Good news everybody! Ricky Ahuja over at Affiliate Venture Group decided to do a profile on me for his Asians in Advertising series. Now to get him to change the font color on his blog….
CNN reports today that California companies are fleeing the Golden State. Which isn’t exactly news, since it’s been happening for the last 2 years, and every couple months, gets profiled by a blogger, or newspaper, or online news source, all usually quoting Joe Vranich. Vranich, a “business relocation expert” explains:
“From Jan. 1 of this year through this morning, June 16, we have had 129 disinvestment events occur, an average of 5.4 per week. For all of last year, we saw an average of 3.9 events per week. Comparing this year thus far with 2009, when the total was 51 events, essentially averaging 1 per week, our rate today is more than 5 times what it was then.”
Thus, more businesses are leaving California this year than in the past. All the major news sources blame the exits on high taxes, strict regulations, low government assistance or incentives, and an ever-increasing amount of legislation to comply with, passed by an unstable and confused legislature. Over the last couple years, the headlining companies moving away have been ones with large physical workforces, moving to states like Texas, Florida and Arizona for the higher quality workforce, lower operating costs, tax breaks, and reasonable cost of living for employees (combining metrics like real estate taxes, utility expenses, personal income taxes, etc.). Additionally, benefits in California are outrageously high compared to some of these states; Arizona, in particular, advertises its low unemployment insurance and workers compensation rates.
“Leaving” is a catch-all term that covers many important business decisions that these companies are making. Some are pulling out completely from the state, while others are leaving only satellite offices to retain California clients and moving the majority of their operations and revenues outside of the state. New and potential businesses are choosing not to start in California, also pulling down future tax revenues for a desperate state. Still others are choosing to hire new employees and open up all future locations outside of California.
While the headline exits have been large companies – read Northrop Grumman, eBay + Paypal, Hilton Hotels, KB Home and others – many smaller businesses are heading out too, as the burden is sometimes much heavier, proportionately. Small Business California, a San Francisco advocacy group, conducted a study and concluded that more than 1/5 of small business in California do not expect to be in business within the state in the next three years. One respondent expanded on his “no” answer: “[It is] way too difficult to do business here… everyone has their hand in your pocket. CA needs to get a grip on the fact that small business is the driver and without it, we are doomed.”
All this means California is losing grip on a ton of possible tax revenues that are instead going to neighboring states. For the past few decades, California has been rash with giving people their “rights,” including allowing Proposition 13 to pass (and preventing any real tax dialogues on existent taxes that should be reformed, because nobody will ever vote for higher taxes, no matter how necessary), and giving unions too much headway in public employee pensions, plus the undoubtedly crushing costs of the large prison population in the state, unemployment and illegal immigration. A Milken Institute study concluded that:
“By around 2012 or 2013, the three major state pensions’ total obligations will be more than five times as large as total state tax revenue. Not only will California’s growing senior population depend on Medi-Cal and other state services, but public school enrollment is likely to rise in the coming years. The state can ill afford to fund pensions by cutting back on these services. In 2009, the unfunded pension liabiliteis came out to $3,000 per working-age adult in the state. By 2014, they will triple to over $10,000 per working-age Californian. Raising employee contributions alone will be less effective over time as the ratio of actively contributing members to benefit recipients continues to decrease. Currently, the average state employee contributes to the system for 25 years, but will receive benefits for 26 years — and the number of benefit-receiving years is increasing as longevity improves.”
Proposition 13 is probably worst in that they cannot reform any existent taxes, so must go about devising all sorts of new ones on business, as there no new types of personal taxes to be created. No wonder, then, that they pass callous legislation like their online sales tax, which bypasses every other state in determination of where business is taking place, aka “nexus.” California claimed that all merchants with affiliates in the state would be required to collect sales taxes for purchases through those affiliates, without regard to where the customers are located. It is easy to see where other states might be bypassed and ignored, since where the customer is DOES matter if they are shopping at physical locations.
The net result is that many online merchants, including Amazon, are cutting affiliates from California completely, as has been done in New York and Illinois already in the past. While it may not seem like a big deal, one must remember that online advertising spend is $10 billion nationally and growing, and with a lot of online companies based out of California, the state should have a big chunk of that pie. When those companies leave – and they’ve begun to – that money disappears. From among our own clients, we already see a mass exodus of people either moving themselves or moving their business location outside of California.
Physical stores argue that it gives undue advantage to online merchants, who essentially provide 10% discounts on their products. This is hardly a good case, though it’s a reasonable argument. In practice, many consumers shop over the border in other states precisely because of the taxes they accrue in California. Technically, the consumer is responsible for filing any sales taxes from these purchases, online or out of state, but no one ever does it. It might hurt physical stores that they have to collect taxes, but nothing will actually change for California – people will still go out of state and duck out of paying California taxes. For example, compare buying HDMI cables at Best Buy in West Hollywood to buying those same cables on Amazon. One can get the latter pair for $3, and free shipping with Amazon Prime, or pay the store price of $29.99 at Best Buy, with an internal buy price of $2-3. The physical store marks it up 10 times and imagines it’s getting slighted when people buy online? One must also take into account that online marketing drives a lot of business to California shippers, providing tons of jobs within the state due to the volume of deliveries required. When these purchases drop, so will the employees driving these packages to their destinations.
