Sen. Durbin to Introduce Federal Sales Tax Legislation, States Affiliate Marketing Exec
Many nations in the U.S. are considering -- or enacting -- changes to their sales tax laws to include online affiliates as establishing a physical nexus. New York, California, Illinois, Texas and other states have passed laws that require Amazon and other online merchants that have affiliates in these countries to collect and pay sales taxes.
This impacts online retailers with affiliates -- that are sites which refer customers to the retailers and get commissions when those consumers buy products -- but it is also impacting the affiliate marketing company, obviously.
A top affiliate-marketing-management firm is VigLink. We spoke with its CEO, Oliver Roup, last month -- see "Affiliate Marketer on Sales Tax'Nexus' Legislation" -- about the attempts by the countries to broaden their nexus definitions to add affiliates.
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We talked with him next a couple of days ago on a national alternative he thinks will help the nations collect online sales taxes, rather than impact retailers and entrepreneurs that rely on affiliates.
Practical eCommerce: Your company, VigLink, is in the affiliate marketing business. Before we start discussing the so called affiliate nexus laws, could you give our readers an overview of what your company does?
Oliver Roup: "We help publishers become affiliate marketers. We've got a piece of software that publishers could install in their websites which makes the act of linking out to merchants and engaging in their affiliate programs very straightforward.
"An affiliate marketer is a person who, for example, has a website. They write about a book on that site and link to the book on Amazon. If a reader clicks through from the site to Amazon and buys the book, Amazon will pay a commission to that site author. But really collecting that money, enrolling in all of the perfect programs, and doing all the right things is quite detailed administrative work a good deal of people simply don't do. Thus, we do it for them and in return we have a cut."
PEC: Our subscribers are ecommerce merchants. Give us an example of how an ecommerce merchant would use VigLink.
Roup:"Ecommerce merchants frequently have affiliate programs to promote sales, especially the smaller ones. The way customers hear about merchants' products is that publishers online market them, and to promote this to happen, ecommerce merchants pay what are called affiliate commissions or advertising fees to those publishers. It is usually as a percentage of earnings. We make it a lot simpler for all those publishers to participate in these programs. So, an ecommerce merchant can reach a larger number of publishers by using us, and to accomplish this, all they want is to flip VigLink on in whatever network they use to handle their current affiliate program."
PEC: Give us a little bit of background on your own firm, please. When was it set up, what are its financing sources, who owns it, that type of thing.
Roup:"The business was launched in March 2009 by me. We received some seed funding in June of 2009 from Google Ventures, from First Round Capital, and by a number of amazing angel investors such as Reid Hoffman, the founder of LinkedIn. The business is based in San Francisco and has an office in Indiana. We use a total of 18 individuals. The company is owned by the shareholders, the workers, and myself. In August 2010, we purchased one of our opponents called Driving Revenue, and that's why we have an Indiana office. Up to now, the company has raised a total of $7.4 million."
PEC: Last month we talked on the states' attempts to consider affiliates in these countries to constitute nexus for purposes of sales tax. Describe what that is and how that affects your company, please.
Roup:"If some of your readers are located in California or numerous other states throughout the nation, they may observe that if they bought something on Amazon or lots of other Web retailers, they aren't charged sales tax. The cause of that originates from the commerce clause of the U.S. Constitution, which states one nation might not merely tax another; just the national government can tax interstate commerce. Amazon is a business which has no physical presence in California, so they aren't required to collect sales tax from California clients on behalf of the California state government.
"These state authorities are now trying to broadly define what a presence ways to force Amazon to collect sales tax from their customers and remit it back to the states. These laws have been passed in several nations, we believe mostly through the agitation of the physical retailers such as Walmart and Walgreens who have physical presences in the countries and do have to collect sales tax, so they're attempting to impose those taxes in their opponents."
PEC: Please wear your public policy hat, in contrast to the entrepreneur hat which you typically wear. The rise of internet retailing is creating a problem for the several states and municipalities that have historically relied on sales tax revenue from the neighborhood brick-and-mortar retailers which you just mentioned. There's currently less sales tax generated by those regional merchants, and that is the issue we are discussing here. What is the answer for all those countries and municipalities that need the cash?
