You’ve all read about the Amazon Tax spreading from New York to other states including California, North Carolina, Hawaii and Rhode Island. Here’s the crazy thing… there is little or no revenue behind these bills, only lost revenue for affiliates and lost jobs for employees. Sounds like a great way to generate revenue for the states, eh?

AB178 couldn’t get out of committee

AB178 was California’s version. It stalled in the State Assembly’s Revenue and Tax sub-committee. There weren’t enough votes for passage. In fact, there weren’t enough votes for it to be heard in committee and it was pulled by the bills author (Assemblymember Nancy Skinner from Berkeley) the day it was to be heard.

What’s the democratic solution? Instead of debating it and hearing public opinion, the Budget Conference Committee snuck it into the budget at the last minute (that is, after 6pm on the last day of weeks of budget negotiations).

Both the State Assembly and Senate passed budgets yesterday and today that included changes to nexus. Governor Schwarzenegger has promised to veto any budget that has an increase that is passed by a simple majority instead of the 2/3 required for tax increases. Whether a game or not, legally he is correct.

$150,000,000 is a lot of money!

I can see why the state legislators are drooling at lobbyists promise of $150,000,000 in revenue for the state. That’s a lot of money! I’d go after that too if I could.

The problem is that the number doesn’t look at the downside, only at all of the upside potential. Here are the assumptions:

1. All stores with affiliate programs maintain their programs and their California affiliates and decide to collect California sales tax.
2. Oops, there isn’t a second assumption. Just the one.

What if the assumption is wrong?

I’m glad you asked. If the assumption is wrong, retailers like Amazon, Overstock.com and Zappos will terminate California affiliates. Amazon has already notified California’s leadership in the state house that it will do so and has been terminating affiliates in North Carolina and Rhode Island when their legislatures pass similar bills. It’s safe to assume that will happen here as well.

That means a decrease in income tax revenue as we will generate less revenue. That will be compounded by our sites being less competitive and losing more sales thus more income tax revenue for the state. That will be compounded by layoffs, or at a minimum less hiring, which will result in both less income tax revenue and an increase in unemployment payments by the state.

NY collected $50 million after it passed the Amazon Tax last year

Maybe there was a first mover advantage. Amazon collected NY sales tax. It has clearly stated that it will not collect from any other states unless there is a national solution. That’s what the US Supreme Court stated in Quill v. North Dakota: Only the US Congress can force collection of sales tax where nexus does not exist.

I’ve heard rumors that Amazon accounts for 30% of that increase. Assuming that is correct for California, that’s $45 million that comes off the top before anything else happens. If you think $105 million is still a big number, what happens when other retailers terminate as well? It’s not looking so good, is it?

Why should you care about California

On this one, I think that as California goes, so goes the rest of the country. With the Silicon Valley here and companies like Google, Yahoo and eBay in opposition, you have no hopes of fighting this in your own state if if passes here.

What’s my solution?

This post has gotten too long so I am going to split it into 2. Please read the next one for my way to climb back through legislators’ loophole.

From a practical perspective, it’s not hard to understand the current financial mess the states are in. The federal government has all but abandoned them. When businesses aren’t making money and consumers are keeping their cash instead of spending it, tax revenues dry up. It’s simple: States need to find new and creative ways to get money in their coffers. Never mind the fact that they may waste funds on questionable projects or allocate dollars for politically motivated reasons.

But here’s the problem: The Internet is not merely a sales channel – it has become the repository of our nation’s and the world’s information, and the engine of our nation’s and the world’s economy. As such, its value must be recognized as above and beyond something a state should be able to arbitrarily tax.

Harvard Business School Professors John Deighton and John Quelch, writing in AdAge, offer some startling statistics from a study they prepared with Hamilton Consultants for the Interactive Advertising Bureau:

• Roughly two percent of Americans are directly or indirectly employed in jobs that support the Internet. The dollar value of their wages is about $300 billion.
• The Internet directly pours about $175 billion into the U.S. economy – but it influences economic activity that creates an annual value of $444 billion.
• About 190 million people in the United States use the Internet an average of 68 hours per month. The value of this time, conservatively speaking, is about $680 billion.

