Almost everyone involved in selling anything online suggests that you set up an affiliate program. With an affiliate program, people sign up with you and receive links that they can use to refer people to your Web site. If a visitor buys through the affiliate link, the affiliate gets a commission.
It sounds like a great way to drive more sales and it has worked well for years. Amazon.com has probably one of the oldest affiliate programs around. I’ve been an Amazon Associate for years.
However, after years of having our own affiliate program for our products, about six months ago we shut it all down. We told all of our affiliates to remove the affiliate links from their Web sites and sent out our final payments.
Why? Because of the “affiliate tax” (aka the “Amazon tax,” “affiliate nexus tax,” or “Internet Sales Tax”) that states are trying to levy.
What is the Affiliate Tax?
Cash-strapped states are trying to get more tax revenue by targeting affiliates. Everyone knows that you need to collect sales tax from people who live in the state where you do business. If you have a physical presence in the state, it’s called a “nexus.” The difference is that now, states are trying to say that affiliates count as having a nexus in a particular state.
That means as a small business, you have to collect tax for any state where you have affiliates. For a small business, this change is an extreme accounting and logistical nightmare.
Internet Taxation is a Moving Target
The more we read about the state rules affecting affiliate programs, the less we wanted to deal with affiliate stuff at all. As a vendor, keeping up with all the legislation simply isn’t worth the effort.
The list of states enacting Internet tax rules keeps changing. This site has information on the states that have enacted laws or have legislation pending:
In most states, the tax only applies to retailers who sell $10,000 to customers in the specific state during a given time frame. Unfortunately, that threshold varies by state. As of this writing, the threshold in Connecticut is only $2,000.
The administrative overhead for managing the affiliate tax is a killer for a small business. You would have to register for a tax number in each state, monitor the current tax rates (which change from time to time), collect tax for each state, and remit payment separately to each state.
The remittance frequency varies by state, as does the sales threshold, so you have to track that too. For most of us, it’s simply not worth the effort.
The tax situation is such a mess that Amazon has dumped affiliates in a number of states, such as Colorado, Rhode Island, and North Carolina. The company has said it will drop affiliates in any state that enacts the tax and Amazon Jeff Bezos has called the tax “unconstitutional.” Other large retailers like Drs. Foster & Smith terminated their affiliate program entirely.
It makes sense really. Managing an affiliate program well takes work. If you’re a small retailer, the amount of money you make from affiliates is unlikely to offset the annoyance of figuring out how to remit taxes to umpteen different states.
Right now, our shopping cart handles taxes from one state, Idaho. Reconfiguring it every time some state legislator makes a move is completely nuts.
What Can You Do Instead?
So given that our affiliate program is no more, you might be wondering how we handle joint ventures now. If you don’t have an affiliate program, what are you supposed to do?
Our answer is to offer a “pay for performance” advertising program. We give advertisers a coupon that they can give to their customers.
For example, at our recent Self-Publishers Online Conference, we had coupon codes such as “SusanSentMe” which gave attendees 10% off the price. If a customer used a coupon, we knew from the code where they got it. After the conference, we paid the advertisers based on how much we earned from the ad on their site.
Handing out a coupon doesn’t make you any type of “commissioned salesperson” so no state can come back and say we have a “nexus” in that state. Advertising is a short-term, one-time event.
So for us, using coupons works nicely. We can completely avoid tax issues and still be able to do joint ventures with people who like our products and services.