It can be particularly devastating to the small merchant who relies completely on sales generated by online affiliates. They are not big enough to have a physical store, and the Internet makes it quite possible to have a sales business without extremely high overhead. Meanwhile, the paperwork required of him in collecting sales taxes – which CANNOT be that easy – will divert his attention, cost money, and require audits by California tax authorities, which I’m sure are as welcome as one’s annual physical.
The ripple effects of such policies are actually kind of harsh. Many are in the position of having relied on online marketing as a career for years, only to find their revenues cut to zero by ignorant state policies. They may have a family, and a house with a mortgage worth more than the house, plus staggering property taxes and all sorts of daily surcharges garnered by living in an expensive state. If they can’t sell their house or pull up enough savings to get out of the state, many will have to quit online marketing completely and find new jobs. Many will be too old to find new jobs right away, having to swell the unemployment lists, and many will take years to retrain for another appearance in the job market.
Due to their many misguided policies, California is losing business and people left and right. To be fair, they are trying out an economic incentive program to entice business back to the state, but it’s hard to see how that can sell. In fact, the whole state needs a marketing campaign to improve a somewhat tarnished image. It’s beautiful and sunny, but thousands of communities are underwater, their education system is a joke, the cost of living is stupendously high, and drugs and crime are an expected evil. Racial bitterness will be inevitable as Caucasians get outnumbered by Latinos; already, the complaints about illegal immigration and liberal welfare states have prompted cries for a secession from California of the inner counties. Even their most famous export, the movies from tinsel-clad Hollywood, are requiring some desperate measures from the California legislature. In 2009, movie production was only about half the rate it was in 1996, with most of the productions going to Canada or other states that are willing to provide huge tax breaks. I can’t imagine it’s improved since then.
We keep getting these, or emails similar in wording:
We regret to inform that the [RETAILER] program will be removing all affiliates located in states that have approved the Affiliate Nexus Tax. These states include: New York, Illinois, Arkansas, Connecticut, North Carolina, Rhode Island, and California.
Thank goodness we’re not in any of those states. I want to know where all these affiliates are now moving. Nevada, Delaware… or perhaps the Caribbean?
UPDATE: So far, it’s Nevada.
The affiliate marketing world just experienced a major seismic event today. California finally made the brazen step of passing legislation that forces online retailers to collect California sales tax regardless of physical presence. Clearly, the governor’s office thought that this move would bring in more tax dollars for a state that is drowning like the Titanic. One can thank the reckless stupidity of the lawmakers that introduced Proposition 13 back in 1978, and the voters who passed it – an effective ban on hikes to existing taxes, as getting 66% of the populace to agree on an increase will never, ever happen. Thus, they’re stuck trying to find and create new taxes: surcharge this, surcharge that, and oh, by the way, an Internet sales tax that circumvents federal law about interstate commerce. It’s not so bad that Internet purchases require payment of a sales tax. It’s that one state decided it would make its own decision about what “nexus” means, and thus decide all these unknowns about online marketing that the federal government should be deciding. You know, so there’s fairness involved? Like not screwing all the other states out of their share, or enraging them to do exactly the same thing and just hurting the businesses and affiliates trying to market them? Imagine a sale made to a California resident by an Illinois company with servers in Texas, and 8% sales tax collected by each state because each decided that they had a case for presence (whether location of purchaser, seller or seller’s technology) for a wonderful total of 24% tax. It seems ludicrous now, but could very well go that way if other states follow suit.
Amazon has already fired all its California affiliates (meaning tens of millions of possible tax revenue gone, and just Amazon alone), and we have yet to see what other companies with any kind of affiliate presence will do. Many people seem outraged, but who knows how many of them will follow suit and actually move away from California. Some won’t be able to afford moving (what with the property market as it is), or unwilling to leave Silicon Valley behind, or even unable to leave the beaches behind… In any case, BIG business is bound to move to other states, because they have the resources to do so and have the profit motive in mind, which will be maximized by living in a friendlier state. The fact that the law seems to be vague right now (how does the law apply to agencies/networks, who are sometimes in a quasi-merchant role?) will also make it more likely that grey area companies will want to move. In all, it seems like it’s making California less money in the short-term, and give the state an anti-business reputation that might be hard to erase. It is fact that all previous states that employed this same type of legislation have all lost a lot of tax revenue from online marketers who ended up moving. Plus, those states lost out in other areas too: property taxes from those individuals living in the state, income taxes from those same individuals, plus sales taxes on anything local they bought – plus all the economic blessings they bestowed on local businesses while there. If Jerry Brown really wanted to do something revolutionary, it would be to destroy Proposition 13 so they had some room to maneuver. Personally, I think California is doomed to die a slow death no matter what they do -because they will never be able to destroy Proposition 13, short of a revolution. The worst thing is that they’re responding to big box retailers like Walmart (not even the mom and pop local stores, really) who have physical stores, and who want to crush all their online competitors who have successful affiliate programs to increase their sales. The end result (I assume) they hope for is that the online retailer with “no” physical presence decreases or loses all their sales in the state, and their affiliates no longer want to serve them… which leaves them open to servicing the big box retailers like Walmart who ALSO have an online presence and so are unperturbed by this whole sequence of events.
