[markwelch]

In an article on the American Booksellers' Association web site (http://news.bookweb.org/6698.html), Nancy Skinner is quoted as stating: "Currently, we are working on amending the bill to clarify that it does not apply to advertising."

She is also quoted as saying, "This bill does not affect advertising banners. The point of this measure is that if an out-of-state company pays commission to a resident or residents of California based on the sale of tangible personal property, and that company makes more than $10,000 in sales from that relationship, they should be required to collect California sales tax. The key difference is that this bill is triggered by an actual sale of a specific product not a simple advertisement."

Of course, her clarification implies that "commission-based advertising" will still be included in her amendment. Presumably this would exclude pay-per-click advertising (Google AdWords), but would still apply to anyone selling through eBay (since eBay refers customers in exchange for a percentage of the transaction), in addition to any pay-per-sale or commission-based advertising through so-called "affiliate programs."

I would like to see the proposed amendment, of course.

[mellie]

Every other state closely mimics the NY version with the exception of the levels (range is $2,000 - 10,000), sounds like Ca is going to go similar route as well. I think that is because of the courts ruling in NY.

[Brian - ShareASale]

One of the key points for us going forward will be to convince local lawmakers that ours is an advertising industry. The word "affiliate" is used differently for them than it is for us... I think we need to start using the word advertiser when discussing these issues with lawmakers.

Affiliates do not collect money for merchants, they don't take orders, they don't do any of those things .... they place ads - as do all advertisers, etc...

Mark - good find on the planned ammendment.

[Jorge - JRami]

I think we need to start using the word advertiser when discussing these issues with lawmakers...they place ads - as do all advertisers, etcRight and this needs an update too cause lawmaker might interpret 'customer brought' as 'affiliate made the sale'.

Affiliate marketing is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's marketing efforts. http://en.wikipedia.org/wiki/Affiliate_marketing

Affiliate marketing
http://en.wikipedia.org/wiki/Affiliate_marketing
Display advertising
http://en.wikipedia.org/wiki/Display_advertising
Internet marketing
http://en.wikipedia.org/wiki/Internet_marketing

[markwelch]

I have still received no response from Assembly Member Skinner's office regarding the promised amendment to this bill. I called and left another message today.

I am now expecting that we will not see any proposed amendment until the Assembly Rev & Tax Committee hearing next Monday.

[TrishaLyn]

When we were meeting with people in Sacramento a few weeks back we were trying to really hammer home that it's advertising, using the analogy that it's not very different from ValuePak or a billboard... except it's traceable. We also mentioned that the Sacramento Bee has affiliate ads on their website.

I hope that helps. I know Brad Waller and some others are up in Sac today, I hope they're making headway. Looking forward to a recap later.

[Sam Bay]

When affiliate marketing is solely based sales commissions, it wouldn't a stretch for the 'other side' to call this a merchant/salesperson relationship, as it is exactly that.

What we should refer to our business in this matter is traceable advertising -- not simply advertising because that won't fly. Further, a clever workaround would be for affiliates to get paid a small advertising fee by the merchant (could be $1 per year) upfront, for putting links (similar to Andy's CAB payments), so it would bolster our position that the relationship in question is, in fact, an advertiser/publisher relationship and the publisher gets further payments depending on the performance of the ads they run (measured thanks to the traceable advertising method).

I've heard that some cable channels run infomercials that they get paid on the total sales volume, but it's still called advertising.

[JackMarketing]

People seem to understand it better when it is described as "pre-paid advertising" vs. "post-paid advertising." Pre-paid advertising is the old fashioned model of paying money up-front and hoping it works (like newspapers and PPC). Post-paid advertising is only paid for if it gets results. Therefore, it is a newer, more efficient model made possible and trackable by Internet innovation (like affiliate program advertising). Overall, it reduces waste in the marketplace and does not force consumers to pay so much for wasted effort and expense by retailers.

[markwelch]

Liz Mooney, aide to Assembly Member Nancy Skinner, returned my call this morning to respond to my earlier messages. She said that no amendment will be submitted prior to or at the AB 178 hearing next Monday. (FYI, she and some other legislative aides return calls from a blocked number.)

She said that they are "considering" a number of potential amendments, and would probably "discuss" them during Monday's hearing. But any actual amendment would occur sometime later. In other words, on Monday we'll still be fighting a ghost, without knowing what version of the law the author actually plans to move forward. The hearing will be a waste of time.

