California, Here They Come

by Melanie on September 3, 2012

As September 15 approaches, the California Board of Equalization is gearing up to step up enforcement of sales tax collection for online sales. This activity is a direct result of the passage of AB155 last year and the agreement reached between Amazon and the State of California.

The law applies to out-of-state retailers that have substantial nexus with California consumers. This includes any out-of-state retailer that has sold more than $1 million to California consumers in the past year and has had more than $10,000 in sales referred by an affiliate operating in California.

Merchants meeting the conditions outlined above are required to collect and remit sales tax for purchase made by or shipped to residents of California as of September 15. The California BOE is in the process of notifying merchants of the requirements.

During the next couple of years around 100 auditors, lawyers and others are being hired by the state to ensure compliance with the new requirements.

So, what does this mean for our industry? Some merchants will not be affected; their sales do not meet the criteria for nexus. Other merchants will be affected and will either begin collecting sales tax or, remove affiliates to avoid nexus. It is important for merchants to seek qualified counsel before making any decision.

Merchants have options regarding their affiliate programs. A solution similar to the solution identified by a team of independent New York Affiliates back in July 2008 is one possible solution. Remember that back in 2008 a group of NY Affiliates banded together to identify and implement solutions. With help from some we were able to retain legal counsel. Read more about the New York experience that paved the way at NYAffiliateVoice) Other options in California and other states have also been identified by us. Merchants need to seek and retain their own counsel to verify that these possible solutions apply to them. As always, never simply accept the opinions of counsel not retained directly by you. Costly mistakes can occur by accepting advice of anyone other than your own lawyers and accountants.

The impact on Affiliates in California will be the same as in all the other states where new nexus definitions have been passed. Some Affiliates will see little or no changes in their income but others will lose some income as they are  removed from programs. Other Affiliates may see additional terms and restrictions placed on their activities as a result of the implementation of the “New York Solution”. There may be a loss of income from one merchant if program closes but California Affiliates should not be discouraged. There are thousands of merchants to choose from.

As New York Affiliates learned, recovery is possible. Replace merchants that drop you. Adopt new terms and conditions as needed. Most importantly, diversify.

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One of the highlights of Affiliate Summit East Day 3 was the session entitled Affiliate Compliance – Best Practices, Issues and Options.  This was a panel discussion with moderator David Naffziger of Brandverity, and panelists Pat Grady of Rhino Fish Media, Marty Marion of Deluxe Corp, and  Matt Wool of Acceleration Partners. The session was a frank discussion of the challenges of managing affiliate compliance. At the conclusion of the session there was an increased understanding of the blackhat techniques some employed and the red flags that indicate something is amiss.

After the introductions, the panelists moved onto defining compliance and talking about some of the points merchants need to consider. Pat stated that compliance begins with having clear rules; clear and solid terms and conditions are necessary to establish the rules. It is important to have an affiliate manager who is knowledgeable and understands affiliate marketing and the techniques used. The affiliate manager also needs to utilize tools inside of the network interface as well as outside tools and services such as Brandverity or Affiliate Fair Play.

Marty who manages the Deluxe family of programs added that he applies a cohesive set of terms and conditions across all his programs. Consistency of rules and enforcing them is critical to maintain the integrity and success of his programs. Terms and conditions set the rules that protect the merchant. Merchants can be held responsible for the actions of their affiliates. An example would be if an affiliate makes exaggerated or false claims for a merchants product or violates FTC regulation, the merchant can be fined or held accountable.

Matt stated that the terms and conditions must be comprehensive to reflect the goals of the program. For example, his terms for the Tiny Prints program includes terms that are designed to protect the core of his program; for him the core are his “mommy bloggers”. Having read through their terms and conditions, I have to agree that the Tiny Prints terms are comprehensive; including rules regarding the cookie stream – what happens if a second affiliate comes into the cookie stream and the investigation process. By having clear and comprehensive rules, affiliates will have an understanding of what they can expect.

The panel stated that the terms and condition should also set parameters for the process if there is a question about what the affiliate is doing. Set guidelines for the questioning process and the actions that are taken if violations are found. Determine ahead of time what the rules are and then, enforce them evenly and consistently. If questions arise, reach out to affiliate, they should be able to answer in a timely fashion.

David stated that it is important to know where traffic is coming from and how affiliates are getting it. Different types of affiliates use different techniques and there will be different compliance concerns.  Knowing the type of affiliate they have is the merchant’s first step to knowing what they need to protect themselves against.  Some networks are easier that others when it comes to monitoring affiliates.

The panel agreed that multiple tools are needed to monitor a program. Matty suggested the use of analytic program to monitor conversions. Matt agreed, adding that tools such as Brandverity are an aid. It is important that if you suspect something you look further and ask questions. Pat suggested that merchants also look at referral urls, conversion rates, sources of traffic and even the affiliate’s reputation. He reminded everyone to always have a healthy level of suspicion.

David discussed the importance of trusting your ”spider sense”. If your spider sense starts tingling, check into your affiliate’s reputation. If the affiliate is cheating other merchants, save your energy – give the boot.  Otherwise, program managers need to investigate and follow through to protect the merchant,  the merchant’s reputation and the program. Know what your affiliates are doing. The panel agreed, saying as a merchant you should know what your top 50 are doing and then pick random 50 to monitor on a monthly basis.

Changing technology impacts monitoring affiliate compliance. Toolbars, mobile marketing and even pay per call raise additional issues. It is important to stay on top and be proactive. Adam Riemer (AdamRiemerMarketing ) was in the audience and participated in an interesting discussion of allowing sub-affiliates into a program. Adam made it clear that sub-affiliates greatly increase the risk on many levels. Besides making commission double dipping possible, sub-affiliates may unknowingly violate terms (they may never see merchant’s actual terms and conditions). Sub-affiliates can also add complexity to the traffic trail and hide violations and compliance issues. All of the panel felt that transparency is important and it goes back to the need to know what your affiliates are doing.

In addition to the moderator questions, there were questions from the audience. The session was very well received, it was filled with information and lively discussion. Be sure to catch the video when it becomes available.

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