I’m not opposed to having a sales tax. I’m just inclined to think that the federal government should be the one mandating a national sales tax and setting the definition for Internet marketing nexus (with recourse to the Supreme Court if necessary), actually collecting it, and doing the monetary distribution to the states (this last part being extremely important). That would remove all possibility of unfair advantage and anti-interstate commerce (so businesses would not have to run away from any state), vague definitions of nexus without proper industry input (some dude in the CA tax department can’t just say you have a CA nexus because they say you do, and which is impossible to fight unless you have tens of thousands of dollars and oodles of time to prosecute the state) and the crushing tax paperwork that could otherwise swamp your business. How do small businesses remit to 50 states and fill out all the proper paperwork? They would have to waste way more time filling out 50 sets of confusing tax documents with so many extra traps to get caught in, and thus more tax penalties. Instead, they’d avoid doing business that would entrap them like that… which is what we see here, people moving to another state to avoid the burden, and even shutting down if there was nowhere they could go to avoid the tax headache – obviously bad for retailers who need the marketing exposure. This nexus and interstate commerce issue is an important one that needs to be covered by the federal government, much like mail-order businesses were decided not to have physical nexus just because they mailed catalogs to a state.
Scary lecture about FTC’s Do Not Track proposal. According to Sarah de Diego of Diego Law, there are dire possible outcomes of the FTC’s proposal. It seems as if the FTC is leaning toward forcing merchants to delete all consumer data right after a transaction. The vagueness of such a demand is staggering: when is a transaction complete? Why immediately after? And why such a grand protection of privacy that kills online merchants (thus destroying the largest growing segment of taxable business income in the United States) and also affects offline brick and mortar merchants? It could also kill companies like Netflix, which suggests movies you may like based upon your previous activity… how do they save this information? Well, then they have to detail classes of information and exceptions. However, the point of “Do Not Track” is removing a consumer from ALL tracking, including cookies. They can choose to be invisible, and thus, impossible for any online merchant to properly monetize. Multi-item purchases would be another exception. All sales technology would have to be refitted. And not to mention old data – what would you do with legacy data? Scrap every single sales record ever generated? Then business records (which the IRS demands you keep for up to 5 years) would have to be scrapped, and the FTC and IRS would be butting heads.
The exploration of the proposal is so that the PMA can answer a 5 page questionnaire provided by the FTC to “inform” their upcoming proposal to the legislative branch. They were given 60 days to do so. Very little time to get proper answers on legislation that could totally change the landscape of the American economy.
First seizures linked to COICA. The Combating Online Infringement and Counterfeits Act (COICA) may have some useful purpose in protecting US industries from pirates of all sort, but the way it’s being implemented can be so easily abused. There is no warning or request, like is required under DMCA, so there’s no way for somebody to validly fight against the seizure and reclaim their stolen property. Without due process and proper legal recourse, it is very possible for the government to actually be infringing against civil liberties and violating the Constitution. The warrants backing up the seizures need to have adequate proof and legal support, as any vengeful company can claim copyright/IP infringement and have smaller competitors put out of business permanently. Yes, there are a lot of illegal pirates out there, so the US needs to do something. However, it needs to show its also protecting the civil liberties of its citizens. Business interests count for a lot, but if it means the government is a mere pawn and does not act for the people…
“Do Not Track” is being proposed as a solution to the problem of online privacy. This is where consumers can choose an option on their browser to prevent any persistent cookies being used to “track” their online behavior while they browse. However… it would vastly change the landscape of Internet commerce if businesses couldn’t track consumer behavior properly. besides, the majority of identity thefts occur from weaknesses in government databases and consumer companies that process credit card payments. Do Not Track would not help stop hackers that steal millions of names and numbers from say TJ Maxx, and Social Security numbers from the personal laptops of government officials. Instead, Do Not Track would slow down legitimate e-commerce for no good reason other than this privacy boogieman. Yes, you need to enforce corporate behavior so they don’t install spyware: persistent cookies that illegally access information are bad, and those should be stopped outright. However, regular cookies are important and need to remain. Of course, uneducated Internet users will believe it’s a great option. (Even implementing it would be such a huge headache. Think of all the roundtables and bartering for the technical details, and companies fighting it and delaying legislation with hundreds of lobbyists…)
1) North Carolina woman gets $9 million in alienation of affection case against mistress of her husband. Husband has to pay divorce settlement, and his girlfriend has to pay $9 million? What is going on here? To all scorned women: your HUSBAND committed the error, not his girlfriend. Make HIM pay. Besides, if you make him pay, sympathy is on your side. If you make them both pay, you’re just a vindictive bitch lusting after money and everybody can see that. And really, is your relationship worth $9 million plus the divorce settlement? In this particular relationship, I extremely doubt the couple could have made $9 million during a lifetime together. Regardless whether or not the couple could have made that money, can a jury put a pricetag on how much financial damage an outside party can do on a relationship? What a can of worms. For me, this is about abrogation of responsibility… I’ve ranted on about this before, but it’s time for people in our society to take personal responsibility for things and lay less blame on outside parties. Stop suing everybody under the sun for a payday! Is that what the law is for? If your relationship fell apart, that’s between the husband and the wife. Can you sue a pretty girl for making sheep eyes at the husband? She led him astray; this doesn’t mean she gave up the goods. And what degree of “giving up the goods” is considered alienation of affection anyway? Anyways, this rant is aimed squarely at NC, HI, IL, NH, MI, NM, SD and UT. Get rid of those archaic laws from witch-burning days. Your stupid legislatures should have done that long time ago. Yes, the greedy woman benefited… but blame should be put on those DIRECTLY responsible.
