Earlier this month Amazon.com cut ties with Colorado-based affiliate marketers in response to Colorado's new state law regarding sales tax.
Amazon is still in a pending legal challenge with New York, and has already dropped their affiliates in both Rhode Island and North Carolina after similar state tax laws were passed.
The Affiliate Tax gained the nickname "Amazon Tax" due to their aggressive response to the issue. At the moment, pending the outcome in New York, they immediately "fire" affiliates in any state that passes the Affiliate Tax. However, Colorado's new state tax law is different...
In Colorado, the situation is different. The state's new law doesn't link paying the tax to the presence of affiliates; instead, it requires out-of-state retailers to help enforce collection of the 2.9 percent state tax that online consumers in Colorado are technically supposed to pay already, though few know about it or do it.
Each year, retailers would have to tell their customers what taxable items they bought and that they need to pay the tax to Colorado. Retailers also would have to turn over those documents to the state to help enforce the law.
Backers of the law say that Amazon still will have to comply, whether it has affiliates in Colorado or not. So why did Amazon fire the affiliates? To make a point in a larger battle over online sales taxes, and to deter other states from adopting Colorado's approach, they believe. source
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We discussed the issue on this week's episode of the IMTW Podcast. Paul Colligan asked me what I would do if I were an affiliate marketer based in Colorado...
3 Ways To Survive The Affiliate Tax Issue
1. Replace Merchants
2. Change Revenue Model
3. Flip Affiliate Site
There are 3 strategic actions that you can take if the Affiliate Tax gets passed in your state. Above I have prioritized them in the order that I would approach the issue personally. Selling a profitable affiliate site is always my last option.
If you have a profitable affiliate site with decent traffic & revenue, back up that entire site as-is before making any changes. Including your stats for the last 12-18 months.
Next I would do my research and aim to replace the merchants who dropped their affiliate program in my state. This is most likely going to include Amazon.com and Overstock.com for sure, with any number of merchants following suit.
Many merchants already have a physical presence across the states. Examples include Wal-Mart, PetSmart, and others that have retail locations.
You may find comparable merchants to work with as an affiliate, but you may choose to improve or change your revenue model as well. Ideas include:
- Test Google Adsense
- Sell Advertising to other affiliates not affected by the change
- Sell Advertising directly to the merchants you were working with
I would start with the merchants who closed their affiliate program, and go directly to them with your stats to negotiate a direct advertising deal.
If you don't get a positive response there, approach other affiliate marketers in states that are not yet affected. You can negotiate advertising rates and funnel your targeted traffic to those affiliate sites.
And of course, you can always fall back on Google Adsense as an indirect way of earning money on the click-through's to both merchants and affiliates.
The final option would simply be to sell the affiliate site while it's hot - while your traffic & revenue stats are current. You can list websites for sale on Flippa.com for a quick turnaround, and sell your site to an affiliate in another (unaffected) state.
This is of course the reason I suggested you keep a backup of your affiliate site prior to making any changes or testing new options. You'll want to take it back to it's original state for the sale, so that the new site owner can simply swap out your affiliate links for their own and continue to operate the profitable site from there.
I hope this gives you creative ideas for dealing with Affiliate Tax issues, whether you are in an affected state or find yourself at some point in the near future.
Best,
About Lynn Terry
You forgot the other option. Move interstate 😀
While it may not be a viable or sensible option for most affiliates, I know there are quite a few Amazon affiliates making big money - and I don't think they would want to lose their income.
The problem concerning these taxes still alludes me.
In Sweden if a company got a Swedish affiliate the company have to pay tax and social fees on the money that the Swedish affiliate would get. Unless the affiliate has a special tax paper then the affiliate have to pay the tax and fees themselves.
Good writeup Lynn,
There will continue to be termoil in the affiliate arena until more states pass similar bills.
With the way Colorado stated the bill, Amazon will still have to comply, as they still sell products to Colorado residents. The bill states anyone selling more than 100k of products to Coloradans, must send records to Colorado at the end of the year.
Lynn,
This is a truly practical, nuts and bolts approach to what could be an emotionally-charged issue. As always, you show just how savvy you are, by mentioning backing up everything, including site stats. How many people would think of that, I wonder?
Now if I can just get to the point where this becomes an issue in my own business! LOL
Thanks for no-nonsense approach.