Deighton and Quelch also discuss the Internet’s impact on job creation, telecommuting, and society through social networks and online communities. The implications go far beyond the economic impact of the Internet.bDeighton and Quelch conclude with this point:

“When regulators start trying to constrain the Internet, let’s be aware of its enormous and ever-increasing economic and social impact. The Internet is an economic powerhouse that drives U.S. competitiveness and productivity.”

Each state and the federal government should think long and hard before they mess with that.

Following Overstock.com’s announcement that it will pull its affiliate advertising from California due to the legislature’s proposal to increase taxes and the announcements of other companies such as Amazon.com threatening to follow suit, Governor Schwarzenegger today reiterated his deep commitment to not raising taxes to solve our state’s budget deficit and announced Overstock.com will reinstate California-based internet affiliate advertisers:

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall – that’s why yesterday I vetoed the majority vote tax increase passed by the legislature. With unemployment at an all time high, we should be doing everything we can to - keep jobs and create jobs - in California. That is why my Administration immediately contacted Overstock.com when we learned of this news and, I am pleased to announce Overstock.com has reversed its decision and will continue to do business with affiliates here in California. I will continue to fight to keep jobs and businesses in California.”

California lawmakers proposed a tax on affiliate advertising and sent legislation to the Governor, but as promised he vetoed it because we cannot solve our budget deficit by raising taxes and driving businesses out of the state.

Overstock.com estimates its internet affiliate advertisers in California create millions of dollars in revenue.

I applaud Governor Schwarzenegger and his staff for taking a stance in favor of small businesses and fairness. While this is a step in the right direction, we still face this serious issue in multiple states, including California.

The simple truth is that they are based on a loophole left by the Supreme Court. In Quill Corp v. North Dakota (1992), the Supreme Court ruled that only the US Congress can force companies without nexus in a state to collect sales tax for that state. The loophole was that having a salesperson in the state created nexus.

Who is a salesperson?

A smart lobbyist figured out that the states can expand the definition of a salesperson to include anyone who is paid commission for advertising on its site. They neglected to realize that this is advertising and can be cut off with the click of a mouse, just as Amazon has done in several states and promised to do in several more. That means no increase in sales tax revenue.

The real equation is: AB178 = a decrease in income tax revenue + a decrease capital gains tax revenue + an increase in unemployment payments. In other words, it equals less revenue!

Let’s end the debate

Enough on what is constitutional or fair. Enough talking about how there is no revenue because affiliates will be terminated by the retailers or affiliates will move to other states. No one in state government is interested in that. They want another solution. (I’ve told them that doing nothing is a better solution. That resonates about as well as talking about a solution from Congress.)

My solution: Climb through the looking glass

My solution is climbing back through the same loophole the states are using. It’ll kill loyalty sites (including my own) but it will keep many more around and suck all of the revenue from bills like AB178.

Enter Shopzilla, our white knight

The Shopzilla Publisher Program is perfect for this. Not only does Shopzilla pay on a CPC basis, it has a quality filter to protect retailers. That means that any sites that have questionable practices or low-quality traffic, will be paid less or will not be able to survive.

Shopzilla is where you can find many of the stores who terminated NY affiliates. I did a quick search and here is the list that I found. I’m sure there are more but I wanted to get this out today. I think that any retailers who want to keep their affiliates in all 50 states should consider using Shopzilla. In addition, I am guessing that some of the other comparison shopping networks have similar programs to compensate publishers using CPC and systems to protect retailers against low-converting traffic. I’d also bet that the affiliate networks will join in with their own CPC compensation structures.

Sign up: Shopzilla Publisher Program.

