated by this; they probably view these retailers as being given a special exemption. I have no reason to believe it will happen any time soon, but imagine a situation where these sales-tax–free businesses outnumber brick and mortar stores? States may be responding in fear of some nightmare scenario like this, because being free of sales-tax is a nice thing to advertise as a business.

    In the short-term, I think Amazon has done the right thing. But I agree with you that it will trickle down, and states will find other targets since Amazon has demonstrated they are no going to play that game. Which means we need to find a long-term solution that satisfies all parties involved, and unfortunately I have no idea what that would be.

  2. Yeah, I think the long approach is by far the better option. Brown is trying to make himself look good on paper and Amazon (I was an affiliate until two days ago) refuses to Brown Nose Brown, and give into tyrannical tax laws (the ones our founding fathers came here to get rid of).

    Brown will fail and California will burn many bridges and force the people who help it’s economy the most to other more common-sense long approach states. We will find a solution to Brown’s (Problem-Reaction-Solution) inept thinking, then we can flush Brown out of office.

  3. As a website owner, Amazon affiliate, and an affiliate marketer also with Commission Junction, LinkShare, Google Affiliate Network, Skimlinks, ClickBank, etc I am extremely concerned about the impending impact of the scheduled enactment of the PA Affliate Nexus Tax Law which is scheduled to be enforced starting September 1st. AFter months of hard work, my affiliate sites are beginning to earn some income, I make money from AdSense almost every day, and although not alot, it gives me hope that things are going in the right direction. Now I am afraid that In September the rug will get pulled out from under me, and all the hard work will be for naught, and right before Christmas too.

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