To date, I’ve only been able to identify one merchant who began collecting any state’s sales tax after enactment of this law: Amazon made a strategic decision to “collect the tax and sue” in New York, after its retroactive enactment of the law in 2009.  Amazon hasn’t repeated that strategy elsewhere.

In June, I posted my question on a popular affiliate-marketing discussion forum, asking if any publishers or retailers could identify any companies which began collecting sales tax in any state as a result of the “Advertising Nexus” issue. Nobody could name even one.

I also left a phone message and sent an email to Assembly Member Nancy Skinner, the law’s sponsor in California:

Ms. Skinner: I left a phone message, but thought I’d clarify my question. As you know, I’m upset about the “Advertising Nexus” tax law, which forced Amazon to stop paying me for advertising on my web site.

But I’m open to learning more about [how] California and other states benefit from this law. Specifically, could you name ANY online retailer which began collecting ANY state’s sales tax because of an “Advertising-Nexus tax law”?

I’ve only been able to identify one: Amazon made a strategic decision to “collect the tax and sue” in New York, though it hasn’t repeated that strategy anywhere else.

Surely North Carolina or Rhode Island should be able to identify some merchants who started collecting sales tax for those states after the Advertising-Nexus law was passed there. But they won’t say.

I’m not even going to be picky: I’ll include any merchant who changed their sales tax policy “near the time of” any PROPOSAL regarding an Advertising-Nexus bill, even 18 months before or at any time since, and even if the bill didn’t pass.

I’ve posted the question to several experts, who’ve all said the same thing: “That’s an interesting question.” Nobody has been able to identify a single merchant (other than Amazon in New York) who has begun collecting sales tax in ANY state, in a situation in which it could conceivably be argued that an “Advertising Nexus” proposal might have been a factor.

I would appreciate if you could identify any merchants you’re aware of, who have begun collecting sales tax for ANY state as a result of the “Advertising Nexus” issue being raised.

Ms. Skinner has not responded.

I’ve noted in other posts here that I believe that these laws are unwise, ineffective, and unconstitutional. They’ll eventually be stricken down by federal courts (but as legislators have noted, any taxes collected during that time would be kept by states). There are several much more effective, fair, and legally plausible strategies if states actually sought to force out-of-state retailers to collect sales tax. (Since those other strategies would actually be fair and effective, few legislators dare to propose them, and no lobbyists will support them.)

But given the precarious financial situation in California and other states, and my personal belief that out-of-state retailers should be required to collect sales tax for all states which impose them, I’d love to see some benefit from these laws. Seeing such benefits might reduce the sting from losing 26% of my advertising revenue on July 1.

But so far, the only effect of these laws has been the termination of advertising relationships with many thousands of web publishers (small businesses) in each state, shifting revenue away from states which enact “advertising nexus” laws, and thus reducing those states’ income-tax revenues while collecting no additional sales taxes.  Some of these small businesses have actually moved to other states, in order to retain their advertising relationships — thus shifting jobs, payroll taxes, and 100% of their income tax to other states.

Please prove me wrong: please identify any company which began collecting sales tax in any state as a result of any Advertising-Nexus Tax Law (“Amazon Tax”).

I was interviewed (in my home office) and featured in a news segment on KTVU-2 news last night; you can view the segment here (but you’ll need to wait through a 15-second commercial before seeing the 2-minute, 15 second segment).

I was also interviewed today (June 30) by KPIX-5 for broadcast on tonight’s news.

I’ll start by sharing today’s example (quoting directly from the merchant’s description of its affiliate program):

“…. Payments are made once the affiliate [publisher] has earned more than $100. If an affiliate fails to earn more than $100, they are never paid. Subsequently, payments of the balance are made roughly every 45 days as long as the balance is over $100. Payments are made only via PayPal. …”

This merchant sells a “web service” priced from $24 to $199 per month, and promises to share 50% of the first month’s payment plus 5% for each additional month, for the life of the account.  For the $24 monthly package, the publisher (affiliate) would earn $12 the first month plus $1.20 for each additional month.