2) Integraclick listed as one of America’s fastest growing companies in 2009 by Inc. magazine. They listed something like $900+ million in revenue during 2009 (according to Inc., dunno if true or not but I assume so), and a good portion of that are due to rebill offers. They even posted about it last year, remarking that “it’s safe to say that continuity programs aren’t going anywhere any time soon.” And then December 1 happened. FTC released additional marketing guidelines that went into effect on that day. These guidelines banned merchants from using deceptive billing practices, affecting a large number of merchants and a sizeable portion of the Integraclick portfolio. The affected merchants typically ran a health or beauty offer (colon cleansers, teeth whiteners, diet pills, etc.) that offered free or low cost trials and automatically billed users once the free trial period ends. The offer typically had little to no or wrong contact info so cancellation was almost impossible, and sometimes involved extra charges that users needed to opt out of – except they were never aware of that fact. Regardless of how hard it was, the credit card companies weren’t happy with the fact that so many of the charges through these merchants were charged back and they received neverending amounts of complaints from consumers regarding fraud, unfair fees, unethical practices, etc. The banks and credit card companies began yanking the merchant credit card processing accounts for many of these rebill merchants during early 2010 and many of these guys shut up shop and flew the coop with whatever cash they still had, leaving unpaid bills to affiliate networks stretching to the millions of dollars. The affiliate marketing industry still hasn’t felt the full effects of this catastrophe, and it seems likely that 2010 will be a bad year for any company that relied on rebill offers for success in the past. It is even likely that listed high revenues for 2009 may now turn out to only be wishful thinking, and full of accounts receivable from merchants who no longer exist, are unwilling to pay or will never be able to afford it. Back to the original point: continuity programs did go somewhere, and real soon. The Bad News Bears happened. Thank goodness that IDzMedia didn’t do too much in those areas. It must be playing havoc with a lot of those search marketers that built up portfolios of keywords on those rebill health and beauty offers!
3) Other companies blackening the reputation of Content Unlockers as a strong advertising model. This is a recurring gripe, made worse by the fact that advertisers are beginning to get pissy. Due to lax oversight of publishers – ahem, the practice of immediate acceptance of any and all publishers, including porn, black hat, warez and intentionally illegal websites – a lot of unacceptable traffic gets sent to offers by these other gateway companies. We use the term “gateway” here to mark a difference from our Unlocker product. Many of these offers were initially used by IDzMedia before being poached and used by everybody else. However, the quality of the additional volume from everybody else is so low that advertisers have begun to baulk and take action. In the past few weeks, several important advertisers have yanked placements from major gateway companies. While we have not been affected, it’s hard to be the only one with ethical practices while everybody else breaks the law willy-nilly. We have been lucky that our carefully built reputation has prevented us from losing accounts, but it’s a pain to continually offer apologies for this niche. With all the building issues, we have to prove that we’re not doing what the others doing – and that requires a lot more patience and communication than we’d otherwise have to do. The one nightmare scenario is that the advertiser gets sick of dealing with the quality issue and removes the offer entirely from the social media incent space. Then, everybody gets punished regardless if they had a hand in it or not. And we are going down that road. It is time for agencies to demand better practices from its client affiliate networks and so on down the line. People like us VET all our traffic so it tends to be of better quality; this is how we can maintain great offers, high conversion rates and continue paying all our affiliates. All the others do not vet and thus don’t know their traffic until it’s way too late; these guys scrub like crazy, yank payments randomly, have irresponsible payment schedules and flood advertisers with so much bad traffic that it always gets noticed. These guys turn the industry into a giant Ponzi scheme, which it should NOT be. How shortsighted. Huge profit now, and then you can fly by night when you’ve made the area radioactive.
Semi-related issue… spoiler alert: CPA * CR should equal EPC? Then why don’t stats at some major gateway companies fit that simple mathematical formula? Perhaps someone should pay attention to what’s being inflated.
