HB 2551 TAX: The Death of Affiliate Marketing
Arizona’s Affiliate Tax: The end of affiliate marketing in Arizona?
Author: Aaron Kelly
Arizona is well known for its pro-business climate, which has enticed companies mlillions of ambitious entrepreneurs to call the state their home. However, the State’s fiscal bliss has subsided and instead has been replaced by a 1.5 billion dollar deficit. To remedy this enormous budget shortfall Arizona, like several other states, is considering a new sales tax that targets out-of-state online retailers through their in-state marketing affiliates. In essence, a tax on affiliate marketing.
This article will address the affiliate nexus tax, and how it will not only destroy affiliate marketing in Arizona but push the already ailing economy into a death spiral.
HB 2551: The Death of Affiliate Marketing Tax
Arizona HB 2551 is a modeled after a similar New York state bill that broadens the legal definition of “nexus,” which is a business’s physical presence within a state. In April 2008, New York inserted a line item in its state budget claiming sales tax jurisdiction over the affiliates of Amazon.com, maintaining that the home offices Amazon’s affiliate marketers operated from constituted sufficient grounds to establish nexus.
(This topic will be discussed during our upcoming webinar on Affiliate Marketing by Ginette Degner on March 23rd: Affiliate Marketing Webinar - Sign Up Now)
Similarly, Arizona’s HB 2551 charges that any company that contracts with an Arizona resident in exchange for a commission or other consideration, whether directly or indirectly through an Internet website link, should be presumed to be doing business in the state of Arizona for the purposes of the Arizona transaction privilege tax (sales tax.) This presumption would only apply in situations where the cumulative gross income or gross proceeds from such sales exceeded $10,000 during the preceding 12 months.
The law appears to be specifically targeted to retailers who use extended networks of websites for displaying its advertisements – in other words, at businesses like Amazon.com who rely upon affiliate marketers.
Desperation is a stinky cologne
There are thousands, if not tens of thousands, of affiliate marketers in the state of Arizona. Affiliate marketers are like any businesss, in that they pay state income taxes, employment taxes, sales taxes, and even property taxes. In 2009, Arizona’s affiliate marketers paid $3.7 million in tax revenues – an amount that will almost certainly be higher in the 2010 tax year….but only if HB 2551 fails.
It does not take a mighty leap of logic to assume that if HB 2551 passes, affiliates will earn less income. Furthermore, many online retailers like Amazon have already threatened to cut ties with its affiliate marketers in states that enact affiliate nexus tax laws. Think they are bluffing? Just ask thea ffiliates in New York, Rhode Island, North Carolina, and now Illinois. After all, the Internet knows no boundaries and Arizona residents will still be able to buy from Amazon, whether or not it has any affilites in the state.
Moreover, HB 2551 is likely to have a deleterious effect on fundraising by Arizona’s cash-strapped schools, which increasingly are relying upon affiliated e-commerce websites to generate funds. Take the popular Box Tops For Education campaign that to date has raised over 100 million dollars nationwide for field trips, recreational equipment and other educational extras. The campaign began when kids around the nation began to collect cereal box tops which they’d turn in for a few cents on every box top. Today, that campaign is mostly conducted on the Internet via websites that donate a portion of the commissions they generate when parents shop there. Participating merchants include Barnes & Noble, Best Buy, Land’s End, Avon and 1-800-Flowers.
Since Arizona consumers will still have the option of buying from out-of-state retailers, even if they don’t spend advertising dollars with Arizona businesses, HB 2551 could easily have the effect of reducing revenue without increasing sales tax collections. And even if it doesn’t – is this the right time to add an additional source of taxation for the millions of Arizona households struggling to make ends meet in the current economy?
The Effects of Similar Nexus Laws In Other States: Epic Fail
So far, three states – New York, North Carolina and Rhode Island – have passed nexus sales tax laws. One would assume that if so many other states are clamoring to enact similar legislation that these states must be raking in tax revenue. On the contrary, the laws have not only failed to address to budgetary shortfalls but have actually made things worse. In fact, Rhode Island’s state treasury has actually lost revenues following the enactment of the new law. Based on this fact there is a new bill before the legislature that would repeal the failed experiment known as the Rhode Island Affiliate nexus Tax.
Things are no different in North Carolina as tax administrators have given up entirely on tracking collections from the new tax scheme. In New York, the cost of lost business has been compounded by the high cost of litigation: New York is currently battling the deep pockets of both Amazon and Overstock.com in the courts.
Colorado used a different model when it attempted to collect sales tax revenues on Internet purchases, shifting the responsibility for such taxes from businesses to consumers. Colorado’s law requires businesses such as Amazon to mail yearly notices to their Colorado customers on January 31, detailing the total amount of purchases on which they still owe tax. That information is also reported to the state Department of Revenue. After the passage of this law, Amazon promptly shut down its Colorado affiliate program. More recently, a federal judge has blocked Colorado’s requirement that online sellers must report sales tax obligations.
