Affiliate Tax – Can You Hide?

Editor’s Note: With the number of states considering the so-called Amazon tax or some similar tax growing it’s nearly impossible to keep up with all the iterations of the issue.  Traditional affiliate marketing is not the only advertising channel at risk. Peter Figueredo, CEO of NETexponent, posted an excellent blog on their corporate site (reprinted with his permission) posing the question can any network with CPA model afford not to get involved in shaping the outcome of this issue?

Ever since the “affiliate tax” issue appeared I have been wondering how each state will determine nexus. I mean, where do you draw the line? We already know that affiliates clearly constitute nexus because they are viewed as sales commissioned partners of an advertiser. If an affiliate is based in a state that has passed the affiliate tax law then advertisers working with that affiliate must collect sales tax. I get that. This post is not here to debate the pros/cons of the affiliate tax. I am trying to determine where you draw the line.

Lets take CPA ad networks for example. They pay their publishers (or affiliates) a bounty or revenue share for sales they generate to advertiser websites. Yet nobody mentions CPA ad network publishers when they discuss this tax.

What about Google? They now act as an affiliate for many advertisers who run their affiliate program

Google Product Ad example

through the Google Affiliate Network. Google places product ads in search results and gets paid a bounty or revenue share for those sales. Google has offices in NY and many other cities so should working with Google constitute nexus for advertisers?

How about companies like Skimlinks and VigLink? They both work as a master affiliate and allow other affiliates to promote advertisers through their links. The advertiser pays the network like Commission Junction or LinkShare. The network pays VigLink and Skimlinks. They in turn pay affiliates. Some of those affiliates may be in states who have passed the affiliate tax. What happens then? Clearly companies like these think there is no danger to the advertiser. In fact, Vig Link is even promoting the fact that they will shield affiliates who reside in states who have an affiliate tax. Many advertisers are choosing to sever relationships with affiliates in states that have affiliate tax because they do not want to collect sales tax in those states. VigLink negates that decision by advertisers because it works with many affiliates who are in states that have an affiliate tax…yet an advertiser may never know. Could this hurt the advertiser? I don’t mean to pick on VigLink but they are the only site I have found to clearly advertise this practice as a benefit of working with them.

Where do you draw the line? What about CPC deals, aren’t they performance based?

Our agency has been monitoring this situation diligently and we continue to advise our clients to the best of our ability. However, many questions remain unanswered.

About Peter Figueredo

Having worked in the online marketing arena since 1997, Peter Figueredo has seen the ups and downs of this industry. He is currently the CEO of Affiliate Management and Search Marketing Agency NETexponent. which he co-founded in 2001. Prior to that his online direct marketing experience came from working at interactive agencies such as Mass Transit Interactive, as the EVP Director of Performance Marketing, and i-traffic, currently a division of Agency.com where Peter held the title of Director and helped establish and grow their Affiliate Marketing Services division. At a time when affiliate marketing was relatively unknown Peter was building and managing affiliate programs for leading Fortune 500 companies.

Peter’s company recently launched an Affiliate Marketing Research division called Affiliate Benchmarks to provide Affiliate Marketers with more insights and data.

You can find Peter on Twitter: @figueredo.

4 Responses to Affiliate Tax – Can You Hide?

  1. Peter,

    You make excellent points. The ad tax could be interpreted to include anyone in the food chain who gets paid a % of sale (one qualifying criterion of establishing nexus). So what about the shopping cart provider? Or the OPM? Or the solution provider? The list goes on…

    But then there's the enforceability. Is a state tax collector resourced enough to identify if a merchant has a commissionable relationship with someone masking an affiliate in their state? Is a merchant willing to take that risk?

    We know that an online (and catalog) merchant, Drs. Foster and Smith, terminated their entire affiliate program because the risk became too high that they'd be somehow 'caught' having nexus because they didn't know what an affiliate may or may not be doing.

    Which brings me back to Vig Link. I had never heard of them until this post. After hearing about Drs. foster and Smith, I'm concerned Vig Link might unknowingly be causing the risk to go up for merchants, who will opt to kill their entire affiliate programs instead of getting 'caught' unawares. This is no longer an isolated problem for affiliates in a few states, this hits the entire industry.

  2. Thanks Rebecca…I agree that Vig Link is playing in a dangerous area right now. Advertisers working with them should at least be made aware of the risks. I am not sure if Vig Link gives advertisers the flexibility to remove certain affiliates based on their home state but that would be a good way for them to put the power back in the hands of advertisers.

  3. check out my follow-up to this story where i interview the CEO of VigLink
    http://blog.netexponent.com/2010/04/viglink-inter

  4. Lance says:

    I am continually amazed at the average citizen who seems to not understand that the simplest way to avoid all this mess is to go ‘off-shore’.

    The tax system does not allow for the taxing of persons from overseas who make an income from within a country. So, if you live in England but make money in the USA then you pay English taxes NOT US taxes.

    A bit of interesting info – if you win millions in Vegas but live overseas the Internal Revenue cannot make you pay ANY taxes on your winnings. You take the money home and pay taxes in your home country. However, in many countries there is NO taxes on gambling winning. So it is possible to get away with paying NO taxes at all even if you win the New York Lottery – how cool is that?

    Back to the affiliate issue.

    To be considered a citizen for tax purposes you must live in a state/country for a certain number of days a year. You may need to not own a home or have a bank account in that state/country.

    This may all sound really difficult to achieve but it’s not.

    Transfer the home into the name of a non-earning trusted member of your family (wife, husband) or turn the home over to a trust of which you are the beneficiary (the safest approach).

    Open a bank account in an off-shore bank – there are many of them and I’m sure you can find a bank you trust that has branches overseas (try HSBC – Hong Kong and Shanghai Bank [bet you didn’t know they were a Chinese bank did you?] and ask them to open an account for you in Hong Kong.

    But before you transfer your home and close bank accounts check the tax laws – they may be different where you come from.

    Now there’s the residency issue. Well I’m assuming you make your living online so you can work form anywhere? I’m also assuming that you love to travel? So start travelling and have as long a working vacation as you want. Instead of paying taxes to the Govt use that money to help pay for your trip. Depending upon how good an affiliate you are it may pay for the whole vacation and more!

    I travel all the time, settle down in a country for 3 – 6 months, move on when I want to and pay no taxes. When I’m over all the travelling I’ll go home, settle down and pay my taxes. Until then why should I pay taxes to any country who’s government systems I don’t use?

    I understand that there may be reasons why you might not want to live the life I do and decide to stay and pay your taxes. But please don’t believe for one second that there are not alternatives – there are!