The Legality of Affiliate Marketing

Affiliate marketing is still somewhat of a new concept, even though its roots can be traced back to the 1990’s when retailers created platforms in order to analyze third-party online referrals in order to provide financial commissions for sales. Remember what the online world was like in 1995? While commissionable transactions were nothing new even in the year Clueless first came out, turning such a time tested model into one that fit into a blossoming digital era was a challenge.

online legalFirst of all, there were no geo boundaries for the US tax nexus to oversee. There were marketing rights found in other countries and as in person transactions faded into the abyss, lawmakers began scrambling to make sense of it all. Now, online (only) retailers are booming but they also need to know what kind of legal issues they may face. So far, no clear legislation has been made to keep up with an ever-changing eCommerce industry, but there are three primary legal concerns retailers and affiliate marketers should consider more closely.

Untangling the tax nexus

Before the internet, sales taxes were pretty easy to levy on companies and were held within state borders. As a manufacturer or retailer, you either made or sold goods in a certain state, and you were taxed accordingly. But with eCommerce, retailers are free to sell to anyone and it’s very tough to require the remittance of taxes to states, cities or counties. At first, that wasn’t a huge issue for local and state governments since eCommerce was such a niche industry but that’s changed.

Now, eCommerce is slated to overtake brick and mortar operations, and the amount of sales taxes being paid simply doesn’t add up. As such, a number of legislators are drafting bills in order to call affiliates a veritable “extension” of a retailers sales team since that would be an easy way to fix the “physical nexus requirements” called for with taxation (and thus boost the revenue of sales tax).

Tackling affiliate disclosure

The Federal Trade Commission (FTC) created new disclosure of advertising guidelines in 2013 that encompassed social media and blogs in an effort to rope in affiliate marketing. In the guidelines, it’s stated that any blogger or social media guru who gets incentives (monetary or otherwise) for promoting just about anything (service, product or brand) has to make that information public. In other words, if you rely on an affiliate to send traffic your way from SM posts of blogs, you also have to follow these rules. However, critics say the system is skewed since penalties are steeper for retailers than affiliates.

Plus, these guidelines simply haven’t been well received or rampantly adopted. In 2011, there was a ruling that Legacy Learning Systems (a company that offers guitar lessons) was guilty of “deceptive advertising.” This happened when an affiliate pretended to be real students posting false reviews. The company was charged $250,000.

Direct marketing to our neighbors up north

The third legal issue involves the Anti-Spam Legislation in Canada, effective in July 2014. This is considered the most aggressive anti-spam law global (so far). Implied consent comes with a detailed definition in order to protect consumers from any sort of spam. To establish implied consent with an existing business relationship, the consumer must have made a purchase or agreed to a business opportunity, been part of a contract with the business in the past two years, or inquire about an application for a purchase or business opportunity in the last six months.

Maybe Canada has things right with these laws. How they’ll impact US retailers is yet to be seen.

About Larry Alton

Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.

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