4) Assassin’s Creed 2 with its stupid Internet connection requirement, and online saved games. I like single player games because I don’t have to rely on being online. I have DSL and Clear, and both are fast enough but they periodically cut off for a few seconds and then come back. That’s not called a constant Internet connection. I don’t need that hassle of being logged off and on many times while I’m playing. Besides, what if I’m in the middle of nowhere and want to play? I can’t use the game in a secluded spot with bad Internet because some ass decided this model was the way to go? What if I’m traveling and like a bit of gaming? What about that 30% of Americans with NO broadband Internet connection? Biting off your foot to spite your hand. I also like to have my games saved on my computer. This way, I don’t have to rely on some servers of some company that could tank any time and thus lose all my saved games. Not to mention the fact that if Ubisoft went bankrupt, I would no longer be able to play the game at all. Also, your first few weeks and SO many reports of servers being down, DDOS attacks, etc etc. Well, DDOS is a fact of life… but what kind of impression does that make if your first time noob buyers can’t freakin play the game because of your DRM? You lost that guy forever. Yes, you need to make up for expensive development costs by limiting piracy. But great, you happened to lose all the people that might have bought it anyway… and you for sure made the fanboys mad, who happen to drive a lot of game sales for violent videogames. These are the guys who make a choice every day whether to download or to buy, and buy when they think it’s worth it. You have to persuade them to make that choice, or they won’t. Console manufacturers must be pleased though. All those fanboys who didn’t care about the DRM issue enough to totally boycott Ubisoft went immediately to buy it for the 360 and other consoles. Stop driving PC games to consoles, because the response time blows and controls are just not as tight! I hate consoles. I’m playing ACII on a console and it’s annoying. I WOULD buy it for PC but this DRM crap is making me not buy it… and it’s painful.
Personally, I believe this kind of DRM is illegal. You CANNOT sell the game secondhand, which is the prime requirement of retail law. Amazon actually delisted all used copies of ACII on sale because they won’t work with their new owners. Gay.
Also, here’s a post from Xarkezeth on GamesOn.net:
“I just thought I’d register to say that, in compensation for downtime for PC users of Assassin’s Creed 2, they’re giving us free access to the DLC. Which was already included in the PC release anyway. Stunning.”
Newsflash: Amazon fires all Colorado affiliates in response to new Colorado law requiring new sales-tax regulations on online retailers. Clearly, Colorado didn’t learn a thing from all the other states where this has happened. Other retailers may follow suit in the wake of Amazon’s decision, and that means a lot of affiliate marketing income that could have been generated in Colorado will not longer be so. The eventual outcome of this decision? Less taxes collected in Colorado than if no law had been passed. Lawmakers call it blackmail, business (and affiliate marketers everywhere) call it reality.
The issue is where a company’s nexus lies. Where is business taking place? Because an Amazon affiliate who resides in Colorado routed a customer to Amazon, does that mean that nexus was created in Colorado? Well, the issue was kind of sidestepped when the Colorado legislature made the law state that e-tailers should start collecting sales taxes for sales made to Colorado residents or turn over lists of purchases made by Colorado residents. The burden was transferred to Amazon rather than placed on the affiliates… but Amazon made the decision to terminate the affiliates anyway. From one perspective (that of the Colorado affiliates), it does look like Amazon is punishing them for nothing. However, there are larger forces at play. First of all, each state that enacts these laws is essentially creating a different standard for taxation, which causes a huge headache for e-tailers that already do collect taxes – they have to modify their sales presentation for every single state they sell to or in. Also, the possibility is that they will define nexus differently in each case. Mind you, this is only the state – and not what may happen if county and municipal governments start weighing in on online taxes… that would be an even bigger headache. It also doesn’t include the possibility of different taxes on different items. Just run the numbers. If each city, locality and state government had a separate tax law and rate plus different taxation on item types, thats hundreds of thousands of laws and rates that one company would have to keep track of. How many do brick and mortar stores have to deal with? A lot less, since they’re dealing with one city, one locality, and one state government only.
Compare Colorado and New York’s bills requiring collection of sales taxes. If the first few states to do it already have different definitions, then the possibility is that the future of online retail will mean a gigantic clash of tax standards and confusion. The result could be like the situation Expedia finds itself in now: late last year, Expedia was sued by the Florida AG for not collecting the right amount of taxes and the judgment requested was in the hundreds of millions of dollars in back taxes. What was the crime here? That Expedia was collecting taxes on the room rate paid to the hotel, rather than the room rate charged to online customers. With splitting hair decisions like that (which could, of course, result in hundreds of millions over years) made by ONE legislature, is it okay for the largest e-tailer in the world to accept that state tax laws should place essentially random legislation in play that is not backed up in any systemic way across the country? And by following such tax laws, would Amazon be placing itself at risk for being sued for hundreds of millions of dollars in back taxes from any ONE legislature at any time in the future?
Sure, states need their money…. but this is something the federal government needs to address. Nexus, again, is where business takes place and according to current law, that means the physical point of purchase. So for brick and mortar stores, it is the store location (aka if you shopped in Delaware, you pay Delaware sales taxes on your purchases). But for e-tailers, the physical location is the location of the servers for the company. That is where the online request goes, and that is where the database exists that let the user handle their shopping cart and checkout, and which manages the shipping order that goes out to the warehouse(s). According to normal taxation, the purchase should be taxed at the location of that server. Since Amazon has no physical presence in Colorado – other than affiliates, which the law has not resolved to be a legal physical presence or not at this point, leading to the actual reason for their decision to drop Colorado affiliates – it feels it should not have to pay sales tax in Colorado, as it isn’t in line with current taxation norms around the country. (Interestingly enough, Virginia is planning to pass legislation that does include affiliates as a physical presence… and Rhode Island already does, and Amazon responded by cutting off all affiliates there.) Who can address this? If the federal government and state governments work together, they can find a solution that will benefit everybody (though this may take a LOT of effort to coordinate, and plenty of time to argue about it). But these haphazard laws put in place by single states desperately looking for tax revenue not only hurt business with precedent, endless taxation hassles and possible legal actions in the future, they also hurt the states where e-tailers have their physical presence. Are they allowed to collect all those taxes or will Colorado get them? Or will e-tailers pay taxes to both states (doubling the tax cost)? How can this tax be shared, and will states stoop to discussing sharing? These kinds of questions are not ones the states can resolve, and it is right for businesses to back away until a national decision is made.