Ms. Mooney said that their goal is to apply the law the same way that New York has interpreted its law. She specifically said that pay-per-click advertising would not be included by the bill (but I don't think she understands the variety of "hybrid" programs out there that promise payment-per-click but are ultimately contingent on subsequent sales activity). Ms. Mooney also mentioned the concept that only "solicitation" activity (including email marketing) would be covered, not ordinary advertising.

I'm frustrated; Ms. Skinner has tried to silence her critics by claiming that they don't understand the bill (because it doesn't mean what its plain language says), and by promising an amendment to "clarify" that it doesn't mean exactly what it says. But in fact, no amendment is planned.

This may be strategic: if the California bill remains identical to the New York law, then litigation over the New York law may reduce the costs for California to defend the same law. That's probably the advice that Ms. Skinner is receiving from the bill's supporters (lobbyists for booksellers and other local retailers, who seek the broadest possible law to eliminate the unfair competitive advantage that online retailers have in not collecting sales tax).

It's also entirely possible that Ms. Skinner has decided to "abandon" this bill, and allow it to be killed in committee. Concealing this plan from opponents might serve to distract the efforts of opponents who would thus spend less time and effort opposing other legislation.

Ms. Mooney did state that their office has not yet received any individual letter from Amazon (although they have heard from a coalition that includes Amazon), so Amazon has not yet threatened to terminate all of its California affiliates (and not collect any California sales taxes) if the law passes, as it has promised in some other states. Ms. Mooney specifically mentioned that she didn't believe that Amazon's "sales force" (web publishers accepting commission-based Amazon advertising) in those other states was significant compared to California; I think she shares my earlier expectation that Amazon is going to simply "role over" and collect California sales tax.

Ironically, if the bill is enacted in its current form, it is nearly certain to be stricken as invalid (regardless of the interpretation of the law by the California Franchise Tax Board). If the bill were amended to match New York's absurdly restrictive interpretation, it would be much less likely that a court would rule it invalid.

But that doesn't matter to California web publishers: the bottom line is that if any version of this bill is passed, we will each receive termination notices from dozens of out-of-state merchants (several hundred merchants will terminate all their California publishers, but of course most publishers only have relationship with a small subset of those merchants). A few merchants will require California publishers to annually sign and submit a written declaration that we're not engaged in activities prohibited by the law (probably the exact same procedure as a few merchants now use for New York publishers).

As a California attorney, if I were retained by an out-of-state online merchant to evaluate this law, I would almost certainly advise the merchant to terminate its "affiliate program" relationships with all California web publishers, if any version of this law passes. I would absolutely not recommend the "declaration" process used by some merchants for New York publishers, because any misconduct by publishers might trigger retroactive application of the law (which would be far worse, financially, than immediate implementation of sales-tax collection). If the law were enacted in its current form, I'd probably advise out-of-state merchants (if they retained me) that they should also seriously reconsider any advertising through eBay or Google, and any relationship with Commission Junction (notwithstanding any promised "narrow interpretation" by legislators or by the CA FTB). Of course, I haven't been engaged actively in the practice of law for ten years, and I have never agreed to represent or advise any online merchants.

[markwelch]

Jack wrote: > People seem to understand it better when it is described as "pre-paid advertising" vs. "post-paid advertising." < (emphasis added)

I think the terms "performance-based advertising," "traceable advertising," or "trackable advertising" are preferable. Your suggested use of the phrase "pre-paid" is a misnomer (and probably more confusing than helpful) because virtual NO advertising (CPM, CPC, CPA, CPS) is actually pre-paid, and I expect that any legislators who have operated a business know that most "traditional" advertising is invoiced and paid later. (They may also realize that a significant percentage of advertising is never actually paid for, as the payment-default rate is incredibly high for advertising in most traditional publications.) I'm not sure how political campaign advertising is handled; I wouldn't be surprised if it generally is either pre-paid or backed by a bank line of credit or guarantee.

Of course, the proponents of the "Amazon Tax" love to use the word "commission" because for most people, that word triggers memories of direct salespeople who are physically present. They also like to use the word "affiliate" because for most people, that triggers memories of the intensely close relationship between local TV stations and the networks with which they are affiliated.

