[Trust]

Drs. Foster and Smith & LiveAquaria shutting down affiliate program completely because of these nexus tax laws -


"Dear LiveAquaria Affiliate,

Regarding pending state nexus/sale tax legislation

It is with great regret that we have to inform you that we are shutting down affiliate marketing at Drs. Foster and Smith & LiveAquaria effective immediately February 22, 2010. This closure is across the board in all states with all affiliates and is not related to you only as one of our affiliates.
We regret having to do this for a variety of reasons, not the least of which is that so many of you have done a great job for Drs. Foster and Smith and will be adversely affected by the loss of revenue from Drs. Foster and Smith sales. Thank you for all you have done to promote our company on your web sites. We apologize for the hardship and inconvenience that this creates for you.

The single reason for the decision at this time is the moving target of the ever-growing patchwork quilt of state legislatures that are considering nexus legislation relative to affiliate marketing and sales tax. It has become increasingly difficult to determine who is considering such laws, where they are in the process and what the ramifications are in each state. What affiliates may not be aware of is that such nexus situations do not only relate to sales tax collection, but potentially state income tax for a corporation as well.

We wish there was clarity on this issue from state to state and nationally, but there isn't. So until this matter is cleared up nationally, we are shutting down all affiliate marketing. We apologize for any hardships this brings to you and your team. We have greatly appreciated the work that you have done on our behalf. The sudden nature of the move by California to reintroduce legislation late last week and to push for a quick vote, emphasized the ever-changing nature of this issue and our need to be ahead of such votes and decisions.

With our appreciation for your contribution to our company,

Sincerely,

The LiveAquaria Affiliate Marketing Team"

Think this is the first one to shut down completely because of this.

[Rexanne]

This is what I've been most afraid of since the tax issues have started. Merchants will just bail on the affiliate space and who can blame them?

It breaks my heart but it's understandable. Hopefully, someone somewhere will come along and stop the surge to tax the Internet. We desperately need national help, not just state by state at this point.

[Kevin]

Really a shame. As Rexanne said though, for larger merchants that will hit the thresholds easily (maybe?), if they want to maintain their competitive edge, they will utilize stop gap measures.

[Linda - 5starAffiliatePrograms]

I just read about Drs Foster and Smith somewhere else and blogged about it. Then discovered Trust's thread and added that there was a discussion started here about it too.

Shoot! This is not good. Hope it does not start a trend.

Anyone that is fighting this issue with their local legislators should use this letter and the letter from Overstock about dropping CA affiliates to show that these bills WON'T increase state tax revenues, but WILL negatively impact affiliate marketer's business income.

[simcat]

I was disappointed when I got dropped earlier this month due to the co. tax debate.

But the good thing is that was the last LS merchant I make any real sales for. So I won't have to log-in to LS any more! Plus I'm already seeing replacement commissions from CJ & SAS.

Agree that this will only have negative implications on the affiliate marketing space. It seems weird to me that there is such a wide range of reactions to these laws (by merchants).

No-one can say they can move to be safe, or already are safe from nexus tax laws. In this case if you are/were an affiliate of these companies, it doesn't matter if you live if colorado, delaware, or timbuktu. You got affected.

[BlogBonnieBlog]

Shame to see! I can understand their plight. We have one person whos entire job is dealing with the sales tax in each state. That letter brings up another interesting point and that is paying potential state income tax for each state.

Having had to do multi state taxes when we moved, its a pain in the butt and would be even worse trying to do it for a myriad of states on a corporate level.

[loxly]

Originally Posted by BlogBonnieBlog

Shame to see! I can understand their plight. We have one person whos entire job is dealing with the sales tax in each state. That letter brings up another interesting point and that is paying potential state income tax for each state.

Having had to do multi state taxes when we moved, its a pain in the butt and would be even worse trying to do it for a myriad of states on a corporate level.

Many of us actually thought of that way back when NYS decided that it was creating a nexus based on "affiliate" marketing. Once a company has nexus in a state, there is more than sales tax that is an issue.

[markwelch]

Like others, I also expect to see many merchants follow this strategy, choosing to simply end their "affiliate programs" to avoid the grasp of these unconstitutional efforts.

Last year, I suggested that merchants might try an intermediate risk-reducing strategy by adopting the "New York solution" for all publishers, not just those in New York or other states that enact "Advertising-Nexus" language. However, the new language added in the California bill (ABX8-8) would seem to exclude this type of "safe harbor."

Some other states are seeking to enforce unconstitutional laws that were enacted before the Supreme Court decisions that clarified that sales-tax nexus requires "physical presence"; some of those laws impose a sales-tax collection duty on any merchant who purchases any advertising or mails any advertising materials or catalogs into the state (exactly what the U.S. Supreme Court ruled was unacceptable). Because those states chose not to enforce those laws in the past, they were never litigated and declared unconstitutional, so states hope to use them to bully risk-averse out-of-state merchants into collecting sales tax.

Perhaps most frightening, a few other states appear to be just plain "bullying" out-of-state merchants, without any real legal theory for doing so. No merchant wants to deal with the threat of huge legal costs to respond to demands or enforcement actions from desperate bureaucrats in multiple states.

With these threats looming, merchants are wisely considering whether the additional sales that come from affiliate programs are worth the risk. I expect most merchants will conclude that continuing their affiliate programs is the wisest course of action.

One additional issue that I haven't yet seen discussed: I suspect that some merchants may consider dropping their "network" affiliate programs, or switching to an "invitation-only" status, in order to "reduce their profile." (State tax collectors can easily view a list of all merchants with public affiliate programs through CJ, LS, SAS, etc., or which are listed in affiliate directories; merchants may seek to exclude themselves from those lists).

[emuflies]

The only way this issue is going to go away is if we can get some resolution on the constitutionality of these nexus laws, and preferably if the NY law gets overthrown.

Otherwise this is going to be one endless "whack-a-mole" game, even if we stave off one bill, there seems to be one lurking just around the corner in a few months. It's become impossible (and I can't see it getting better) to plan for the medium/long term at all and invest time or money in this area.

Any chance of a permanent resolution on the horizon?

[brookschaaf]

This is a good example of the chilling effect this type of legislation will have on our industry.

I am hopeful that we'll receive a favorable ruling in the NY case but even if we do lobbyists will still pitch this bill to legislators as "free money".

It is sickening how pointlessly harmful this is.

[delsol]

Thanks Trust for this very interesting fact.

The stupid (pardon my French) Colorado law might be giving reflection to merchants. Although with or without affiliates, it appears every merchant has to collect sales taxes in Colorado (PERIOD). Removing an affiliate program will not help them. Their only question could be "to sell or not to sell in Colorado". Further educating merchants, on this issue, could help...?

Hey, what about affiliates in other countries? Maybe we could all "pitch in" and buy a small island in the Caribbean. We could name it "Affiliate Nation" or "Affiliate Bastion"?

http://www.privateislandsonline.com/great-whale-cay.htm

hi..hi...

[La_Valette]

lobbyists will still pitch this bill to legislators as "free money".

That's the problem. They're only looking at one side of the equation (calculated in a questionable way) - the additional sales taxes they think they'll collect.

What they don't look at is the lost income taxes, and other damage to the economy.

Most of these states have state income taxes (except Nevada) and loss of affiliate income will cause a big drop in that revenue. (And if affiliates simply pack up and leave state, the economic damage would be even greater.)

[mellie]

This shouldn't be surprising. If you recall, Beach Audio shut down their affiliate program last summer after Summit over nexus issues.

Other merchants are quietly shutting down, have been for months. They may or may not be mentioning nexus issues when shutting down whether they do so state by state or all at once. Others are moving programs in house so they are more private, thinking they will be less noticed.

By shutting down and claiming sales tax nexus issues as the cause they could be setting up for additional scruitiny by revenue departments. The main reason why some merchants quietly close or limit affiliate programs rather than attributing it to nexus legislation.

In addition, by announcing they are closing affiliate program due to nexus issue they add additional clout to the opinion that nexus is created by affiliates.

I'd be more upset by the lack of notice.

