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  1. #1
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    Should Merchants Impose the "NY Solution" on all publishers?
    Okay, I'm going to leap out on a ledge and suggest something that none of us like:

    Merchants should seriously consider adopting the "New York Solution" for all of their web publishers, whether located in an "Advertising-Nexus" state or not.


    The "New York Solution" is a procedure aimed at meeting the "safe harbor" guidelines issued by New York's tax agency. To comply, a merchant must add specific language to its agreements with publishers, and must also require that publishers annually submit a certification:
    > "that the resident representative [web publisher] is prohibited from engaging in any solicitation activities in New York State that refer potential customers to the seller including, but not limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending e-mails. In addition, if the resident representative [web publisher] is an organization such as a club or a non-profit group, the contract or agreement must provide that the organization will maintain on its Web site information alerting its members to the prohibition against each of the solicitation activities described above [and must also] contain a statement alerting the representative [publisher] that the certification and any information submitted with it is subject to verification and audit by the Tax Department." <

    Many merchants who chose to continue their relationships with New York publishers adopted language which also excludes some other specific activity (including direct-to-merchant PPC).

    Merchants who chose to terminate their advertising relationships with New York publishers did not adopt this language (perhaps at their peril, as discussed below).

    Why Should Merchants Adopt the "New York Solution" for All Publishers?

    There are two issues to address.

    First, of course, is the risk that additional states will enact the "Advertising-Nexus" tax language; Rhode Island has already done so, and North Carolina appears very likely to do so (asserting retroactivity). The governors of Hawaii and California vetoed this legislation, but the law might re-appear in new budget bills, or the Hawaii governor's veto might be overridden. It's also possible that the "Advertising-Nexus" tax language will appear in the budget laws enacted in other states, without advance warning. It is possible (though not certain) that states enacting the identical "Advertising-Nexus" tax language as New York might adopt the exact same interpretations.

    Second, unfortunately, is the risk that "affected publishers" (publishers who reside in a state which enacts the "Advertising-Nexus" tax law) might attempt to deceive merchants and the states by using "address games" or "entity games," using addresses in other states even though the publisher continues to reside in the affected state. Unfortunately, there have been a substantial number of discussion threads in the Affiliate Tax Laws sub-forums, inquiring about or suggesting the use of strategies that I consider to be "address games" or "entity games."

    I assume that merchants who seek to terminate their relationships with publishers in "Advertising-Nexus" states are more likely to encounter this behavior than those who adopt the "New York Solution." However, merchants who use the "New York Solution" might also encounter publishers who fabricate another address because they wish to engage in specific activities which are prohibited in "affected states" but not elsewhere.

    If all "Advertising-Nexus" states adopt the New York interpretation, then merchants who apply the "New York Solution" to all publishers might still avoid being "stung" by an affiliate who conceals their residence in an affected state.

    I hate the idea, but I'm worried that merchants who don't take this extremely expensive and burdensome step might risk being "caught" with active affiliates in an affected state, and might be forced to not only collect sales tax going forward, but also to pay sales taxes which were never collected from consumers for past transactions (after the law's effective date), plus interest and penalties.

    Of course, merchants who adopt the "New York Solution," and the required paperwork hassles, would probably be much less likely to accept publisher applications without a clear expectation that the publisher will actually carry the merchant's advertising (currently, 90% or more of publishers who are accepted into a merchant's "affiliate program" never actually post any advertising on their web sites).

    An Alternative: Merchants might choose to simply impose the "New York language" in all publisher agreements, but not require the certification procedure (or require certifications only from publishers who reside in affected states).

    It's actually unclear to me how a state where the merchant has no "nexus" (because of the contractual language) could compel the merchant or its publishers to incur the burden and expense of collecting "certifications." (Publishers who reside in the state can be compelled to respond to audits by their state's tax agency, but I don't see how this would extend to the merchant.)

    Another Alternative: Perhaps affiliate networks (or another service provider) could provide the "certification" service for merchants who require it (for a reasonable fee). This might substantially reduce the cost and burden for all parties.

    This is not legal advice, nor a recommendation; it is really just an expression of concern, and an idea for a possible solution to a problem that hasn't yet manifested itself.

    What do other folks think of this issue? What alternate solutions might there be?
    Last edited by markwelch; July 8th, 2009 at 11:10 PM.