To meet the $100 payment threshold quickly, the merchant’s advertising on the publisher’s web site would need to drive at least eight new customers.  (Even assuming a 100% renewal rate, the $100 payment threshold would be met after five months from six new customers, or after 12 months from four new customers, or after 19 months from three new customers.)

Why this is a Bad Idea:

First, most experienced web publishers (affiliates) have experienced payment defaults from one or more merchants (they’ve been “burned”).  Most publishers have also seen merchants shut down before the payment threshold could be met.  These publishers are reluctant to carry any new performance-based advertising, especially for merchants with “in-house” affiliate programs.

An absurdly high payment threshold is a big “warning sign” for these skeptical publishers.  Some publishers will even view this as a sign of hostility or distrust by the merchant, or as a sign that the merchant doesn’t consider the affiliate program to be important.  It can also be perceived as a signal that the merchant isn’t confident about its own ability to convert or retain new customers.

Most “in-house” affiliate programs set a payment threshold of $50 or less (often $25).  Even those amounts can be perceived as unreasonable, if a publisher isn’t sure how successfully the merchant can convert traffic drawn from performance-based advertising. That’s a huge reason why most publishers prefer to work with “affiliate networks,” which usually combine advertising fees from multiple advertisers to meet their payment threshold.

Lost Advertising (and Tax) Revenue: Within hours after the governor signed the bill into law, Amazon and Overstock terminated their advertising relationships with all Illinois web publishers.  Hundreds of other merchants are also expected to do the same (as they have in New York, North Carolina, Rhode Island, and Colorado).  This will shift hundreds of millions of dollars in advertising revenue from Illinois publishers to publishers in other states and offshore, thus shifting tens of millions of dollars of income-tax revenue from Illinois to other states and nations).

Unlike other states, Illinois didn’t assert immediate or retroactive effect, so Amazon and Overstock were able to give publishers a one-month “grace period” before these advertising relationships end.  (As a pessimist, I suspect that dozens of less-ethical merchants will deliberately delay their similar announcements until a few days before the law’s effective date).

Fleeing Businesses: As in other states, larger web publishers are planning their exodus from Illinois in order to avoid the law’s devastating impact.  Today, FatWallet announced that it will move out of Illinois, taking 55 jobs, and Coupon Cabin announced today that it’s exploring moving its offices to Indiana.

Carrion: Wal-Mart, Sears, and Barnes & Noble immediately invited Illinois web publishers to carry their advertising instead of Amazon’s.  But these companies offer lower advertising fees (and draw much lower conversion rates) than Amazon — and their web sites push customers into local stores (for which publishers aren’t paid any advertising fees).

In addition to their skimpy advertising rates, all three of these companies combined offer fewer than half as many products as Amazon, and provide much more limited product information. In my main niche, these three merchants combined offer fewer than 20% of the products which Amazon now advertises on my site.

Why Do I Care? I live and work in California, so the Illinois law doesn’t directly affect me (in fact, it might bring me a tiny slice of the advertising revenue lost by Illinois publishers). However, if California enacts its pending “Advertising-Nexus” bill, I’ll immediately lose the 26% of my total advertising revenue that comes from Amazon.

________

Update (August 2, 2011):

Both Coupon Cabin and FatWallet moved their offices and jobs out of Illinois, in order to maintain their advertising relationships with retailers without nexus in Illinois. The State of Illinois forced these companies to choose between staying in Illinois (with reduced revenue and layoffs, forced by the state) or taking all the jobs a few miles to a nearby state (and continuing to grow).

In both cases, the new offices aren’t very far from the old offices: FatWallet’s offices (and 55 jobs) moved about 5 miles from Rockton, IL to Beloit, WI, while Coupon Cabin moved about 15 miles from Chicago IL, to Whiting, IN).