One solution I liked was posted as a comment on the OReilly.com website: “The solution? The federal government should implement a 5% “out of state” sales tax for internet merchants to remit to each state quarterly, based on “ship-to” state. Internet merchants will only have to worry about their state’s tax rate, and 5% for out-of-state. Simple and implementable without bankrupting small e-commerce companies with a bureaucratic nightmare. This 5% is less than just about everyone’s sales tax, but brick and mortar retailers benefit from local infrastructure, and thus should collect a higher sales tax to remit to the state/locality. Call it a day, let everyone get back to the business of running their business and making a living.” However, this solution is still problematic as there are states with NO sales tax, and states with no sales taxes on certain items. For example, downloaded software is not taxable in CA… which is why a lot of software distributors set up shop there.
I am not suggesting that maximizing profit for business is the number one goal, so it is right for them not to pay or collect sales taxes. What I am suggesting is that there are too many unknowns and undefined items within online marketing that one state cannot go and try to decide all those for themselves. In any case, these kinds of decisions not only affect American companies, but it affects foreign companies that sell to the United States. Online commerce is one way of increasing foreign trade, in or out, and it has been growing in recent years as foreign manufacturers started selling direct-to-consumer and made-to-order. Especially as shipping costs have decreased to the point where shipping a large object from overseas to the United States can cost as much as coast to coast shipping domestically. By taxing in a haphazard way, states are essentially frightening away this type of commerce from their borders, and driving it to states that aren’t so fast on the draw. A national consensus, which the state governments can then use to anchor their own sales taxes, definitions of nexus and whatnot, would show foreign e-tailers that this framework is the cost of doing business in the United States and make it more likely that they would comply to continue selling in the United States. And that, in turn, would make them more compliant with collecting the appropriate sales taxes and customs fees in general, dealing with all the individual states and their possibly divergent tax rates (not definitions). As a comparison: any US company trying to ship to customers overseas knows the hassles of red tape and wildly different customs regulations across Europe and Asia… and unless the company is really big and has the resources to set up localized offices in each country, most businesses just don’t bother as the cost and effort to work with it is just not worth it.
My underlying focus in all this is not the big, big companies. In fact, I don’t really care if Amazon gets stuck with extra taxes or work. My concern is with the smaller e-tailers that have to live with the consequences of these decisions. The freedom of the Internet is such that small businesses have a way to expand their reach across the country without major costs. However, this expansion will be held back if they have to hire horders of lawyers to figure out sales tax issues per state and deal with the multitude of regulations that one can foresee coming out of all this. Of course, Colorado has said that this legislation only targets those generating above $100k in sales per year, but again, definitions can change from state to state or from year to year if the legislature wants to continually revise its definition. These small businesses might choose not to grow via the Internet – which not only causes less economic growth, but can also result in loss of jobs and economic vitality for the state and country. No small matter these days. California and Hawaii have chosen not to do so – mainly because Amazon and others threatened to remove themselves from the state – but that’s good for all the affiliate marketing companies, small time retailers and home business sole proprietorships and partnerships working out of those states (of which there are a lot). Until a consensus decision be made on a national level, I’m afraid that a lot of these issues and factors won’t be taken into account, and that the only factors local decisionmakers will take into account are their local budget shortfalls.
Here as a wrap-up to my discussion of all of the above is a special report from the Tax Foundation, released yesterday. They conclude that “Amazon taxes”, a blanket nickname for all taxes of this sort, are essentially failures. They note that the Amazon taxes decreased revenue collected because as affiliates were cut, they earned less income, thus paying less tax; that the taxes have collected very little revenue from existing e-tailers in compliance; that tax legislation of this sort will face and ARE facing continual constitutional challenges (note discussion above on federal government deciding things for real); that there are disparate burdens on online businesses (note discussion above on complying with different tax laws in every state); and that these laws signal hostility to interstate commerce, thus promoting tax law rivalry and retaliation between states and businesses which could cause even more vitriol, lawsuits, confusion and most importantly, lost sales.
IDz Media, over the course of 5 years, has built up a strong reputation in the online marketing industry. Having been around for this long as a large independent affiliate network and agency – without the support of Fortune 500 media companies with large advertising portfolios from their mainstream media operations and huge budgets – we’ve gained a measure of respect from other agencies, networks and advertisers who continue to see us as an exciting opportunity for high-volume, quality traffic. Publishers who see this kind of stability also warm up to it, noting that stability equals strong cash flow, and strong cash flow means consistent payments, fair terms, etc.