Deb
Wow thanks for the heads up... I live in Colorado. YIKES. Our politicians are a bunch of bobbleheads.
Business people (the serious ones who drive real revenue) will simply set up an out of state corporation... and sell their business to that corporation... then, the states that favor this kind of commerce will gain tax revenue from the businesses and the states like Colorado will lose the tax revenue they seek to gain. The little affiliates who make $300/month will be the ones who really lose out.
I remember Reagan's comment... "Governement isn't the solution to our problems, government IS the problem"
So far the other shoe is still on in CO, and most other affiliates haven't followed Amazon's lead. Will be interesting to see how this shakes out.
Seems to me like the best option will be a consensus among the state gov'ts on sales tax collection/reporting requirements for online companies. That would take efficient, bipartisan communication, hope and change. Hmmm...
the whole tax system in the US is too complicated. Having different rates sales taxes makes life not easy for a business that operates in the whole country.
I understand the bad feelings everyone has about Amazon cancelling their affiliates, but there are ways to survive (see above).
The move of amazon is also a sign that they do not rely on their army of busy affiliates anymore. Their brand is very powerful and very often people go to amazon directly.
In Germany (and the rest of the EU afaik) there is only one sales tax per country (it can be different depending on the type of goods, i.e. food and newspapers and short trips in a taxi are 7% - all the rest is 19%) and the tax is collected at the point of sale. Every month the business has to forward the tax to the financial authorities.
No problems for anyone. The business records who it is paying to and the affiliate has to declare its income in the annual tax statement.
Gosh, I didn't realize New York State was still pending???!!! This will change my focus a bit on what websites I decide to build over the next year...I am already used to not being accepted from some sites because of being in NY so I guess it is time to put my out of state LLC plan into action, pronto!!!
I'm with you Loretta - never even gave that idea a thought! The only thing that really stinks here is ... by selling a very profitable site, I wonder if you'd ever get out of it as to what you could potentially make over however, many years.
If this were the case, I wonder if some kind of revenue sharing set up would be a good idea?
For example, sell the site to someone who's in a state that's not affected for XX amount of dollars but also have a written agreement of some sort of revenue sharing between the seller and buyer? I would definitely set up a legal binding agreement with all the I's dotted and T's crossed but this might be something to think about as well.
Great post Lynn! Once again you share how to take a bad situation and make it good. Squeezing those lemons one squeeze at a time to result in delicious sweet lemonade!
I moved three years ago from Delaware which has no sales tax to North Carolina, only to have my business affected. Now I am re-establishing a business in Delaware. Small businesses shouldn't be held hostage to fights between corporate giants and politicians. We have enough to worry about in this economic environment.
Marcia Ming
marketing deas for small businesses
Lynn:
There is another solution that I found on this blog:
http://blog.seorevolution.com/2009/07/17/amazon-affiliate-tax-solution/
The video shows how to setup up your company in a different state so that you can remain where you live and still be an affiliate!
Travis
Lynn:
Not sure if my first comment got deleted or not so I apologize if this comment is redundant. My original comment was that Jerry West of teh SEO Revolution blog has a detailed video on how to avoid the affiliate tax issue if you live in the affected states. You basically setup a company in another state. I left the link to the video so I'm not sure if your blog is setup to automatically delete comments with links or put them in the moderation que. Either way, feel free to accept one of my comments or none;)
Thanks,
Travis
I recently moved to CA and I'm setting up my first site which is being monetized by Amazon affiliate links. It's pretty disheartening to have to deal with this but I'm figuring out that constantly overcoming challenges is an integral part of entrepreneurship. Looks like setting up a business in a different state is a viable option (as mentioned by Travis above). I hope I don't have to deal with it but if I do I'm happy to know there is a solution to the problem (even if it's somewhat painful to set up).
I have another way. Establish your business in another state. It's easy, just incorporate here in Wyoming. A Wyoming business is not effected by the Colorado Laws.
I have used Wyoming Corporations for all of my businesses and set up corporations for several people to operate there business. Some were Network Marketing Heavy Hitters who lived in countries that the company they were using was not set up yet. Pretty similar situation really to the Affiliate problem with a couple of states.
It's easy, cheap and has many benefits besides being back in business. One being no income tax in Wyoming.
Tip no4 Move to Thailand and live the dream
David, I never would have thought about establishing a business in Wyoming to avoid those laws. Thanks all for sharing your wonderful tips!