A Letter in Opposition to AB 178

I wanted to share my letter in opposition to AB 178. Thanks to everyone who gave me feedback, in particular Angel Djambazov. Writing letters does make a difference, especially on this issue because education is so important. People in decision making positions do not understand what affiliate marketing is or the consequences of this legislation.

March 26, 2009

To Members of the Assembly Committee on Revenue & Taxation
State Capitol (Assembly)
P.O. Box 942849
Sacramento, CA 95814

Dear Assembly Member:

I am writing in opposition to AB 178 (“The Amazon Tax”), which would have negative consequences for online businesses based in California. If this bill passes the state will experience a decrease in business activity and probably a drop in net tax revenue.

The goal of this measure is to force out of state retailers to collect and remit sales tax (use tax) by categorizing their California-based affiliates as nexus. While the desire for increased tax revenue is clear to understand, this is a destructive and ineffective approach based largely on misperceptions about what affiliate marketing is.

Before reviewing the likely short and long term negative effects, it may be useful to review two topics:

1. The current language of the bill is overly broad. Any business which accepts “commission or other consideration” for “directly or indirectly” referring “potential customers” is deemed nexus. This is basically a definition of advertising. While this may be intended to apply to affiliates, it could equally apply to any television, radio, outdoor, mobile, print advertising, or non-affiliate internet advertising, such as Google Adwords.

2. Affiliate Marketing is a form of advertising; affiliates are not a sales force. The retailer who engages with a California company on an affiliate basis has no more direct relationship then if they had purchased advertising from a television or radio station. The term affiliate marketing simply describes one of three main advertising models used on the internet:

a. CPM (Cost Per Impression) – If you buy an advertisement on television, radio, outdoor, mailing list (including email), or in print, you’ll pay based on the number of estimated viewers and the value of those viewers.

b. CPC (Cost Per Click) – If you buy an advertisement on Google Adwords, Yahoo Search Marketing, or Microsoft adCenter, you’ll pay for each individual click that is sent. Many affiliate programs also pay out on a pay per click model.

c. CPA (Cost Per Action) – This is the typical advertising model used by affiliates. If you have a retail affiliate program, you set a commission rate to pay affiliates per sale.

CPA marketing allows the advertiser to engage with a large number of affiliates (better known as publishers) who are rewarded if they can prove their value. In contrast to a sales force, distribution center, or maintenance team, an advertiser enjoys no advantage by working with an affiliate in a particular physical location. As a case in point, many large affiliates are based outside the United States. The affiliate marketing model benefits affiliates by allowing small business to display advertising on behalf of retailers which they normally would not have exposure to without an advertising agency.

If affiliates are considered tax nexus, their ability to charge for advertising on a CPA-basis will be seriously disadvantaged compared to their competitors in other locations and their competitors using different advertising models – CPM or CPC. If California affiliates change their locations or their advertising fee structure, this nexus is avoided.

The following items should be considered in opposition to this legislation:

  • Online retailers without current nexus in California have a high likelihood of severing their relationships with California affiliates to avoid nexus. This has already happened in New York, where hundreds of merchants dropped all their New York affiliates – most famously, Overstock.com terminated 3,400 relationships. This loss in revenue greatly hurt small business owners in New York.
  • As a form of advertising affiliate programs are only so valuable to online retailers. The average affiliate program might generate, through advertising, about 10% incremental revenue for an online retailer. Small businesses which participate in affiliate programs are widely dispersed nationally and even internationally. If you divide this percentage by the national population, you’ll note that even in California, the most populous state, revenue from affiliate advertising would only account for one or so percent of an online retailer’s sales.
  • Tax collection compliance is difficult. Most online retailers could not immediately charge sales tax even if they wanted to because the tax code is complex and the change would have to go through the development queue. Faced with a choice between losing one or so percent of their revenue and a possible lawsuit, they’ll probably choose to end their affiliate relationships.
  • The overly broad language will cause confusion and hesitation in the marketplace. If the bill applies to affiliates, it should also apply to Google Adwords, which the vast majority of online retailers advertise through. It might also apply to advertising agencies, such as my own.
  • Passage of this legislation would virtually guarantee a costly lawsuit against the state by its own small and large businesses.
  • Companies without affiliate programs will avoid launching them. My business makes its money managing affiliate programs so you can see the impact this would have on us. My business currently employees seven people full time. This legislation would put a damper on our expansion plans.
  • California will lose current and future jobs because affiliates – highly portable businesses – will move out of state, sell to out of state entities, and not start up in the future.
  • The current and future jobs lost will include a high portion of skilled, well-paid, work-at-home jobs. Becoming an affiliate publisher is an accessible business model, requiring very little capital and is a great model for self employment. California’s unemployment rate is currently 10.5%.
  • In California, call centers and web hosting companies are granted safe harbor status, presumably because the state realizes many of these relationships would be severed and these businesses damaged. The same is true with affiliate relationships.

Thank you for your time and consideration on this matter that is so important to my business and so many other businesses in California.

Sincerely,

Brook Schaaf

CEO

CC: [Note: this list is comma instead of line break separated to save space.]Hon. Charles Calderon, Hon. Chuck DeVore, Hon. Nancy Skinner, Hon. Jim Beall Jr.,Hon. Joe Coto, Hon. Diane L. Harkey, Hon. Fiona Ma, Hon. Jim Nielsen, Hon. Anthony J. Portantino, Hon. Lori Saldaña

About Brook Schaaf

You can find Brook on Twitter @brookschaaf.

2 Responses to A Letter in Opposition to AB 178

  1. Beth says:

    Brook,

    Great, great detailed letter! Thanks. Also, people should note, that letters don't need to be this detailed. We have a good sample letter on PMA website too for people to use which makes it easy.

    http://www.performancemarketingalliance.com/calif

    Cheers,

    Beth