While Illinois has certainly lost payroll taxes and corporate income taxes, employees didn’t have to move their homes: most employees can continue to live in Illinois while working in the other state, if they’re willing to accept both the increased commute cost (probably losing any public-transit options) and the income-tax hassles affecting folks who live in one state while working in another. Of course, employees living in Illinois won’t be allowed to “telecommute” (work from a home on some days), which will likely increase their commute costs further.

Over time, some current employees will move (to reduce commute expenses and tax hassles). When other employees quit, and as new positions are created, those jobs will go to local workers who live near the companies’ new offices in Wisconsin and Indiana.

A related note: As expected, California enacted its own “Advertising Nexus” tax law, and just as they did in Illinois and other states, Amazon and other out-of-state retailers terminated their advertising relationships with California web publishers. I’ve lost more than 26% of my advertising revenue, though I’m working hard to try to recover a small part of that lost revenue from other advertisers (all paying lower rates, and some less ethical).

Dear Mr. Cullen:

I’m confused by your use of the term “sales tax fairness” to refer to the Advertising-Nexus bills pending in the California legislature (http://news.bookweb.org/news/forbes-wonders-if-amazoncom%E2%80%99s-sales-tax-battle-losing-effort).  I was also surprised that you wrote about Amazon’s “threat” to terminate its advertising relationships with California web publishers as if it were a new development “this week.” Amazon’s letter is nearly identical to its June 2009 letter in response to the same “advertising-nexus” language (see http://www.abestweb.com/forums/showthread.php?t=120899).

These bills are not about “sales tax fairness” — they’re about pandering to California booksellers and other local businesses.  * * * * The state Board of Equalization has now concluded that if any of the bills were enacted, there would be no new sales tax collected, and income tax [revenues] would be reduced.

I strongly believe in “Sales Tax Fairness.”  I’m one of the few California taxpayers who actually report and remit use tax for purchases from out-of-state retailers.

Amazon and other out-of-state retailers should be required to collect and remit California sales tax.  The current situation is especially frustrating because the U.S. Supreme Court (in the Quill case) has provided a unusually clear blueprint to accomplish this — even without “physical presence” — but California abandoned that process and Congress has refused to act, so schemes like the “Advertising Nexus” language remain unconstitutional.

Please, let’s stop wasting our time and energy quibbling over unconstitutional “sleight-of-hand tricks” aimed only at punishing Amazon and other out-of-state retailers (without collecting a penny in additional sales tax).  Instead, we should all be working together on the issue of Sales Tax Fairness. — Mark J. Welch

In the editorial, Mr. Cullen deceptively cited New York data regarding its collection of $70 million in additional sales taxes.  We all know, of course, that Amazon was “tricked” in New York by the secret, unexpected insertion of the advertising-nexus language into a retroactive budget bill, so that Amazon was caught “off-guard.” Amazon chose not to challenge the retroactivity provision, but instead opted to collect sales tax from New York customers while challenging the law’s constitutionality in court.

Amazon has made clear (since the spring of 2009) that it would respond differently in other states.  Amazon has warned legislators and web publishers (clearly and repeatedly) that it will terminate its advertising relationships with publishers in any other state which enacts this unconstitutional language into law. When North Carolina, Rhode Island, and Colorado enacted similar laws, Amazon terminated its advertising relationships with all web publishers in those three states, and doesn’t collect sales tax from its customers in those states.

The booksellers are angry that Amazon benefits from “sales tax unfairness,” and they’re right to be angry about it.  They should be angry at state legislatures and Congress, but pandering politicians have successfully duped booksellers into directing their anger at Amazon and other out-of-state retailers instead. The politicians don’t want to eliminate “sales tax unfairness,” but instead to manipulate the issue as a pretext to garner support from local business owners.

The result, so far: laws that punish Amazon and in-state web publishers (by interfering with advertising relationships), without addressing sales tax unfairness.

I didn’t suggest that he abandon his plan, but the simple truth is that the “growth cycle” for a new merchant’s affiliate program is much slower than he’d expected.

