California legislature wants to tax affiliates

Remember the 1990s, when everyone pretty much agreed that a tax on the internet was a silly and counter-productive thing to do? Well, now you can forget about it, because the politicians have been on a spending spree and they need someone to pay up. Will California move to tax online sales by claiming that affiliates constitute a “storefront?” The governator has sworn to veto such legislation in the past, but with the measure included in a larger deficit-cutting package, he may have little choice unless he’s willing to bankrupt the state or lock up its ability to adapt financially over this single issue.

The problem with putting taxes on internet transactions is basically the same as it was when such proposals fizzled in the 90s. Whoever goes first will be the only one imposing such a tax, so unless the market being taxed is huge, it probably makes more sense for those websites to stop selling to those who require extra fees and focus on the other six billion people in the world. Since most places will still not charge an extra local or state fee, adding exceptions for every place that does (and keeping those up to date) would ruin a lot of the efficiency that is built into the potential scale of web businesses.

If every national, state, and municipal government had its own tax rules for web transactions, a single online business would need to know thousands of sets of law!  That’s not even practical for mega-corporations, so you can forget about small independently run sites like the ones that make up the majority of the internet.

In fact, when the issue came up last year, Overstock.com immediately announced that it would be dropping affiliates located in one of the taxing states. Hawaii and California initially backtracked, inspiring Amazon and Overstock to re-establish relationships with affiliates there, but the ban on affiliates Rhode Island and North Carolina stuck around.

Where is this Website

At issue is the concept of an “in-state nexus.” Since websites sort of exist everywhere and anywhere all at once, it has been hard for governments to define exactly whose legislative authority they fall under.  Obviously, the U.S. federal government manages to collect income and corporate taxes from the American businesses that own and operate websites, but is the corporate headquarters the same as the website’s address?  Does the website physically exist in the state of the person who accesses it, or where it is hosted?

One answer to the question was pioneered by New York.  Their solution was to define affiliate marketers as a physical nexus.  The reasoning is that, as employees, these individuals represent a real physical presence in the state by an agent of the business.  Amazon is suing the state of New York over this definition, but the law has been in place since 2008 and its still slowly moving through the courts.

In addition, residents of New York are supposed to be keeping track of what they buy online and adding the tax due on their annual returns.  I wonder how strictly the residents of New York have stuck to that one…

You’re Fired – The Logical and Popular Solution

Instead of complying with a patchwork of regulations and taxes, why not just fire your affiliates located in difficult states?  So far, this has been the popular solution to quickly eliminating anything that could be considered an “affiliate store-front.”  Its cheap, its simple, and there are plenty of people in India and China that are willing to put those sales dollars into their local economies.

So what would you do if your state put up affiliate taxes?  How would you see it from the perspective of an affiliate marketer or from the perspective of someone running the affiliate program?  I can say now, pretty confidently, that I won’t be moving to any place that imposes such a tax on my business.   Trust me, I don’t mind paying my fair share, but we already do that with property taxes, sales taxes on the stuff we buy, and income taxes on all the money we earn.

Something like this doesn’t really make the economy more “fair,” it just punishes more effective technologies and tries to make outdated business models more competitive.  Well congrats, we’re all going to be a lot less efficient in the coming years as we struggle to conform to a patchwork of overlapping fees and contradictory laws.  I’m sure that will be just great for both the economy and your state’s tax collection efforts…

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