While All Eyes Watch Washington, The State Tax Man Takes Aim at Internet Marketers
BySupreme Court Justice John Marshall wrote that the “the power to tax involves the power to destroy” in 1819. One hundred and ninety years later, Commission Junction of Santa Barbara is learning that Marshall’s insight is more applicable now than ever.
Commission Junction runs a website that taps the vibrancy, creativity, and entrepreneurial spirit of individual web publishers around the globe and provides them with a way to be compensated for their talents without ever needing to pick up the phone or struggle with a necktie before a job interview. Businesses are able to bypass large, slow, and expensive advertising agencies and get remarkable results online through Commission Junction’s network of individual webmasters and bloggers. No doubt many small websites are able to pay for their server expenses because of advertising arranged through Commission Junction or one of the many competitors and imitators that its business model has inspired.
Looking at their success and growing market share in the internet advertising industry, we’d say that the folks who run Commission Junction have earned a break and a little relaxed wine-tasting along the Central California coast. However, they have one powerful reason to sober up: The growing demand of state governments to fill their coffers with “affiliate nexus” taxes that promise to destroy Commission Junction and the fledgling affiliate internet advertising industry.
In order to understand how individual entrepreneurial efforts at marketing and advertising – like those that Commission Junction helps to facilitate – are being singled-out for destruction, it is important to have a little background. Normally, under the “physical nexus” rule, states can’t collect a sales tax on transactions with out-of-state businesses that occur outside their the state’s territory. However, an increasing number of state legislatures are amending their tax codes to include “affiliate nexus” language that claims jurisdiction to levy a sales tax on an out-of-state business if an out-of-state purchase was promoted through a website owned by a person residing within their state. For example, the state tax man will argue that a California teenager’s effort to make some extra money by designing a website that promotes an opportunity to buy a widget from a company located and run entirely within Ohio will subject that Ohio widget business to the substantial California sales tax on the transaction if the Ohio business pays the teenager a commission for the link through a company like Commission Junction. In other words, the transaction still occurs on the Ohio company’s out-of-state website, but because the company rewarded the teenager for a customer who linked-in through a web page in California, the state tax man is entitled to be paid.
New York was one of the first states to try out the “affiliate nexus” tax collection scheme and it worked pretty much as you’d expect. Out-of-state companies that were previously using individual bloggers and web marketers through companies like Commission Junction cancelled their affiliate program offers after the “affiliate nexus” language was added to the tax laws. In total, an estimate 3,500 offers were cancelled because the out-of-state companies understood that (1) they can sell directly via their own out-state website to consumers in New York without paying sales taxes, but if an affiliate from New York promotes the deal a sales tax must be paid under the “affiliate nexus” rule and (2) it is too difficult an administrative burden to keep track of which of the millions of affiliates who can potentially accept an offer to host advertising on their websites arguably “reside” within New York under the state’s tax laws and consequently what the companies state tax burden will ultimately be. Ultimately, businesses concluded that they’d be better-off avoiding the transaction costs of affiliate marketing in sites run by New Yorkers and decided instead to concentrate their marketing efforts on their own site and on major search engines and advertising providers like Google. Hundreds of thousands of New Yorkers lost an opportunity to make money.
The destructive impact of the “affiliate nexus” rule in New York hasn’t deterred other state legislatures from looking to adopt the rule in their states. The Commission Junction website shows campaigns against “affiliate nexus” taxes in California, Connecticut, Hawaii, Maryland, Minnesota, and North Carolina. A never-ceasing demand for spending and diminished revenues from a slowing economy are driving states to look to taxation and regulation of the internet in ways that they avoided in the past. With the nation and the anti-tax movement focused on the unprecedented spending in Washington D.C. and the promise of new taxes to finance health care “reform,” the state tax man’s attack on internet affiliate marketers is going largely unnoticed.
Before legislators in these states vote on the “affiliate nexus” rule in their states, they should be reminded John Marshall’s maxim about the destructive power of taxation. Let’s hope that Commission Junction and their army of bloggers and webmasters can get the message out before the vote in your state.
Click the thumbnail below to see Commission Junction’s advocacy page against internet taxation:
