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A Framework for Discussing what the Nexus Tax Means

May 27th, 2008 Posted in affiliate marketing

When I initially read Phillip Dampier’s comment on 5 Star Affiliate Program’s blog, I was concerned that he was going the way of so many by just dismissing affiliate marketing as a haven for crappy websites built to make a buck.  In some ways, I suppose that’s exactly what he was doing, but I have to admit he has a valid point.

It’s self serving for New York affiliates to simply concern themselves with loss of commissions.  It’s a VERY valid concern, but it’s true that the reputation of our industry is sullied with people who have a vague understanding of what we do, and in fact, non existent to most.

So what are we to do?  Have you been able to explain to your neighbors and friends what you do for a living as an affiliate?  Alright, maybe the really smart guy 4 doors down that works in IT, but the rest just have their eyes glaze over.

So I think New York affiliates would be better served approaching this issue just like our affiliate oblivious friends:  as consumers.

So here’s the framework (and I think it’s a good one, not simply a set of phrases and pulpit bangers):

New York has, unconstitutionally in this case, extended it’s tax reach by creating their own set of definitions of business.  They’ve done it in a nefarious fashion:  by inventing a physical connection to a virtual relationship.

Traditionally, a tax nexus has been defined by an address where commerce is done:  a sales office, a retail store, or a distribution center (although not all distribution centers, as you can see here).

Now, New York is defining “at will” referral contracts as the basis for a nexus.

Many consumers agree with merchants decisions to terminate these contracts in order to keep from paying these taxes when they buy online.  My caution to those consumers is a simple one:  If this tax effort fails to reap rewards, it will be re-worded, and extended out through another means.

In other words, don’t hurt the pawns when your issue is with the King and Queen.  Calling for merchants to dump New York affiliates is short sighted.  It will cause New York to make up another non-sensical definition of what business is so that they can beat the Constitution.

As New Yorkers, none of us will win unless the notion of unfair taxation is defeated at its core.

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This entry was posted on Tuesday, May 27th, 2008 at 7:38 pm and is filed under affiliate marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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    As the person referenced above, let me say that part of my argument's tone is intended to provoke, because there are far too many people on all sides of this equation who still have their heads buried in the sand on this issue. NY consumers will wake up June 1st and be outraged to find all of their favorite websites now charging sales tax, threaten to take their business elsewhere, frame it as a political argument about how evil this or that political party is (or the state in general), and then just pay it when they have to.

    Merchants are not doing any favors for themselves either. Vague references to "new laws" are not exactly a great way to generate the kind of consumer backlash required to get this nonsense overturned by legislative action. Merchants should themselves be educating consumers about why they have to pay tax now, and give them appropriate avenues to take action.

    And too many affiliates on website monetizing forums seem preoccupied only with one thing - their earnings, and they reflexively attack anyone that threatens their next check. Affiliates and merchants could be pooling resources and arguing the economic harm such legislation could have, but not just on themselves but also for consumers.

    That takes money and effort, and a broadening of "self interest" to also encompass the customers who click the links that bring those checks.

    Too often when I raise this issue, it becomes boiled down to "I don't care as long as I can keep earning... pay your taxes yourself and stop threatening my cash flow." No surprises that a lot of consumers seeing that kind of reaction, along with the well-publicized Overstock case (and the apparent lack of others taking legal action to get a temporary restraining order) means, for consumers, the best way out of this is to pressure retailers to suspend their affiliate programs for New York based websites until this gets sorted out in the courts.

    The arguments are very strong to do just that, particularly when framed for retailers as NY'ers taking their business to competitors who don't have affiliate programs, and therefore won't have to charge tax. Online, 8% of a price difference is more than enough to push people to shop elsewhere. As I raised on 5 Star, Newegg and Chiefvalue are excellent examples. One has an affiliate program and now has to charge tax, the other doesn't and won't. Otherwise, these two companies share so much in common as to be nearly interchangeable. But now one has a signicant price advantage for at least one state's residents.

    And while it's true New York would tax air if they could (they already tax dirt), what keeps them from doing so is a concerted, loud effort to suggest those that might try will not have a long career in public service. That requires people to get involved in protesting this. Consumers will en masse next week when they find out virtually all of their favorite sites are now charging sales tax. Retailers are already finding out in trying to figure out how to comply. Now affiliates need to also come out as strong. If it continues to be more of "leave me any my income alone - I don't care about your problems unless they impact me," then my reaction will be just one among many.
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    Thanks for the comment.

    I didn't go far enough in this post in indicating the importance of the "at will" nature of the contracts involved in affiliate marketing.

    If, for whatever reason, someone were to be in favor of internet sales taxes, New York has left a giant out for merchants that they wanted to act as tax collectors for them. Simply eliminate the affiliates, and you eliminate the liability. An unintended effect to be sure, but a glaring one. A merchant is free to terminate any sales affiliate, at any time, for any reason. "At will" indeed.

    So it goes without saying, that whether or not you oppose the tax, New York has done a brutal job in:

    a.) Writing the tax bill
    b.) Explaining it

    With the law itself being Strike One, strikes two and 3 sure came quick thereafter.
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    Kevin,l wanted to be sure you saw Phillips latest comment on my blog. It's long and it's a doosie. Haven't even figured out how I want to respond. Can't even hardly think straight about this any more. Here it is:

    http://affiliate-blogs.5staraffiliateprograms.c...
 
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