Roup:"We absolutely sympathize with countries who believe they have to increase revenue, and I think it's worth mentioning that those purchases aren't tax free. The buyer is supposed to report their purchase to the authorities and remit taxes themselves. Not many people actually do this, but it's certainly never been a tax-free buy.
"We believe that the right spot for any alteration of rules that should happen is in the national government. The U.S. Constitution reserves to the federal government the right to tax interstate commerce, and as a practical matter, a national rule would apply to everybody and prevent these issues of place shopping and job flight which plague the country level initiatives. So, I believe that if California feels the need to boost earnings by altering how taxes on Internet purchases are accumulated, then California has senators from the national government, who we think should address their problems there.
"There are very clear [U.S.] constitutional issues at the state level. This whole battle was fought before using the mail order merchants, where physical retailers were upset that catalog companies could mail products to their nation without needing to control taxes and that was really determined by the Supreme Court, who said, '' and clearly I am paraphrasing -- that physical existence and nexus aren't exactly what you wish they were. They are actual legal theories which have a definition. Just because you state that something represents a nexus does not actually mean it does. So, I believe that's the type of theoretical reasoning.
"The other hand is a really practical truth that none of those laws have really increased taxes for any of those countries that have passed them. Whenever the legislation is passed, the internet merchant breaks ties with affiliates in the nation, and the nation still doesn't collect any taxes. Thus, every state that has enacted these laws has actually seen a decrease in earnings since it still does not get to collect any sales tax from the out-of-state purchases, and they push the affiliate jobs either out of state or ruin them altogether."
PEC: The national example which you cited, what type of law would that be exactly? Is that a national law that applies only to Internet retailers?
Roup:"Senator [Richard] Durbin of Illinois really has declared that he plans to introduce legislation in the autumn that could tax Internet purchases and demand Internet retailers -- no matter where they are located -- to collect taxes from purchases at a country on behalf of the state, and then remit it to that nation. The federal government has the ability to tax interstate trade and some other rule that passed would apply nationwide. So you would not have this issue of organizations and retailers attempting to dodge from one nation to another to reap the benefits of the rule differences."
PEC: Has Senator Durbin formally proposed that laws?
Roup:"He's announced that he plans to introduce legislation. I don't think anybody has seen it yet, but he thinks this has to be adopted at the national level and he plans to address it at another session."
PEC: And that's the better response -- getting the federal government involved -- because it is interstate commerce?
Roup: "Absolutely. And we don't have any position on the taxation itself. I believe that the concept that affiliates are embroiled in the struggle of whether Amazon should have to collect taxes for remission to the states or not, there is no reason we should be tied up in that struggle. They are really separate issues, and whether the legislation is addressed to the national level, then it will pass or not pass as that legislative process goes and we won't be at fault in it at all."
PEC: It will get to be somewhat arcane concerning the various proposals which are floating around. One of these involves Texas, for instance. It applies to servers and efforts to link a firm's business on a Texas-based web server as establishing a nexus. That could be quite confusing.
Roup: "Yes. I believe the notion that you said, it ought to be frightening to companies far wider than simply affiliates. If you use a vendor like Akamai -- a content distribution system with servers all over the world -- and when the government sets up a system where you can not pick a vendor without doing really thorough legal evaluation of all of the jurisdictions where their servers sit, that becomes a massive regulatory burden. Vendors who provide their services over the Web will find it more difficult to get customers if these clients are concerned about suddenly having to pay taxes in a new jurisdiction, or perhaps just having to study regulations. They simply won't do it."
PEC: Anything else on your mind as it applies to ecommerce merchants?
Roup:"Our fundamental point is that we take no position on whether Internet retailers should be required to collect taxes or not. We just feel that lawmakers should enact a solution that will actually be successful and will collect tax revenue. The laws which are proposed and that have passed lately, none of them have actually been successful in collecting that tax earnings, and thus they simply introduced regulatory burden and caused job flight and place shopping. The right location for this to be addressed is at the national level."
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