  2. #2
    OPM and Moderator Chuck Hamrick's Avatar
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    It's actually unclear to me how a state where the merchant has no "nexus" (because of the contractual language) could compel the merchant or its publishers to incur the burden and expense of collecting "certifications." (Publishers who reside in the state can be compelled to respond to audits by their state's tax agency, but I don't see how this would extend to the merchant.)
    So tell me how an affiliate would be audited on sales made in that state where taxes were not collected. The affiliate has no information on where the sale was made or who it was made to. So you are saying that the state would force the affiliate to produce sales records and then request the sale and customer data of the out of state merchant?

    Mark I respect your knowledge as a lawyer and analytical mind but this is yet another investigation into someone else's ethics and morals. I can tell you that there are many New York super affiliates who changed their state of residence. Not that I know if they actually moved? No, but I suspect that they didn't. It is still free will to go against a law even though you suspect it to be unconstitutional. Thanks for the advice to the affiliate community but no one needs another soap box of opinions.

    What pisses me off is all the gnashing of teeth and no one is talking about a solution. We are going to stand by while good people push grass roots efforts as last options while the industry thought leaders pussyfoot around the subject. Why is no one discussing the ABW solution to not credit sales for affiliates in a state where there is an established nexus law? Why are the networks not debating this? Has any of the supposed representative groups vetted this with a New York lawyer steeped in the state law? The tragedy is when merchants pull programs because they are terrified of the state. So we stall this trend for a year while 20 other states line up behind it and we see the end of affiliate marketing? What do we have to do as an industry to take this to the state? Where's the leadership?

  3. #3
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    Chuck, there is a lot of action, what do you mean "Where's the leadership?" There is a group meeting in Baltimore tomorrow, Mellie is working on this with many people. There are threads of people writing to their representatives. If you have something to add, then add it. Don't come in and holler without your solutions in hand also.

    There is a LOT of action in the NC forum.

    Mark you may mean well, but your pontificating comes off as unrealistic and distracting from the issue at hand. Sorry, that is how I see this latest thread. Merchants aren't going to implement more record keeping if they don't have to. Anything that makes the affiliate cost more is going to make companies close their affiliate programs. As Chuck said, have you had tax law specialist look at what you are proposing?
    Deborah Carney
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  4. #4
    OPM and Moderator Chuck Hamrick's Avatar
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    Why is no one discussing the ABW solution to not credit sales for affiliates in a state where there is an established nexus law? Why are the networks not debating this? Has any of the supposed representative groups vetted this with a New York lawyer steeped in the state law?
    There's my solution! Do you really think that the affiliate tax nexus is going to go away? I admire all the affiliates who have gotten active trying to change the legistature's opinion. But is this the end of it and what about New York? So that's it and affiliates lost that round? How long before Florida and Texas start down this path?

  5. #5
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    Calm down there. I don't understand where you are getting the nobody's doing anything theory. There are threads and discussions and Brian has been involved and buy.at and lots of people. You act like everyone has their heads in the sand. I don't think people see the "ABW" solution of not paying affiliates for sales in their home state as a solution. How does it get tracked? Reversals? Go ahead and start a thread on that if you want to, don't come into a thread on a different topic and rant that no one is doing anything.
    Deborah Carney
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  6. #6
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    http://forum.abestweb.com/forumdisplay.php?f=543

    That's where a discussion on your proposed solution should go.
    Deborah Carney
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  7. #7
    OPM and Moderator Chuck Hamrick's Avatar
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    Mark asked for opinion and I gave mine of his remarks including my frustration that no one is talking about a solution to the problem at every state. Fine I will take my rant to that thread.

    I don't understand where you are getting the nobody's doing anything theory.
    No one is working on a solution to the problem in every state and I certainly don't see solutions suggested for New York. Unless the answer is to wait and hope that Amazon, Ebay or Overstock get the law over turned in the state appellate court.

    Calm down my ass! I am pissed that there is all this talk about changing the minds of individual state legislatures. Meanwhile more states are jumping on the bandwagon. Where are the suggestions and national efforts to find a way to defeat the affiliate tax nexus? That is where our energy should be focused. What is your solution Loxly?

  8. #8
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    I started this discussion thread to initiate a discussion of what practices and policies merchants should adopt, to best deal with the Advertising-Nexus tax laws and the forseeable publisher misconduct that may result. Hence this is posted in the "Merchant Best Practices" forum.

    I'm not going to respond to off-topic responses in this thread. As Loxly indicated, discussions about "other solutions and alternatives to the Advertising-Nexus laws" should be in the "Affiliate Tax Laws" forum and sub-forums. As one example, there is a discussion there of the Streamlined Sales Tax Project, which was modeled on the guidance in a U.S. Supreme Court decision.

