Small Business Taxes Gone Wild In California

I estimate that 99% of Californians do not understand the implications of the new small business tax that Governor Jerry Brown signed into law yesterday. This law would mandates online sellers like Amazon.com and Overstock.com to start collecting sales taxes on items shipped to California if they have some sort of relationship with an affiliate. What is an “affiliate?” That is the question that I also estimate 99% of Californians don’t know the answer to. Put simply, affiliates are people who are in the business of pre-selling products from online retailers for a commission. Think of bloggers who blog about the merits of a particular product, then offer a link to buy from an online retailer.

The operative word here is “business.” For many affiliates, this is a small business that they run. As a business, affiliates make an investment in time and money with the hope of making a return on that investment. Sometimes it works, and they do have a positive ROI. Now, with the new law, the biggest online retailer, Amazon, has terminated all affiliate relationships in California. Simply put, all the affiliates that rely on Amazon for their income are out of business. Is this a good thing for the struggling economy and for real people trying to create a living?

As an affiliate marketer myself, I cringe at the thought of yet another tax on top of all the other small business taxes that are imposed on the little guys just trying to make it. I started to write down my thoughts for this blog, but found an article by Pace Lattin that aptly states what I wanted to say:

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There has been a great deal of discussion of all the Affiliate Tax laws being passed in the media. Unfortunately, thanks to a great spin campaign by companies such as Walmart, the discussion has been focused on how these new Nexus Tax laws will affect large companies like Amazon and Overstock. Time and time again these new laws being proposed are called “Amazon Taxes” for the sole purpose of ignoring the rest of the companies that will be affected when these taxes are passed. The real truth behind the Affiliate Tax debate is that these laws will have a profound and significant affect on almost every company in the industry, from the largest to the smallest – but will have the greatest impact on the small companies.

This is not an “Amazon” tax, or an “Overstock” tax, but instead a “Small Business Tax” that has been labeled incorrectly in order that the general media might ignore the reality of what these taxes will do to small businesses. I’ve actually met a few attorneys who don’t quite understand the real problems with these laws. Let’s quickly look at what most of these tax laws will do, and explain it simply:

The laws specify that if there is any affiliate of any company making revenue for a product in that state, then the company itself has to pay taxes for any transaction in those states.
My explanation is purposely obtuse and vague, because in many cases so are the laws that are being passed. The definition of a transaction or purchase is not very specific and thus is extremely problematic. This means that anyone engaged in any sort of ecommerce, whether it is sale of a product, promotion of a program, signups to site, in theory could be forced to pay those states taxes.

Thus if you are CPA network promoting a product and you have affiliates in those states, you may be liable for taxes in those states. Why? Because as anyone who is in this industry knows, the definition of who is selling the product, versus what a network is and even what a publisher is, is often difficult to pin down. Sometimes affiliates of CPA Networks are the publisher, sometimes they are just a PPC buyer, and sometimes the network is a publisher of another network. With all the connections, who is to say what establishes the nexus? Don’t expect States that are desperate for money to actually define this for you, but instead send any company that has any affiliates in that state, anyone that reports that their money is made from marketing, tax bills. We are their new “banks.”

Even if we knew the answer definitively to the different questions, many companies, from lead generation firms to dating sites are going to start avoiding CPA networks in those States for that specific reason. They do not want to risk that working with a company in a certain State will somehow cause a nexus and thus require them to file paperwork, file additional taxes. They’d rather make it easy and work with someone else.

Thus, as I started, the victims here are not the Amazons of the world. They are the small businesses. Most CPA networks are just that: Small businesses, with a few employees, working hand in hand with their affiliates to create valuable opportunities for their advertisers. They, along with their affiliates will suffer the most. These taxes are aimed at our industry, our friends, our community and our businesses. If we continue to allow them continue without standing up, supporting those people who are fighting, it is very possible in a few years we all will wish we did.

Pace Lattin
pace@pacelattin.com


Have small business taxes gone wild in California?

Copyright © Alex Tran