We haven’t come this far without creating a set of best practices that assist us in generating this consistent cashflow and company stability. These best practices help demonstrate who we are as a company to our many partners – governing all our affiliates so that we know where all our placements are and taking responsibility for our traffic; putting limitations in place to stop fraud of any kind, including IP filters, geo-locators, pattern recognition and other security mechanisms; initiating responsible payment terms so that publishers can get paid quickly but advertisers have sufficient time to review leads for quality; being open and transparent and communicative with our partners so that we all know what we’re doing and early action can be taken at the first sign of needing it.
Frankly, this is not an easy task in today’s online world. Hackers wreak havoc by sending in viruses, corrupting databases or DDOSing for sites and people they don’t like; spoofers attempt to steal information from clueless individuals signing up for just anything online; kids and teenagers barter credit card information databases with criminal rings in the online underground; and the list goes on. While not always so obviously illegal, so-called “black hat” marketers do things like spam or generate tons of pop-ups or distribute spyware or open the door for fraudsters of all types to pour their abuse onto advertisers – in order to generate easy income. How do they “open the door”? By passively letting fraudsters send in fake registrations, spoof locations, use fake credit card information on offers… and then passing the buck by feigning ignorance and rejecting responsibility for the so-called actions of others. This is akin to watching somebody getting mugged but refusing to call the police or stepping in to stop it – by non-action, you have let socially unacceptable actions happen which may not affect you directly, but a collection of such events will definitely have a negative effect on the society you operate in.
Marketers that allow fraud to happen and then claim it as the action of others do not help anyone. While they may have generated sales for an advertiser, these leads are unactionable and worthless, as the registered users cannot be contacted and often did not actually sign up and give consent to be contacted, and spurious charges will be overturned by the credit card company. The advertisers who receive these leads can suffer additional fees and get their credit card processing revoked if they send over too many of these kinds of charges; and contacting individuals who did not actually consent can lead to legal headaches and lawsuits for “spam” even though this may not really be the case. Even without all that, the advertiser will have agreed to pay over a sum of money for new customers who are not actually customers. This investment is a total waste of money and regardless of whether this sum is paid over or not, the advertiser can be soured on online marketing or marketing via that particular channel – and yank it for everybody, “black hat” or not. That’s bad. It is understandable from the advertiser side, and thus blame can solidly land on the shoulders of all those black hat marketers that caused the issue in the first place.
This is a particular issue in two areas that we’ve been involved with over the last several years.
The first is the cash reward program. In its early years, providing cash rewards for participating in online programs was relatively problem free. Cash rewards were always meant as a little incentive for people to purchase stuff they were already going to purchase, or sign up for stuff they were already going to sign up for. However, the possibility of getting cash from some far off online source was a draw for a lot of fraudsters, often individuals with little else to do and no desire to get jobs and advance themselves with socially legitimate means. Some of these cheaters were people who might not consider themselves to be criminal, but justified their online thievery as something no one would know about, or would affect somebody that they would never see, or wasn’t really crime because filling in forms with garbage doesn’t seem so bad, or would have no backlash because who would come after somebody for just a few bucks worth of crime? Others were real cheaters, using bots and proxies to send in reams of fake registrations from faked locations.
It was, and still is, possible to stop all these people from committing harm. Just like any place where money is present, there have to be some security measures in place. A responsible rewards program manager would make sure that users could not sign up multiple times and fake new identities in order to sign up for the same items; that they were not using commonly used proxies to abuse offers; that pattern recognition was used to stop bad behavior; that careful user information review prevented payment to cheaters; that advertisers kept being happy with the signups they were receiving; that their site was as secure as possible from intrusion and outside manipulation. Tough work, but not impossible. The rewards program manager that failed to do the above would likely be blacklisted by the advertiser, payments would be yanked and their reputation would suffer. Consequently, they would fail to make payments to their users, or even if they did, they may pay all the users that had caused them the trouble in the first place, thus depriving themselves of the profit they need to survive as a business. In the end, their business would lose out on site reputation to users, site reputation to advertisers, profit, and no cash flow going forward.
Unfortunately, this isn’t a deterrence if the program manager and site owner themselves are complicit in the fraud. Their intention may be to milk what they can, pay no one and then shut the shop down and disappear – “fly by night” always being a definite possibility. With the advent of software making it easy for anyone to manage their own program, this became much more of a problem for advertisers. They began to see reward sites as a draw for mostly cheaters, since the volume of fraud was constantly rising. Affiliate networks (and site owners) like us were told to begin reviewing client sites more carefully, and given lists of sites to ban from offers. The blacklist wasn’t the end… the advertisers began banning certain kinds of reward program sites completely, cutting off a rich opportunity to legally market even for site owners who HAD complied with all directives and were responsible. Whose fault was this? Everybody that decided to allow, encourage and solicit offer fraud, bot usage, proxy usage, and software like Roboform that allowed users to autosign up for offers without even really looking at them. This wasn’t just hackers; these were ordinary people that had forums and messageboards and blog rings and clipped coupons from their supermarket flyers.