    Chuck asked: > "So tell me how an affiliate would be audited on sales made in that state where taxes were not collected." <

    If a state tax agency chose to audit an in-state publisher, I expect that the focus would be on the activities of the publisher, to determine whether the publisher's actions trigger the "Advertising-Nexus" law for out-of-state merchants, according to the state's interpretation of that law. The audit could also uncover the total earnings the publisher received from each merchant, which certainly might help the state refine a list of merchants to target for compliance investigations.

    Chuck also wrote: > "I can tell you that there are many New York super affiliates who changed their state of residence. Not that I know if they actually moved? No, but I suspect that they didn't. It is still free will to go against a law even though you suspect it to be unconstitutional." <

    Chuck, it's okay to deliberately violate a law which is unconstitutional. However, compliance or conformance with the "Advertising-Nexus tax laws" is the decision of the merchant, not the publisher. Publishers are bound by their contracts with merchants. If a merchant elects to exclude publishers from a particular state, or to impose the "New York Solution" as a condition of their contract with publishers in a state, then it would be unethical (and a breach of contract) for publishers to "trick" the merchant into a fight the merchant chose to avoid.

    Chuck, by acknowledging that you, as the affiliate manager for merchant programs, "suspect" that publishers submitted fabricated change-of-address notices, you've cemented the argument that publishers are "on notice" of this issue. (I worry that an aggressive tax agent might call this "reckless disregard.") Your comment also casts some doubt on my original statement that publisher misconduct is "a problem that hasn't yet manifested itself.")

    It's up to the merchant to decide what steps to take to insure publishers' compliance with their agreement with publishers. I've made a suggestion here -- again, it's not a recommendation, just a suggestion for merchants to consider and perhaps discuss.
    Last edited by markwelch; July 9th, 2009 at 11:17 AM.

  9. #9
    Moderator MichaelColey's Avatar
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    Quote Originally Posted by markwelch
    I'm not going to respond to off-topic responses in this thread.
    Good policy. Some people are so far out there that they're not just in left field, they're wandering around in the parking lot, totally missing the game.

    Now back on topic...

    I would disagree with imposing the "NY Solution" on all publishers. Those offline methods are totally legal, ethical, and effective. They're not pursued by many affiliates, but I don't see any reason to restrict those practices where it isn't necessary. It's not going to stop states from passing new nexus laws, and it's unlikely to prevent nexus in any state other than NY.
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  10. #10
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    MichaelColey wrote that he doesn't "see any reason to restrict those practices where it isn't necessary."

    I didn't make the suggestion because there's anything wrong with the specific practices, nor because I thought doing so would prevent the spread of these laws.

    The reason merchants should seriously consider this suggestion is to reduce their risk of being "tricked," either by a state which enacts the law quietly or retroactively, or by a single unethical publisher who conceals their place of residence.

    The "trade-off" here is the benefit a merchant receives from the specific practices which are prohibited under the "New York Solution." For many merchants, those benefits are very significant and justify the slight risk.

    I expect that 90% of merchants who consider this suggestion will choose not to implement it (even though I believe that most attorneys who consider the idea would probably recommend it.)
    Last edited by markwelch; July 9th, 2009 at 11:54 AM.

  11. #11
    OPM and Moderator Chuck Hamrick's Avatar
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    [QUOTEChuck, it's okay to deliberately violate a law which is unconstitutional. However, compliance or conformance with the "Advertising-Nexus tax laws" is the decision of the merchant, not the publisher. Publishers are bound by their contracts with merchants. If a merchant elects to exclude publishers from a particular state, or to impose the "New York Solution" as a condition of their contract with publishers in a state, then it would be unethical (and a breach of contract) for publishers to "trick" the merchant into a fight the merchant chose to avoid.[/QUOTE]

    Publishers agree to the Terms and Conditions or Policies of a merchant but are contracted with the network with the exception of in-house programs. The affiliate is a contractor to the network and not the merchant thus sent a 1099 at the end of the year. Merchants have the ability to terminate the affiliate at will with little or no arbitration.

  12. #12
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    Admin Note: OT postings split off to http://forum.abestweb.com/showthread.php?t=121643

  13. #13
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    FYI, as I mentioned in another discussion thread today, the newest language (added to California's most recent incarnation of the "advertising-nexus" language in ABX8-8) would appear to exclude the type of "safe harbor" adopted by the New York tax agency.

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