As Brian suggested above, we should absolutely make clear that this bill focuses on advertising. Proponents of the "Amazon Tax" absolutely do not want to use the word "advertising," not only because people generally understand that buying advertising doesn't create a physical presence, but also because advertising is clearly not a fair nexus under applicable Supreme Court rulings.

Of course, I also think it's very important to call this bill exactly what it is: an Amazon Tax, intended to force Amazon.com to collect California sales tax -- which will far exceed the total of new sales taxes collected under this law by all other firms combined. Of course, some people misunderstand the reference to an "Amazon Tax" -- Amazon will not be charged any new or different tax, but will merely collect sales tax that consumers already owe. But calling this the "Amazon Sales Tax Collection Law" is too cumbersome.

[markwelch]

I just received a return phone call from Lenny Goldberg, who is a lobbyist for the booksellers (his lobbying firm is also home to the "California Tax Reform Association"). I appreciate his courtesy in speaking with me and sharing information, even though he knows I oppose AB 178.

Mr. Goldberg he said that they are definitely working on some language to amend the bill to conform more closely to the New York tax agency's interpretation of the New York law, including language that would focus on "solicitation" activity and "not advertising." (He denies that the law affects "advertising," but instead insists that it applies only to "commission sales," but of course he's using that term to refer to performance-based advertising.)

He claimed that with these exemptions, merchants would not need to terminate their relationships with web publishers who do not engage in "solicitation" activities -- even though he is aware that hundreds of merchants terminated their relationships with New York web publishers, even after the law was narrowly interpreted exactly the way he expects the California bill will be amended. His proposed amendment will apparently retain the "proof" requirement, which creates a huge bookkeeping burden and liability risk for merchants who have no duty to collect tax. (This is that paperwork nightmare, getting declarations from every affiliate and then dealing with the risk that the cash-starved state agency will decide that one of the merchant's affiliates engaged in prohibited activity.)

Bottom line: it sounds as if he hopes to amend the bill just as I'd expected in April -- but it will happen behind closed doors, after the public committee hearing. (As I mentioned earlier, of course, it might still be enacted without any amendment, or may simply be killed by the Rev & Tax Committee or later in the legislative process; and of course there would be other opportunities to oppose the law when it's considered by the full Assembly, by a Senate committee, by the full Senate, or by the Governator.)

Based on Amazon's announcement that it will prohibit "Direct to Merchant PPC," it seems likely that Amazon is restructuring its "associate program" to prevent the amended bill from applying to its business, thus eliminating most of the revenue the state hopes to raise with this bill.

If the amended bill passes, then nobody will get what they want: hundreds of merchants will end their relationships with web publishers, depriving us of revenue and reducing state income tax revenues; booksellers will see no change, since Amazon will continue to sell to Californians without collecting sales tax; and the state won't see any meaningful increase in sales tax revenue.

[Kevin]

If the amended bill passes, then nobody will get what they want: hundreds of merchants will end their relationships with web publishers, depriving us of revenue and reducing state income tax revenues; booksellers will see no change, since Amazon will continue to sell to Californians without collecting sales tax; and the state won't see any meaningful increase in sales tax revenue.

This sounds very familiar to me........

Keep up the good work, Mark.

[JackMarketing]

It is a mistake to call it the Amazon tax.

[JackMarketing]

Mark, before I cleared the parasites out and built the huge Zappos affiliate program, I was responsible elsewhere for advertising and marketing budgets of over $7 million/year. I understand how just about all types of advertising are placed and paid for.

I have also worked in Washington, D.C. representing an industry defending against laws that would have crippled it, even though it reduced energy consumption and water pollution by more than 10 times the alternative that was being pushed by legislators who hadn't done a complete, scientific, lifecycle analysis of the issue.

So, Mark, with all due respect, please focus on all the new state Internet taxes, not me. And, thank you very much for all your hard work on this issue.

The point is, it seems that we have to educate everyone about how much more devastating these bills will be than most seem to realize or be talking about. It is far beyond affiliate marketing.

Mark, your point that CA AB 178 is revenue negative for California is important. As long as ANY state is smart enough not to be panicked into passing a new state Internet tax, these new state Internet taxes will be revenue negative in All states that pass one.

Also important is that in these economic times, the US needs innovation. The Internet is a key driver of innovation. The devastation wrought by these new state Internet taxes will cripple US innovation, disrupt many more businesses than most realize, put far more people out of work, and have CEOs considering moving to other states, or out of the US.