The second is the social media rewards channel. As one of the most popular and growing media channels in the last 2 years, social media is the word on everybody’s lips. Are you making money on Facebook? is the question asked by every marketer, and being pitched to every advertiser. By allowing users to buy access to in-game items, information, music, videos or any online content whether on a Facebook application, social networking site (including private blogs and forums) or content distribution platform, the social media rewards channel is huge and what drives a lot of money in and out of people’s pockets. Just imagine the number of people you know who play Farmville and Mafia Wars and other similar games, and how much time and money they waste doing it. To monetize this, application developers and site programmers connect users to advertisers and require certain actions, which trigger the addition of currency or points, or the unlocking of whatever content they were trying to access. Similar to the previous discussion, all these offers can be abused in the same way, and care must be taken to not let that happen. While the greed motive may not be as strong on the user side (Which is a greater motivation? Easy cash, or getting a special flower in Farmville?), the marketers may still facilitate fraud that denigrate the entire industry as a whole – and thus we come to the major problem in social media marketing today.
Those marketers that do not review placements BEFORE the advertising service is initiated end up accepting users with all sorts of illegal and inappropriate content. There are certainly many examples of this today. A simple search reveals placements on adult sites, spoofed sites, warez sites and many other sites that distribute illegal content. The marketers that allow such things are quite aware that advertisers do not allow placement on such sites (as this reduces the image and reputation of the advertiser). It’s easy to see why marketers may let this happen: they benefit from tons of additional traffic, lots of revenue generated, and then they can grab it all on the backend by disavowing knowledge and responsibility for where the traffic came from. Frequently, the excuse is that “we did not know” and that all placements get reviewed before they are paid. By then, it’s too late. Damage has already been caused to the advertiser’s image, you’ve already technically broken terms of service of advertising contracts (as there is no such thing as “I didn’t know”) and you’ve promoted the image that marketers in social media don’t care or don’t need to care about what the advertiser wants until they get sued or arrested. From a practical standpoint, that’s fine if you’re intending on being fly-by-night, aka get it while it’s good, and then run. But for the rest of us long-term marketers? We have to work doubly hard to show that we’re reliable and not like those “other guys.”
For those people that don’t think there are any benefits to being legal, we suggest the following: that advertisers that trust you are more likely to continue the relationship, work with you in iffy situations, not yank payments, raise your rates and open up additional opportunities. Conversely, if you begin to be known for bad traffic and shady activity, advertisers will cut you off first, yank payments at the first sign of trouble, not give you the benefit of the doubt and even initiate legal action against you. I look to ringtone marketing as an example. The biggest “spam kings” in that business, who took the most shortcuts and operated in the greyest of areas, made tons of money over several years but in the end got sued by the attorney generals of several states, suffered millions in punitive damages and fines and were forced to cut back severely or completely, losing out on even more money. Many of the advertisers decided not to allow those particular methods any more, and became much more disciplined. We’ve learned from that, and from tons of other examples and role models in our industry.
On our side, we’ve always maintained that our goal is to be stable and looking forward over the long-term. This does mean much more discipline and thus, in terms of social media marketing, it doesn’t seem as crazily lucrative as other services may offer. However, we’ve been able to build up a stable batch of offers with high CPAs and conversion rates, and we don’t need to resort to any pyramid scheme-like activity. These shady maneuvers include scrubbing out more leads than necessary to support artificially high rates, abusing pixel fires for additional revenue, utilizing “new blood” revenue to pay out the old in lieu of having proper cashflow, etc. As an affiliate network with immense distribution outside of social media, we have the ability to bring in tons of offers that have proved successful elsewhere and which may not be allowed for testing with companies that don’t have solid reputations. These offers usually have high rates which we’ve negotiated because of our volume leverage. The fact that we review all applications with a fine tooth comb and reject a large amount means that our traffic is limited to the best, even though we are purposely cutting ourselves off from a lot of traffic. It tends to be unwanted, in the final count. We have no desire to profit on the short-term, as this tends to mean making less than sticking it out for the long-term. As well, we have our own set of ethics: it’s good to foster an environment wherein the publisher, network and advertiser can all make money, and everyone is treated with respect.
I love the new World Cup 2010 anthem for South Africa. I think I might bother to watch some of the games this time around… not just because I love the song (haha) but I actually like watching soccer games. It’s just a pain in the ass to start watching a team, miss a bunch of games and then try to catch up. My attention span is way too short for that. Speaking of games, sometimes I did wish I had cable or satellite… hmm. Maybe later this year.
K’naan sings for that number but he’s a Somali rapper from Mogadishu and later, Toronto. Homiez. Love his beats and rhymes though. ABC was da bomb for me earlier but lately, Bang Bang has been my go-to for getting pepped up.
Paypal, as of two weeks ago, pulled personal payments and many business payments going to Indian customers. The issue hasn’t been made clear by Paypal but it seems to be some issue with RBI, an Indian bank that is fighting with Paypal regarding payment tracking. I assume the government of India may be concerned due to issues with taxation and anti-terrorism – since there are huge issues regarding business payments increasingly made as personal payments to avoid fees and tracking of business expenditure. Not a big deal for us; our Indian customers will have to deal with just wire payments… though of course, there are fees involved. I’m sure other companies are reeling.. all those that have Indian subcontractors or publishers will have to find alternate ways of paying them.