Colorado wants to close down Advertising Businesses?
Colorado House Bill 1193 was introduced this week, proposing a tax on “affiliate sales.” The target goes beyond normal state consumer tax proposals put out in the last year by various States and makes a demand on businesses that uses distributed advertising mechanisms to pay sales taxes on Colorado sales. According to the bill, any business that has over $10,000 in sales from Colorado citizens through any type of affiliate, CPA or direct response system shall be “deemed to be doing business in this state.”
Many people outside the affiliate advertising industry will think that this does not apply to them, perhaps some major ad networks will ignore this news, but they should listen because it could in theory apply to all segments of the industry, and more importantly adversely affect business nationwide. According to my friend Joseph Franklyn McElroy, CEO of Corporate Performance Artists Corp, he sees that these type of laws are dangerous “Look how Amazon pulled from NC, NY, and RI. Basically these laws violate commerce laws but States hope that risk-adverse merchants will collect taxes for a while, thus helping budget shortfalls.”
Here are my thoughts on the matter and why this law is a very scary propostion:
1) This would require almost all companies that engage in any CPA, Direct Response or Affiliate marketing to change their compensation structures in such a way that they would pay out less when there was a Colorado sale. I can see RFPs from DR agencies start to include, “All 50 States, except Colorado.” This would obviously adversely affect the advertising companies and web properties in Colorado, as more and more marketers would be less likely to want to have to deal with the taxes and paperwork involved with CO purchases.
2) This puts an undue hardship on small businesses to have to fill out additional paperwork and file with the State of Colorado. Already small businesses in this country face enormous issues with various state, local and federal taxes in their own place of business. The internet has been a huge catalyst for small business growth because of the tax considerations for interstate commerce, and this would be one step closer to getting rid of this consideration. Colorado might be the only State to do this, but can you imagine if this starts the ball rolling of other States? Can a small mom-and-pop business survive if at the end of the year they have to fill out 50 different forms for every State + Puerto Rico, District of Columbia and Guam?
3) What specifically defines a sale and affiliate relationships could be expanded to include almost all types of interactive advertising businesses. The definition of an affiliate is very broadly defined in this bill to be anyone who receives money for advertising based on a “commission or any other consideration… who are referred to the retailer.” This means that almost any type of advertisement that would result in a sale, where there is “any other consideration” could be subject to this tax. We all know that much of the interactive advertising industry has a direct response back end – not just direct affiliate commissions, but that the performance of the advertisement in sales determines if more ads are being bought. In theory, any sales on the internet, whether search, display, of social marketing, where there is a consideration for the sale, would be taxed by this “consideration.”
4) Until now it has been the responsibility of the Citizens of the State of Colorado to report their purchases and pay, as they are required in every State. This is a requirement of every Citizen of every State to pay the State for these purchases, but almost no one does this – even though this is the law. The politicians in Colorado know that if they start enforcing the law, more and more voters will become aware of the fact that there is way too much government intrusion into their lives. Many of the politicians in Colorado must know that this, long term, will actually hurt the State, but since this would be a “quick fix” to getting money in their coffer they propose ridiculous laws that make no sense in hope to get elected again.
Now that you’ve read that, here is the scariest part: State Authorities have already been using this idea of a “business nexus” to often go after businesses in other States that sell products or promote ideas that they don’t agree with. In New York, Spitzer tried to shut down internet advertising companies all over the United States making this claim when the federal authorities felt there were no issues. In fact, in some of his most famous cases, after basically closing those businesses with his lawsuits, years later the Judge in those cases threw them out. This idea of a “nexus” when there is just ONE customer from a state who might have seen an advertisement allows authorities from 53 different jurisdictions take actions against businesses. Should we ever be at the whim of elected political authorities to make decisions of businesses in other States?
These types of bills where States put in writing what a business nexus is opens the door to other type of intervention by local authorities. If you are engaged in business in that State, you are then possibly subject to the laws of those States: including any possible local or State laws regarding 1,000 other things. Imagine if a State makes it illegal to advertise junk-food to children – if any affiliate marketer is promoting brownies, some over-zealous State Authority could decide tomorrow to take civil or criminal action against some grandma in Ohio. The Constitution clearly states that it is the duty of the Federal Government to regulate interstate commerce, in order to keep these issues from arising and also to promote free trade between States. As soon as any State starts trying to impose its ideas and laws on the Citizens of another State, barriers start to be created and there is less business being created.
This goes back to my topic, which is that these types of laws have only one effect: they close down businesses. Small businesses, especially start-ups cannot afford to defend themselves when some tax commissioner decides to subpoena them, asking them to “prove” that they aren’t doing business in Colorado. A small merchant risks being shut down when that same commission decides to hand them a $100,000 bill for “presumed” taxes in Colorado. Colorado has long been a State with a strong history of personal and business freedom – I urge you to write the elected representatives of this wonderful State and tell them the truth about this law.
6 Responses to “Colorado wants to close down Advertising Businesses?”
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Great Article Pace! This is what we have to fight!