The list

Here’s what I have so far:

Before I start, I am going to ask that you sign the petition I started. It is all explained below. To sign, just tweet the following on Twitter:

petition @nmevans to Stop the #affiliatetax. Don’t hurt small biz in CA! http://act.ly/q retweet to sign

From the beginning… AB178

Brook Schaaf has a good write up on the California Affiliate Tax.

act.ly and my petition

My friend Clay Johnson told me about a new website, act.ly that launched this week. It is a brilliant idea. You can read the inspiration for it here. It is a service to post petitions that get signed when people retweet on Twitter. It requires that the person starting the petition select a single Twitter account to receive all of the votes.

I decided to give it a try. I found the account for Noreen Evans, the chair of the California Legislature’s Budget Conference Committee (or an account that appears to be hers). I hope that she reads the petition, the e-mails she is getting and this blog post. I hope that she sees that the bill, while well-intentioned, does not achieve it’s goals and will hurt some of California’s small businesses.

As you know, changes to the definition for nexus were proposed in February as AB178 by Assembly member Nancy Skinner. She was unable to get the votes required to send the bill to the full Assembly so she tabled it (made it a so-called two-year bill which gave her until January, 2010 to get it through the Revenue and Tax Committee). There wasn’t a hearing on the bill. I know that because I received an e-mail telling me that the bill would not be heard as my cab pulled up to the state capital when I was going to testify.

It’s baaaaaaaaaaaaaaaack!

Things work differently in government than in business. The Budget Conference Committee spent the better part of a month working out the details of the budget. At 6pm on the last day of negotiations, a trailer bill was introduced with 9 provisions, one of which was AB178. There was little or no debate and no opportunity for public comment. It was passed along party lines.

Amazon says “NO!”

This week, Amazon sent a letter to state leaders letting them know that Amazon would terminate its California Associates (affiliates) should the definition of nexus change. Many other online retailers will follow suit and terminate affiliates.

Failure to achieve its goals

Lawmakers state 2 goals in AB178:

1. Increase the State’s revenue
2. Help brick-and-mortars

Should retailers terminate affiliates, neither goal will be achieved. Affiliates from other states and abroad will find ways to pick up the sales as those of us hurt by the bill see our user bases disappear and our revenues decline. That means that there may be a net decrease in revenue for the state.

Brick-and-mortar, if they have been hurt by stores such as Amazon not collecting sales/use tax, would see no benefit as Amazon will continue to not collect sales/use tax from Californians. So the B&Ms aren’t helped and businesses that use affiliate marketing are hurt.

Or are we?

I try to run my business in a way that is good for our store partners and our shoppers. I spend time looking for ways to build sites that add value, not looking for loopholes. Should this bill pass and we get terminated by the likes of Amazon and Overstock and others, there is a HUGE loophole that was created in the latest draft of the bill.

If we are terminated by stores for using commission-based compensation, why not switch to using links from comparison shopping engines? Of course, this solution works for some business models and not others. We can’t offer cash back from those links but we can maintain the relationships until we see some rationalization in the market.

Budget Vote Crisis

The state legislature voted on parts of the budget yesterday and did not pass them. The change in nexus for out-of-state retailers is in a separate trailer bill. So there is still time. Please sign the petition by tweeting the following:

Sign the petition!

petition @nmevans to Stop the #affiliatetax. Don’t hurt small biz in CA! http://act.ly/q retweet to sign

• Karen Garcia, My Co-Organizer, GTO Management
• Rebecca Madigan, Performance Marketing Alliance
• Rob Smahl, eBates (Rob has come to be recognized as our own “Great Communicator” for his knack with legislative staffers.)
  
• Lisa Picarille, Independent Consultant
• Alan Gray, NewsBlaze.com
• Ryan Owen, Savings.com
• Jennifer Arnold, Commission Junction
• Nicole Williams, Commission Junction

At the end of April we thought that we had killed California’s affiliate tax bill when AB 178 was moved to a two year bill. Unfortunately,  “nothing ever dies in Sacramento,” as they say. Last week the nexus language returned through the state budget committee, which included it in a grab bag of “acceleration provisions.” The new language, inspired by AB 178, reads:

Extends sales tax “nexus.” Requires out-of-state sellers, such as Amazon, that pay commissions to California firms or residents for sales referrals (often through a website link) to collect sales tax on their sales to California residents. This provision improves compliance, but does not change tax liability. Existing law requires Californians to pay equivalent use tax on these purchases, but compliance is low. Provisions reflect AB 178 (Skinner). The estimated General Fund revenue gain is $48 million in 2009-10 and $110 million annually, with additional revenue increases in local sales tax revenues.

