State Taxes Affiliated with Brick-and-Mortar

Why would FatWallet, a company with a reported-2010 revenue of $12 million, readily accept a $100,000 moving cost, changing locales from a $5 million, custom-built office a year later? No, the move was not due to online motions but offline ones, associated to state taxes as relayed in the New York Times.

It also has to do with FatWallet's business model, acting as a middleman, facilitating a reported $1.2 billion in Web commerce. Pat Quinn, Illinois governor, signed a House Bill last March, requiring out-of-state retailers (advertising through Illinois affiliates) to collect and remit Illinois sales tax.

Mr. Storm, head of FatWallet, was faced with a decision. Move his company or let present location decisions thin the company's wallet. He was expected to lose as much as 40% of his revenue because large Web retailers, like Amazon.com and Overstock.com, would sever ties with affiliates like FatWallet to avoid additional costs.

The business maneuver, costing him money, was a no-brainer to Mr. Storm. "We didn't really have a choice about relocating the business. It was relocate or become irrelevant." The customers FatWallet serves are partly at fault; residents are to declare and pay sales tax on goods bought from out-of-state retailers; few do, depriving states of revenue, giving Web retailers more advantages over brick-and-mortar retailers. Of course, brick-and-mortar retailers appreciate the taxes tilt of the playing field.

The laws seem fair to states missing out on deserved taxes as well as physical stores, suffering in sales due to the explosion of Web commerce. But what about the affiliates who seem to be caught in between? Are they getting squeezed too tight?

When California governor, Jerry Brown, signed nexus tax legislation last June, Amazon.com ended relations with 10,000 state affiliates. As featured in the Times story, one business heavily dependent on Amazon, lost 60% of its retailers.

Affiliates, third-party sites who adopt and sell the services and products of larger brands, take formation in a number of varieties on the Web. Forrester Research projects spending on affiliate marketing to rise to $4 billion by 2014 (just under $2 billion in 2009). A Times source states about 5% of Web commerce stems from affiliate marketing.

It will be interesting to see if larger brands, leveraging affiliates, become involved, contributing to the politicking of affiliate marketing. In some cases, affiliates may do more harm than good. Scot Wingo of ChannelAdvisor, states that only about 5% of affiliate sites offer better content or an increased user experience regarding offered products and services. "Many retailers are decreasing the number of affiliates. There's a lot of fraud. And some create channel conflict. They may buy search terms and compete with you."
February 15, 2012