It can take several weeks (and sometimes several months) to properly design and technically implement an affiliate program. After the program is “active,” prospective affiliates (web publishers) must be carefully recruited (and efforts must be spent to exclude unethical affiliates). Even after hundreds of web publishers enroll as “affiliates,” they might not post the merchant’s advertising for many weeks or months.

Three years ago, I published a series of 11 articles explaining the entire process of launching a new affiliate program.  While there have been some changes in the industry since then, most of that advice is still relevant, and I encourage merchants to spend a few hours reading through those articles and reading the “Merchant Best Practices” sub-forum at ABestWeb.com.

The merchant who called me yesterday had more problems: his web store wasn’t well-designed to attract visitors or convert visitors into customers. Among the problems: the store lacked any “privacy policy” and had no “About Us” page; the company’s legal name, address, and phone number weren’t disclosed anywhere; and shipping charges weren’t disclosed until after customers entered a credit-card number.

It’s never too late to work on internet marketing strategies, but unfortunately it is almost certainly too late for this merchant to reasonably expect meaningful sales or profits from an affiliate program during the next 90 days.

If this particular merchant chooses to fix the immediate problems I identified in his web store, he’d be wise to intelligently plan and conduct some brief tests using PPC Search (Google AdWords, Bing, Yahoo), to obtain immediate data and results to use to further plan his marketing strategies.

Unfortunately, my hunch is that he’ll instead pay a modest “upfront fee” to hire an unethical agency that’s promising fast “results” from an affiliate program. If so, I predict that his web store will disappear before Valentine’s Day. (I won’t name the merchant, and I honestly hope I’m wrong and that his business will succeed.)

Many affiliate networks and affiliate managers rave about their “super affiliates,” who are generally defined as the “best-performing affiliates.” Some affiliate networks’ sales reps will assure merchants that if they sign up with that affiliate network, they’ll immediately have access to a group of “super affiliates” who can quickly and easily drive sales.

Unfortunately, many “super affiliates” are actually poachers and leeches who don’t drive new business to merchants, but instead find ways to “capture” credit for transactions they didn’t influence at all. Included among these are “toolbar” affiliates whose software intercepts traffic which the toolbar-owner never influenced, and inserts an affiliate tracking code.

Many other “super affiliates” specialize in “re-capturing” customers whom the merchant either encouraged or allowed to exit the merchant’s web site before a transaction was completed. These include some coupon sites and PPC trademark bidders.  These affiliates “add value” by helping the merchant to recapture a customer who might otherwise be lost, but often at the cost of proper attribution to earlier influencers (including other affiliates and PPC advertising).  Merchants in this situation should focus on specific strategies to avoid “pushing away” customers (for example, by removing a “coupon prompt”), and on other strategies to recapture customers.

In some cases, “super affiliates” earn commissions even as their efforts actually reduce the merchants’ sales. Several years ago, I worked with a merchant who couldn’t understand why his sales had dropped shortly after he added an affiliate program. I discovered that his largest “affiliate” was a “fake coupon web site,” which aggressively solicited consumers with offers of coupons that weren’t valid. When consumers clicked on the affiliates’ links, they were redirected to the merchant web site with a promised discount that the merchant never authorized and wouldn’t honor. Most of these consumers angrily abandoned the merchant’s site, but a small group completed purchases for which the affiliate was paid — thus, the affiliate was being “rewarded” for driving away the merchant’s customers.

In my view, a web publisher who uses trickery and deceit to capture affiliate commissions is not a “super affiliate,”no matter how much the publisher is paid.

I also have strong views about “incentive and loyalty” affiliates, which promise rebates or payments to consumers (or to their schools or charities) if the consumers utilize the affiliate’s links.  In my experience, few of these affiliates add value, and most companies that work with these affiliates will lose far more traffic and sales due to the withdrawal of other types of affiliates whose “affiliate cookies” are overwritten by the incentive or loyalty affiliate.

