States’ Drive to Collect Taxes on Internet Sales Is a Blow to Marketers

It is hardly surprising that states are taking it upon themselves to increase their sales tax income. Residents are supposed to declare and pay sales tax on goods they buy from out-of-state retailers, but few do, which deprives states of tax revenue and gives Internet retailers an advantage over physical stores. California hoped to collect some $200 million the first year after passing an affiliate nexus tax, and the large brick-and-mortar retailers that support nexus bills hope that the bills will level the playing field with Internet competitors.

But these laws have collateral damage. Caught in the crossfire of the nationwide fight — New York and other states have also passed nexus laws — are a large but rarely examined part of the Internet economy, affiliate marketers. These third-party Web sites, which contract with retailers to advertise their wares, come in many forms. There are coupon clearinghouses with multimillion-dollar revenues, like FatWallet and Ebates, which some online shoppers visit religiously to track down daily bargains, and there are tiny mom-and-pop blogs that run affiliate marketing ads related to their content — a pet blog, for example, might carry advertising for pet shops.