HB 2551 TAX: The Death of Affiliate Marketing

Arizona’s Affiliate Tax: The end of affiliate marketing in Arizona?
Author: Aaron Kelly

Arizona is well known for its pro-business climate, which has enticed companies mlillions of ambitious entrepreneurs to call the state their home. However, the State’s fiscal bliss has subsided and instead has been replaced by a 1.5 billion dollar deficit. To remedy this enormous budget shortfall Arizona, like several other states, is considering a new sales tax that targets out-of-state online retailers through their in-state marketing affiliates. In essence, a tax on affiliate marketing.

This article will address the affiliate nexus tax, and how it will not only destroy affiliate marketing in Arizona but push the already ailing economy into a death spiral.

HB 2551: The Death of Affiliate Marketing Tax

Arizona HB 2551 is a modeled after a similar New York state bill that broadens the legal definition of “nexus,” which is a business’s physical presence within a state. In April 2008, New York inserted a line item in its state budget claiming sales tax jurisdiction over the affiliates of Amazon.com, maintaining that the home offices Amazon’s affiliate marketers operated from constituted sufficient grounds to establish nexus.

(This topic will be discussed during our upcoming webinar on Affiliate Marketing by Ginette Degner on March 23rd: Affiliate Marketing Webinar –  Sign Up Now)

Similarly, Arizona’s HB 2551 charges that any company that contracts with an Arizona resident in exchange for a commission or other consideration, whether directly or indirectly through an Internet website link, should be presumed to be doing business in the state of Arizona for the purposes of the Arizona transaction privilege tax (sales tax.) This presumption would only apply in situations where the cumulative gross income or gross proceeds from such sales exceeded $10,000 during the preceding 12 months.

The law appears to be specifically targeted to retailers who use extended networks of websites for displaying its advertisements – in other words, at businesses like Amazon.com who rely upon affiliate marketers.

Desperation is a stinky cologne

There are thousands, if not tens of thousands, of affiliate marketers in the state of Arizona. Affiliate marketers are like any businesss, in that they pay state income taxes, employment taxes, sales taxes, and even property taxes. In 2009, Arizona’s affiliate marketers paid $3.7 million in tax revenues – an amount that will almost certainly be higher in the 2010 tax year….but only if HB 2551 fails.

It does not take a mighty leap of logic to assume that if HB 2551 passes, affiliates will earn less income. Furthermore, many online retailers like Amazon have already threatened to cut ties with its affiliate marketers in states that enact affiliate nexus tax laws. Think they are bluffing? Just ask thea ffiliates in New York, Rhode Island, North Carolina, and now Illinois. After all, the Internet knows no boundaries and Arizona residents will still be able to buy from Amazon, whether or not it has any affilites in the state.

Moreover, HB 2551 is likely to have a deleterious effect on fundraising by Arizona’s cash-strapped schools, which increasingly are relying upon affiliated e-commerce websites to generate funds. Take the popular Box Tops For Education campaign that to date has raised over 100 million dollars nationwide for field trips, recreational equipment and other educational extras. The campaign began when kids around the nation began to collect cereal box tops which they’d turn in for a few cents on every box top. Today, that campaign is mostly conducted on the Internet via websites that donate a portion of the commissions they generate when parents shop there. Participating merchants include Barnes & Noble, Best Buy, Land’s End, Avon and 1-800-Flowers.

Since Arizona consumers will still have the option of buying from out-of-state retailers, even if they don’t spend advertising dollars with Arizona businesses, HB 2551 could easily have the effect of reducing revenue without increasing sales tax collections. And even if it doesn’t – is this the right time to add an additional source of taxation for the millions of Arizona households struggling to make ends meet in the current economy?

The Effects of Similar Nexus Laws In Other States: Epic Fail

So far, three states – New York, North Carolina and Rhode Island – have passed nexus sales tax laws. One would assume that if so many other states are clamoring to enact similar legislation that these states must be raking in tax revenue. On the contrary, the laws have not only failed to address to budgetary shortfalls but have actually made things worse. In fact, Rhode Island’s state treasury has actually lost revenues following the enactment of the new law. Based on this fact there is a new bill before the legislature that would repeal the failed experiment known as the Rhode Island Affiliate nexus Tax.

Things are no different in North Carolina as tax administrators have given up entirely on tracking collections from the new tax scheme. In New York, the cost of lost business has been compounded by the high cost of litigation: New York is currently battling the deep pockets of both Amazon and Overstock.com in the courts.

Colorado used a different model when it attempted to collect sales tax revenues on Internet purchases, shifting the responsibility for such taxes from businesses to consumers. Colorado’s law requires businesses such as Amazon to mail yearly notices to their Colorado customers on January 31, detailing the total amount of purchases on which they still owe tax. That information is also reported to the state Department of Revenue. After the passage of this law, Amazon promptly shut down its Colorado affiliate program. More recently, a federal judge has blocked Colorado’s requirement that online sellers must report sales tax obligations.

Seven other states including cash-strapped Illinois and California are currently considering nexus sales tax legislation. But even members of California’s Board of Equalization, the agency that oversees sales tax collection, admit that the state stands to lose at least 50% of the revenue the legislation is designed to generate if Amazon cuts its ties to California’s thousands of affiliate marketing businesses as Amazon has announced it intends to do if the measure passes. Upshot? No dramatic rise in the state coffers while California small businesses take another massive hit. Does anybody really win?

(This topic will be discussed during our upcoming webinar on Affiliate Marketing by Ginette Degner on March 23rd: Affiliate Marketing Webinar –  Sign Up Now)

For more information on HB 2551 and other taxation nexus laws, contact an Internet marketing lawyer.

REFERENCE: http://www.aaronkelly…

Certified Master SEO Instructor by the Search Engine Academy and CEO and founder of SEO Training SW.
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11th March 2011 8 Comments

8 Responses to HB 2551 TAX: The Death of Affiliate Marketing

  1. Pingback: Arizona to Affiliates: No Nexus (For Now); Focus Shifts to Use Tax Reporting | | Taxing Tech

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