[NewAffiliate]

I've heard people talking about potentially moving to a CPC model (getting paid for driving traffic and not sales) to avoid falling under the law's nexus definition.

I've read the law and it seems as though this might be a legitimate workaround. But...is this just one interpretation of the law? Or is there any precedent that establishes this as legitimate.

For the few merchants I have close relationships with, I'm nervous that they won't want to take any chances and they'll fear anything that isn't 100% clear. Is there any precedent that would convince merchants (and their lawyers) that a CPC model is absolutely not going to require them to pay taxes?

[markwelch]

No. There's never any way to be sure you'll convince anyone of anything. (A disturbing number of Americans believe that Barack Obama was not born in the USA, and they will not consider any evidence whatsoever that could change their minds.)

There will be merchants who won't want to enter into any contracts with anyone in California (even web hosting) -- because they'll be absurdly overcautious. I'm sure some merchants will refuse to buy any CPC advertising from California companies (including Google AdWords) because of this law. I'm not sure they'd be wrong.

Here's the relevant language in the California law (http://leginfo.ca.gov/pub/11-12/bill...aptered.html):

(5) (A) Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that both of the following conditions are met:

(i) The total cumulative sales price from all of the retailer's sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).
(ii) The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in this state in excess of five hundred thousand dollars ($500,000).

(B) An agreement under which a retailer purchases advertisements from a person or persons in this state, to be delivered on television, radio, in print, on the Internet, or by any other medium, is not an agreement described in subparagraph (A), unless the advertisement revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon sales of tangible personal property.

(C) Notwithstanding subparagraph (B), an agreement under which a retailer engages a person in this state to place an advertisement on an Internet Web site operated by that person, or operated by another person in this state, is not an agreement described in subparagraph (A), unless the person entering the agreement with the retailer also directly or indirectly solicits potential customers in this state through use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state.

(D) For purposes of this paragraph, "retailer" includes an entity affiliated with a retailer within the meaning of Section 1504 of the Internal Revenue Code.

(E) This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the United States Constitution.

(Emphasis added.)

This language, like the laws in New York and elsewhere, is phenomenally broad, and arguably could include CPC and CPM advertising (and beyond), as well as non-internet advertising in broadcast and print media.

But New York soon implemented regulations which were quite narrow, and which created a "safe haven" for merchants to continue their affiliate programs if they went through a cumbersome process requiring each publisher to annually sign a document stating that the publisher did not engage in certain activities which were deemed "solicitation." Paragraph (C) of California's law appears to adopt the same system.

The key here is the language, "based upon sales of tangible personal property." The general consensus has been that the ONLY subset of performance-based advertising that's covered by these laws are "pay-per-sale" affiliate programs, not "cost-per-click" or "cost-per-pageview" advertising.

Of course, CPC advertising can get very tricky. I recall that in the late 1990s, some porn web sites would boast very high CPC rates, but then it turned out that those rates were completely contingent on conversion rates. Thus, they'd promise rates as high as 80 cents or $1.00 per click -- but then when you read their contract, you'd discover that this rate applied only if at least 10% of clicks converted to sales; if only 5% of clicks converted to sales, then the CPC rate was 40 cents; if only 1% of clicks converted to sales, then the CPC rate dropped to 8 cents, etc. Despite the promotional wording, were just disguised pay-per-sale advertising (affiliate programs).

But let's face it -- all CPC campaigns are evaluated by advertisers based on sales, and are adjusted to reflect actual sales levels for the traffic referred through the advertisement. So are most CPM campaigns. It's all about ROI, and online advertising allows for very narrow ROI tracking.

The difference is that with CPC and CPM advertising, the advertiser carries more risk (and might end up paying the publisher for clicks or pageviews that never generate sales); with pay-per-sale affiliate programs, the publisher carries all the risk (and gets paid only if sales occur). Either way, actual sales data will determine whether the relationship continues on the same terms. All advertising is "based on sales."

When buying CPC/PPC advertising, some of the "early risk" shifts from publisher toward advertiser (the advertiser must pay for a few hundred clicks before generating enough data to reliably know whether the traffic is worth the fees). But the advertiser quickly computes the value of the clicks from that publisher (and from each section and page at the publisher's site, and from each keyword at a search engine), and pegs the CPC/PPC rates at levels that will sustain profitability.

It would certainly not surprise me if Amazon (or an ad agency working with Amazon, or even another Amazon "Associate" based in another state) approached me with an offer to purchase CPC advertising on my site, at a rate in the range of 3 to 5 cents per click. (Looking at my "archived" Amazon stats, I see that Amazon's advertising fees worked out to about 4.86 cents per click in Q2'11, and 4.44 cents per click in Q1'11.)

[CFW]

I don't know about precedents, but the legislatures could always simply amend the law to include CPC, CPM or whatever else they want.

AFAIK, states aren't allowed to regulate interstate commerce... I would think a NY retailer buying ads on a website run out of CA (whether CPC, CPM, or CPA) would qualify as interstate.