Seven other states including cash-strapped Illinois and California are currently considering nexus sales tax legislation. But even members of California’s Board of Equalization, the agency that oversees sales tax collection, admit that the state stands to lose at least 50% of the revenue the legislation is designed to generate if Amazon cuts its ties to California’s thousands of affiliate marketing businesses as Amazon has announced it intends to do if the measure passes. Upshot? No dramatic rise in the state coffers while California small businesses take another massive hit. Does anybody really win?
(This topic will be discussed during our upcoming webinar on Affiliate Marketing by Ginette Degner on March 23rd: Affiliate Marketing Webinar - Sign Up Now)
For more information on HB 2551 and other taxation nexus laws, contact an Internet marketing lawyer.
REFERENCE: http://www.aaronkelly…
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8 Responses to HB 2551 TAX: The Death of Affiliate Marketing
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Share a Sale has a great blog on what is happening in other states and how it has impacted the economy: http://blog.shareasale.com/2011/03/10/governor-quinn-abolishes-affiliate-marketing-in-illinois/
Here are some updates to this bill from my local chamber of commerce:
This is what I found out RE: HB 2551. McComish is also one of the sponsors.
House of Representatives
HB 2551
taxation; presumption regarding internet sales
Sponsors: Representatives Weiers J, Campbell, Senator Melvin
DPA Committee on Commerce
X Caucus and COW
House Engrossed
*****REVISED*****
Overview
HB 2551 establishes a new collection method for the required Use Tax paid on all remote transactions through retailers having an established presence in Arizona.
History
The Arizona tax commonly known as a Sales Tax is actually two distinct taxes, according to the Arizona Department of Revenue. First, the Transaction Privilege Tax (TPT) is a tax on the privilege of doing business in Arizona and is measured according to the amount of tangible personal property sold by any in-state vendor. The liability for the tax is on the vendor, even though the tax may be passed on to the buyer/consumer. Second, the Use Tax is a tax on any tangible personal property bought from an out-of-state vendor for use or consumption in-state, but there has not been any tax paid on the transaction. The liability for the Use Tax is on the consumer; however, the vendor is responsible for its collection and remittance to DOR if Nexus is established. DOR has general guidelines that establish whether or not Nexus exists. By definition, Nexus is the connection required to exist between the State and a potential taxpayer such that the State has the constitutional right to impose a tax.
Provisions
· Considers Sellers of tangible personal property as conducting business in Arizona for purposes of taxation if all of the following apply: a) the person contracts with an in-state person who receives a commission or other remuneration; b) the person refers potential customers to the Seller through an Internet website or any other means; c) the person makes at least $10,000 gross income/proceeds annually from all of its affiliates.
· Establishes a rebuttable presumption of conducting business in Arizona upon proof that the Arizona resident referring customers on the Seller’s behalf has not engaged in solicitation that would satisfy the Nexus requirements during the preceding 12 months.
Amendments
Committee on Commerce
· Changes the threshold for a Seller and its affiliates from $10,000 gross proceeds or gross income from sales to $120,000 taxable gross income or taxable gross proceeds from all sales annually.
Arizona is pro-business. That means a LEVEL PLAYING FIELD FOR ALL. KUDOS to AZ and we hope they pass HB 2551!!! Amazon has long used this method to skip out on their responsibilities as a corporate citizen of any city or state. As a small business owner, we don’t appreciate having to collect sales tax when they dont- and they have more space and employees here than we do!!! It’s time!! All states need to pass this!!!
Abigall, it would kill the Arizona Economy if Arizona passed this, just look at Rhode Island tax revenues took a dive as affiliates that were making money either moved or reorganized their business in some other state.
The same thing happened in Colorado.
Amazon killed their affiliate program there due to this.
This is unconstitutional to say the least, the feds have a moratorium on this BS, but the states do what the want.
Needless to say, I will move my servers off shore if that passes.
I already pay thru the nose on taxes, and what do I get from AZ? Words withheld because this is a rated G site LOL.
Perfectly fine with us!
We just will not offer product to residents of Arizona.
We will not offer those residents the privilege of buying our products.
They must first move out of Arizona, then we will sell to them.
Simple!
Amazon created the nexus when they decided to put 3 giant warehouses in Goodyear, AZ.
The employees who work at that warehouse have kids in local schools, the cars they drive drive on local roads and if a fire breaks out in their warehouse, it will be put out by a local fire department.
Amazon has the same responsibility to collect sales tax on sales made to Arizona residents as any other business located in Arizona.
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