This is being voted on this week but most people seemed to feel more negotiation will push things out at least until next week. Our goal today was to press our point on the negative economic consequences this legislation would have. We split into three groups and met with about 45 legislative staffers. We advanced the same main argument as before: this legislation will harm small businesses in California by discriminating against a specific type of advertising. New since last time were:

• The documented 50% drop in New York publisher revenue, attributed to New York’s nexus law.
• Amazon’s pledge to sever relationships with California affiliates if the legislation passes.

The short of the long is that no one is sure where this is going to end up. I think our argument on the damage to small businesses has started to penetrate and I personally felt better about this trip than the last time I was up. Governor Schwarzenegger has pledged to veto any tax increases. This may or may not count as a tax increase (as opposed to a collection effort) but we definitely have some allies who want to strike this language. Moreover, there are two other proposals, 711 and 469, that would bring in sales tax revenue without harming affiliates.

Earlier today Google Affiliate Network, Commission Junction, and LinkShare all dropped emails to their California affiliates. These efforts, along with all the Tweets, posts, and smaller email blasts, are VERY helpful to our cause. We definitely heard that we were making our presence known. If you are a California affiliate and you have not yet written your representative regarding this issue, please do so ASAP. We are having an impact and we have a realistic chance to derail this destructive measure. Huge props to everyone doing their part.

UPDATE 6/24/09:

Not sure where this will lead: <a href=”http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/24/BA5G18D621.DTL”>Democratic plan to fix budget headed for defeat</a>

The Office Supply category is listed with a 14% year over year growth in online sales, but that is only half the story. Splitting the Top 500 merchants into those with affiliate programs and those without has surprising results. Just over half the group have a program and they saw a 36% year over year growth. Those of you with a better than average grasp of math should realize that to balance that figure out requires that the other half experience a decline in online sales.

And for those of you who may be ValueClick stockholders or just want to know what else they are proud of, CJ also announced today that for the fourth consecutive year it is the leading choice of performance marketing solutions for more of America’s largest retail Web sites. 62% of the retailers listed in The 2009 Internet Retailer Top 500 Guide who work with third-party affiliate marketing partners choose CJ.  CJ’s 62% market share shows growth over last year, when it claimed 53 % of the Internet Retailer Top 500 market share.

“Pay-per-call marketing represents an enormous opportunity because 90% of the $300 billion a year U.S. advertising market is still offline,” said Mark Suster, partner at GRP Partners. “RingRevenue’s platform brings the visibility of online ad tracking to that much larger offline market.”

This is a development worth keeping your eyes on.  Market research has shown that for every $1 spent online there is an additional $6 spent offline.  It would be interesting if merchant landing pages that display prominent phone numbers (often a red flag for affiliates as a merchant worth avoiding) started to dynamically replace those phone numbers with affiliate trackable numbers to provide per-call commissions to those affiliates based on the average revenue per call of the company.  I think it would still be difficult to 100% accurately track the commission per sale of these calls, but I guess with the right technology that prevents human error on the back end, this could be possible too.  If we get that and a solid way to track the brick and mortar traffic, then affiliates might actually be compensated for all the transactions they are responsible for generating.

In a time where the industry if focused a lot about “attribution” and looking for ways to devalue the last-click, I think it’s important to keep in mind the other non-trackable sales that are not being attributed to your affiliate partners.

What does everyone else think?

Who’s the winner here? TweetBucks, definitely. Let’s do some simple math with the following simplified assumptions.