Quit your complaining! Pay your fair share of taxes or go to prison. The econmomy has evolved in a vitural universe and in order to protect you skinny whilte draft dogdging butts and pave the roads that you drive your gas guzzling SUV on you must pay your fair share. Dodging taxes by claiming internet status is bunk. Pay your tax is part of the cost of doing busines and don’t throw out the tired old argument that this will kill small businesses! It’ will kill inefficient businesses, yes and illegal businesses yes, but Amazon still sells in NY and NJ and around the globe. If you want to fight this go right ahead but do lie and pander to you DR crowd of cronies. Paying taxies is a patriot’s responsibility, especially in this crap economy that was largely created by folks like you and their snake oil salesman hucksterism – from Wall Sreet to Pop Under ads!
Obviously the above commenter has some anger issues and has no idea what he is talking about. This law has nothing to do with the CPA companies paying taxes or anyone dodging taxes.
I have no idea what businesses are "illegal" that they are talking about. The businesses that will be hurt are real tax paying businesses. An affiliate earns money and pays income taxes to the state through links and referrals of customers to a merchant who then takes 100% of the responsibility for the sale. An affiliate never knows who the customer is or has any information about them.
What it will require is for the merchant who is located in another state to collect sales tax on sales to residents of Colorado because they happen to have performance based advertising contracts with residents of Colorado. As Amazon has in every state since NY, and hundreds of merchants have done as well, the simple solution is to just cancel all performance based relationships with all businesses in the state.
It’s easier to turn off the performance based income to everyone from Colorado and spend that money on traditional advertising (you like banners don’t you?) than to lose sales and collect tax from all residents of your state.
Yes, we all have the goal of paying a lot of taxes, because that means we are making a lot of money. We don’t want to lose our income because some legislator decides to illegally tax a company located across state lines.
There is an impact on local business that needs to be considered here.
What in essence you are saying is that it is OK for an out-of-state business to sell Product X to a customer in Colorado and not collect sales tax, but that a local business selling the same Product X must collect sales tax and that is OK with you.
Arguably, this creates an unfair advantage to an out-of-state business, an no one but that business wins: the local company loses and taxes don’t get collected at all. I guess the consumer won a little too because they didn’t pay tax…but maybe had to chip in for shipping.
Yes, in an unbalanced system – where some states want to collect tax from out-of-state entities based on some threshold of affiliate sales – some merchants will decide not to bother any longer and shut down their performance campaigns to that state. Good companies will understand the cost and infrastructure needed to comply and will make a business decision based on the return. Either way, the consumer still wants to buy Product X, and will maybe more disposed to source it locally.
No denying that for the merchant using performance marketing it is a hassle, but from an economic ecosystem perspective, the product will still be sold…and a local tax base have a little more $ to help their deficit. Times suck, government has no money, this isn’t a terrible thing.
If *ALL* states would do this, then it wouldn’t be an issue. And face it, it is only a matter of time. I’m not sure if it is $10,000 or $100,000 or something else, but at some amount of revenue a merchant is doing a significant amount of business in a state, impacting local tax revenues, and that can’t happen forever.
If you don’t agree with that, then consider this – take it up a notch. How would you feel if you were a car manufacterer in the US (and had a good product
, and the US government mandated that you collect 8% sales tax on every car you sold. But China came in to the US and was allowed to sell cars and not collect any sales tax because their factories were in China. Not only would US manufacturers be pissed because they couldn’t compete, we’d miss out on a huge tax base.
While I agree, and have no problem with, every state collecting sales tax on online purchases, the obvious fact here is that they don’t, and this bill will not generate any new taxes; it will actually cause the state to lose money. The websites will not start charging tax, they will simply drop the small affiliate businesses in the state.
If this passes I will either move or be forced to sell the website to someone out of state.
This bill is a real heads up for small home based businesses. We have an established Internet business and are considering moving two families back to Colorado; however, we may not do so if legislation like this passes.
Some counties in Colorado have raised taxes on property to the point where they have stifled 90% of their growth. And, it is these counties that have reduced the number of days to three the county offices are open and the number of hours county employees are working. I am speaking of El Paso and Routt Counties. Essentially we have toooo many bottom feeders like the illiterate fellow who made the first comment.
Now the fellow with the anger management issues sounds like he wants his fair share of what we/you have worked to achieve in the past 15 years of doing business on the Internet.
When Colorado reaches the California point of no return the conservative people in Colorado will amend the State Constitution to read.
Within the state of Colorado no direct or indirect taxes shall be levied against the people without the approval of seventy five percent (75%) of the registered voters in a general election. or…
Within the State of Colorado the right to life, liberty and the pursuit of happiness shall not be taxed directly or indirectly without the approval of seventy five percent (75%) of the registered voters in a general election.
This will eliminate the bottom feeders and send the illegals home to Mexico.
Just my thoughts on a very touchy subject. Taxes.
A real patriot is one whose parents were born in the United States of America or one whose parents became lawful citizens.