While I don’t like to use the term “super affiliate” to describe any web publisher, I certainly recognize that there are hundreds of web publishers who can and do drive significant new traffic and sales to multiple merchants, and of course there are many thousands of web publishers who drive significant traffic to a single merchant.

Instead of looking for “super affiliates” (or “magic bullets”), a merchant’s affiliate manager should focus on identifying the types of web sites that are most likely to attract “the right visitors” who can be enticed to click to the merchant’s web site and complete a purchase. These will probably include some web publishers who are considered “super affiliates” by other merchants. However, in my experience, the most successful merchants find that most of their “top 10″ affiliates are not considered “super affiliates” by most other merchants, because these publishers deliver a unique audience or segment that is most optimal to drive traffic to just one or a small group of merchants.

With careful effort, any merchant can develop a unique pool of “super affiliates” who effectively promote the merchant and its products, driving new visitors and new sales.  Without careful effort, many other merchants attract a worthless pool of “super affiliates” who poach credit for transactions without adding any value, reducing the merchants’ profits.

Some related links:

• “Where to Find My Super Affiliates” (ABestWeb discussion thread)
• “Recruiting Super Affiliates Help” (ABestWeb discussion)
• “How to Approach Potential Super Affiliates (ABestWeb)
• “Can You Name Some Super Affiliates? (Nope)” (ABestWeb)
• “How Do Super Affiliates Achieve Their Status?” (ABestWeb)
• “Thinking About Super Affiliates” (ABestWeb)
• Search ABestWeb for posts about “super affiliates”

The articles originally appeared under my MarkWelch.com web site, but in May 2010 I moved them to my blog (MarkWelchBlog.com).  I’d recommend reading the articles in true chronological order.  (You’d see the articles in reverse chronological order if you select the “Advice for Merchants” category, or the archive for November 2007.)

Note that this series was adapted from earlier reports written for clients, and is thus written for an audience of merchants who already understand what an affiliate program is and how it might benefit their company.

1. Issues That Might Lead a Merchant to NOT Offer a Public Affiliate Program (Negatives)
2. Public vs. Private Affiliate Programs
3. What Factors Do Publishers (Affiliates) Consider When Selecting Advertisers (Merchants)?
4. Affiliate Technology & Network Choice
5. My Usual Recommendations (for Merchants planning an affiliate program)
6. Affiliate Recruitment Strategies and Practices
7. Captive and Stealth Affiliates
8. Affiliate Program Policies
9. Outsourced Program Management (OPM) for Affiliate Programs
10. Selling the Affiliate Program
11. Types of Affiliates (Web Publishers)

One reason I’m moving the articles into the blog is to enable others to post comments.  While I don’t intend to re-write the series, I do expect to use comments to clarify topics, and to link to relevant discussion threads elsewhere.

As a web publisher, my primary focus is on providing “relevant and useful” content on topics that interest me.

As an internet marketing consultant, I advise merchants on strategies to increase sales (primarily  using “performance-based” marketing techniques, including affiliate programs and pay-per-click search advertising).

Earlier, I was an attorney.  Before that, I was a reporter, reviewer, and editor for computer magazines, and I co-authored a nationally syndicated newspaper column.

I created my first web site in 1996 to promote my estate-planning law practice; I later sold that site to another law firm. I also created a web site about “web site banner advertising” in 1996, which evolved into Adbility.com, which I also sold in 1999 (via eBay auction).  I’ve also created and sold several directory web sites, including LitPlans.com (a directory of lesson plan resources for English teachers).

I generally don’t disclose information about my current web publishing activities, because competitors often try to “poach” my successful work.

I have lived in California since 1985, and in Alameda County since 1986.  After 14 years in Pleasanton, I moved to Hayward in 2005.  Earlier, I lived in Dublin, Berkeley, and San Francisco, California; before that, in Peterborough, New Hampshire, in Hopkinton, Westborough, and Shrewsbury, Massachusetts; and Port Washington and Waterloo, Wisconsin.

My email address is Mark Welch at Mark Welch dot com.

(Updated June 26, 2010)