• 1 million users
• Average affiliate product price $20
• Affiliate fee 10%
• 1 Unit sales per affiliate per month

Under these simplistic numbers, the cash flow would look like:

• $20M total sales/month
• $2 M affiliate revenue/month

Applying TweetBuck’s 30%, yields Tweetbucks $600,000/month.

I’m hoping someone who has used the service will comment and include more details from a user perspective. At first glance it looks like a great model for TweetBucks. That 30% comes from TweetBucks being a “super affiliate” where they sign-on as affiliates for all the products and issue revenue checks based on everyone using their affiliate links.

Why wouldn’t you instead sign up as an affiliate and get your 100%? Well that’s the beauty of their system. They do the work for you - signing up for all the affiliate programs, providing the link shortener/converter, and you don’t need a website or need to update your HTML or optimize your affiliate products. It’s a decent trade off if you don’t already have a system to use your affiliate links on Twitter.

So if you want to try affiliate marketing and have a user base, TweetBucks may be an easy way to get started with some potential for supplemental income.

With TweetBucks, Twitter again shows that it has potential for business, but like all business uses of Twitter, it has serious potential to generate spam and annoy the users that depend on it for relevant and timely information. It will be curious to see if TweetBucks can provide a real value to businesses through the affiliate channel or if it will becomes an automated weapon of Twitter spam and a bane to normal Twitter users.

Earlier last year I was struck by how much this applies even to the coupon space, where you might think the established players would be able to maintain their dominance with established SERPs, procedures, and customer bases. While most established players (FatWallet, BradsDeals, AnyCoupons, etc.) are continuing to do well as far as I can tell, many new sites are entering the marketplace. I remember being impressed when RetailMeNot was up and coming a couple years ago because I though this territory was staked out. Today RetailMeNot is one of the big players and enjoys some of the best SERPs I see. Similarly, Savings.com has come up and grown into a power player.

I have now come to accept that the coupon space is going to continue to see strong players enter, hence my attention was caught when I heard Steve Schaffer had launched Offers.com. Steve has a strong publisher background in lead generation and the domain is suited to his background because it includes both coupons and comparisons of different lead offers. Curious about his probable financial outlay in a crowded space , I talked with him on the phone for a while.

Steve would not tell me how much his company paid for Offers.com or Offer.com, which forwards to Offers.com, though I did find a blog entry that quoted a sale price of $180,000 at the Moniker Domain Auction at Affiliate Summit West last year. That is pretty serious money. The site has good content editing and some nice personalization features. (Their “My Offers Locker” is, in fact, their main attraction. It is pretty slick and reminded me a little bit of the email notification service at ShopItToMe.com.)Visitors can Tweet deals with a proprietary URL shortener. Steve was a little vague when I asked him about his anticipated point of profitability but made it clear he wants his site to be one of the leaders in the space and that the space is getting bigger.

To me it is in a testament to the strength of the coupon model. I think coupon sites are an excellent value add. Beyond online and offline deals, they have a natural affinity for loyalty, price comparison, community, and more. At the same time that the coupon vertical is growing, I perceive a simultaneous growth in the myth that coupon sites don’t provide value because orders “would have happened anyway” or some similar logic.

Here are some interesting statistics swiped from Commission Junction’s (Thanks, CJ!) recent webinar on coupon use:

• “There was a 140% growth rate in online coupon use over 2007’s previous high.” -eMarketer, March 12, 2009
• Coupon sites are the second most popular site (at 25% to 37%) after search engines among types of shopping sites users found very important in the past three months. -comScore “State of the US Online Retail Economy” Feb 19, 2009
• Coupons were the fastest growing web site category in November 2008. -comScore Media Metrix

I believe that the increasing sophistication of coupon sites and growth of online retail and affiliate marketing bodes well for this space. So good luck to Steve and everyone else above as the this space continues to grow and change. On the other side merchants will do well to appreciate how nicely coupon sites reach a customer segment intent on purchasing.

Please pardon a lack of reply to any comments. I am leaving on vacation shortly after posting this.