Taxing Issues

23/2008 Issue: Page 64

Print | Email | Digg This

"I love NY" may be the famous motto of the Big Apple, but as of late, it's not the mantra of any New York-based affiliates.

That's because in April New York Governor David Paterson (D-NY) signed into law the state's 2008 – 2009 fiscal year budget that included a provision - initiated last fall by former NY governor Eliot Spitzer - requiring out-of-state Internet retailers to collect sales tax on deliveries made into New York, based solely on a link to a marketer's website. Called the New York Internet Sales Tax, the law went into effect on June 1, 2008 and is expected to raise $50 million in revenue each year for the state of New York.

The new regulation is causing consternation among the community of online marketers and affiliates. Because the tax laws are complicated and it's still unclear about the full implications of the New York State Internet Sales tax, many skittish merchants are opting to drop all their New York-based affiliates in an effort to avoid any hassles and taxes. Most U.S. states already require online retailers to collect sales tax if they have a physical presence in the state that the customer is from – it is called nexus. Therefore, if an online retailer has a physical store in New York, or even an office or warehouse, they must collect sales tax from a customer in New York.

However, this new law is broadening the scope of that to say that a business having any affiliate presence in the state of New York is akin to having "an agent or a representative," thus establishing a physical presence or nexus in New York, which requires taxation.

Merchant Confusion

Prior to the law going into effect, Amazon immediately filed a law suit against the State of New York. The online retailer claims the new rules violate the equal protection clause of the constitution because it specifically targets Amazon. "It was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes," the complaint says, noting that "state officials have described the statute as the 'Amazon Tax.'"

Other merchants simply deactivated their affiliates based in New York – many without notice or explanation (See sidebar). Melanie Seery, a New York affiliate, was so outraged by being dropped by merchants that in June she started a blog called NYAffiliateVoice.com to speak out about the taxation issue and its implications for affiliates.

Overstock, which has a large affiliate program that brings in over $100 million annually, was among the first wave of high-profile merchants to unceremoniously drop its NY-based affiliates.

"We had to drop the affiliates because of the risk of not collecting the affiliate tax and then someday having New York win," Patrick Byrne, CEO, Overstock.com, says. "We would get dinged for that. So we had to drop the affiliates immediately."

However, Overstock did a quick turnaround and less than a month after deactivating affiliates; they followed Amazon's lead by filing a suit against New York State.

According Byrne, the Supreme Court has previously ruled - as it related to catalog retailers - that the burden of collecting taxes cannot be put on the out-of-state retailer. "Therefore, I think New York's law is directly unconstitutional," Byrne says. "We're not suing the state for any money. We're suing to enjoin them from ever acting upon this law, and we're trying to get the Court to throw out the law."

He says that decision to seek an injunction is the right, long-term thing to do and that Overstock is putting hundreds of thousands of dollars into this lawsuit. Byrne has suggested that affiliates write a letter to their state legislators claiming that such grassroots campaigns can really make a difference.

Affiliates Take a Stand

That's what the large community of vocal affiliates on ABestWeb.com is aiming for. Many affiliates at ABW are getting together in New York to examine the issue. At the meeting, to be held on July 28 (after press time), they will discuss the tax issue and talk about obtaining legal services to help better understand the issue and the potential recourses for affiliates. Several ABW affiliates are also participating in a special panel session at the Affiliate Summit East in Boston in mid-August to discuss the issue.

And it's not just affiliates in New York that are watching this closely. Both affiliates and merchants are concerned that large states seeking to generate additional revenue by collecting similar taxes may follow if New York is successful.

"We just think it's a bad idea for New York. Additionally, other jurisdictions are going to watch us fight this in New York. Based on how it plays out in the Courts there, they'll then decide whether or not to go ahead with it as well," Byrne says.

Affiliate Scott Jangro, CEO of MechMedia, based in Massachusetts, recently gave $250 to a group of New York affiliates to help cover the costs of meeting and legal services.

"I'm not from NY, but these guys are taking it on the chin for the rest of us," Jangro wrote on his blog. "There's a lot of money in this industry and I hope that many of us will consider helping out." You can donate at NYAffiliateVoice. com.

Currently, two Technical Service Bulletins (TSB) related to the law have been released. The latest was issued on the June 30, 2008. The TSB, titled "Additional Information on How Sellers May Rebut the New Presumption Applicable to the Definition of Sales Tax Vendor as Described in TSB-M 08(3)S," imposes additional requirements that a remote seller must satisfy to rebut the presumption of "vendor" status.

It is no longer sufficient for merchants and networks simply changes the terminology of their contracts with affiliates to include explicate language barring them from activities other than direct linking to websites, according to the Direct Marketing Association's (DMA) Tax Counsel George Isaacson.

The new TSB says that "each resident representative must submit to the seller, on an annual basis, a signed certification stating that the resident has not engaged in any prohibited solicitation activities in New York State, as described above, at any time during the previous year."

These activities are listed in the TSB as "distributing flyers, coupons, newsletters, and other printed materials or electronic equivalents; verbal solicitation (e.g., in-personal referrals); initiating telephone calls and sending emails."

The prior TSB noted that direct marketers could defeat the presumption of nexus if that marketer is not engaged in other solicitation activity on behalf of a company beyond a Web link. "A pure vanilla affiliate marketing arrangement" with only a referral link will be sufficient to defeat the presumption of nexus. Many suggested that networks and vendors simply changed their terms and conditions to reflect this.

Observers say that PPC marketing will not give rise to the presumption of nexus because it is a set fee based on the number of clicks, therefore, falling under the heading of advertising, which is not subject to taxation. Lead generation activities appear to be closer to the definition of advertising under the new law and would not be subject to nexus.

The Networks

Thus far, the networks have mostly been mum – issuing only basic information about the law and instead advising their merchants to seek legal counsel to sort things out. LinkShare held a conference call in conjunction with the DMA to have the DMA's legal team interpret the regulations. Commission Junction issued a notice to its affiliates, "We are actively monitoring the law and will use reasonable efforts to protect ourselves and our publishers as we deem appropriate. The application of the law is dependent on particular business and factual circumstances, and Commission Junction is not in a position to provide legal and tax advice regarding this law. However, we encourage you to perform the appropriate due diligence as it relates to your business."

However, ShareASale President and CEO Brian Littleton wrote a little more in depth in his blog, "…our first response to this will be to provide this report which will allow merchants to know where they stand regarding the law. Our plan at this time is to treat any case where a merchant wishes to terminate NY affiliates with great care and caution. If a merchant requests to do this, there is little we can do to stop them - but ShareASale will be performing the task so that merchants aren't accessing information which traditionally is considered private within the network."

Littleton went on to say, "There is a chance that this plan will not work. My hope is that we can warn merchants that terminating NY is a bad plan - and one that needs rethinking. If our plan doesn't work - and we end up needing to provide more information to merchants, we may end up having to do so… I say this as a heads up to affiliates because while we don't like to give out info, we also don't want to put merchants in a place that makes it difficult to adhere to the laws of their state or others.

We can't offer legal advice to merchants and/or affiliates regarding these laws. But I can offer my extreme dissatisfaction with the State of NY for their short term thinking and complete disregard for their citizens. I am personally confident that this will all be reversed and I am hopeful that for those affiliates in NY - it comes sooner rather than later."

Meanwhile, it's a game of wait-and-see for affiliates and merchants as the legal wheels slowly turn. Many observers say it will be a while before we find out if this law is declared unconstitutional or is upheld and other states begin adopting similar regulations as a means of generating state revenue.

Print | Email | Digg This