[Shawn Ingram]

This is really sad news.. I just hope, like others have said, that this isn't the first of many merchants to pull out of affiliate marketing because of all the states debating these nexus/sales tax changes for online marketers.. I really wish the politicians would get a clue like it seemed that Brody (I think that was his name) did in Colorado. It was like listening to a light bulb click on across the room the night that Jen Goode and so many others of you spoke on behalf of the affiliates of Colorado. Although I'm currently in Ohio and at this point we dont have a bill like this, I'm afraid it is only a matter of time depending on how these bills fare in other states. I just hope whatever happens, it doesn't bring down the affiliate industry. I still consider myself a newbie with this stuff and am hoping it is all still there when my light bulb clicks and I can start producing... lol

[Affiliateoldguy]

Absolutely the worst kind of reaction to the affiliate tax issues - I echo the opinions expressed in this forum that I also hope this does not become a trend across the country. If all parties would just hold fast until the all the current bills play out, and until the litigation in NY gets to the Supreme Court, then more rational decisions can be made about the affiliate marketing model.

The desperation for more revenue in the short term is creating all this crazy legislation, and most of the states proposing it have not studied the impact of doing it. They are playing "follow the leader" and simply copying bills from other states and tossing them out there, hoping to get revenue.

Of course, as we all know they are tearing down the economy in an effort to satisfy the short term needs for revenue, and exactly the opposite is what they should be doing. Stimulate the small business community across the country and revenue will flow in like mad, but this self destructive tax madness prevails at the moment.

Our tax issue is not the only thing these lawmakers are taxing. Every state doing this has many other tax measures before them. They are all breaking a basic principle of economics - Taxing during a recession. Add to that the terrible damage it is doing to our Performance Marketing industry, and you have a total disaster in the making.

Lots of Democrats will lose their jobs in November of 2010 and 2012!

[markwelch]

Affiliateoldguy wrote: > "If all parties would just hold fast until the all the current bills play out, and until the litigation in NY gets to the Supreme Court, then more rational decisions can be made about the affiliate marketing model." <

What does "hold fast" mean in this situation?

Imagine that you are a merchant based in a no-sales-tax state, with annual sales (current or projected) of more than $10,000 into each of these states which are considering (or have enacted) "advertising-nexus" laws, and with sales into other states whose tax authorities are sending out "demand letters" to out-of-state merchants (based on other laws or legal theories), insisting that out-of-state merchants collect sales tax for those states. What should you do?

Does "hold fast" mean ignoring the laws and letters, and just hoping that everything works out okay in the end? (In addition to legal costs, there is a risk that courts might eventually rule that the merchant should have collected sales tax, and must pay each state the sales tax on those transactions, even though the merchant never collected tax from the customer -- plus interest and penalties.)

Or does "hold fast" mean that merchants should incur the administrative costs (and audit risks) of collecting and remitting sales tax for those states, as well as losing sales to competing merchants who don't collect sales tax from those customers?

Merchants must make reasonable business decisions now, without the benefit of certainty about "how it will all turn out." (Most merchants will make these decisions without consulting with attorneys or tax accountants familiar with the laws of each state -- but those who do seek out and pay for advice will probably find little certainty.) Some merchants will accept modest risks; some will accept more risk; some will accept none.

I don't think "hold fast" is a meaningful suggestion.

Finally, I'll observe that I don't agree with your other political comments, unrelated to the "advertising-nexus" issue. I also want to stress emphatically that the "advertising-nexus" issue doesn't involve any new taxes, but only seeks to actually collect sales tax that's already owed by consumers. (No, the advertising-nexus concept isn't constitutional, nor is it wise, nor will it increase state revenue -- but it's not a new tax.)

[Kevin]

Just to add to Mark's comment, I don't believe that $10,000 in earnings from in state affiliates to in-state customers is the magic number across the board, nor am I positive that the "in state to in state" language is consistent in every piece of crapislation.

I'm actually gathering that info now, since I'm switching teams.

[PetsWarehouse.com]

Originally Posted by markwelch

expect most merchants will conclude that continuing their affiliate programs is the wisest course of action.

We have taken that position and will continue our programs