Ecommerce or affiliate managers may have several different things that keep them up at night: trademark infringement, channel cannibalization, fraudulent sales, cart sniping, and more. All of these are valid concerns for any online marketer. But there are two other items that give me nightmares, cold sweats, and keep my staff up at night – the affiliate nexus taxes in each state and FTC regulations that our affiliates need to comply with.
Quick disclosure: I am not a lawyer and I am not your lawyer. This information should not be taken as legal advice. If you feel one or both of the issues below pertain to you, you should contact your attorney.
Chances are that you are aware of the affiliate nexus tax issue (often called the Amazon Tax). According to PerformanceMarketingAssociation.com “… states are attempting to define their resident affiliates as having a sales presence or “nexus” for out of state merchants in order to collect sales tax for purchases made within that state.”
These taxes go against decades of Supreme Court precedent and do not collect the intended (hoped for) tax revenue. It forces merchants to cease working with affiliates in states that pass them and in most cases those affiliates actually move to nearby states that are not attempting to establish nexus for merchants through their affiliate partnerships. States end up losing tax revenue as income flees the state or simply dry up. They are starting to see this now and I predict we’ll see these laws overturned or repealed in 2014 and 2015. But that doesn’t mean you can ignore them. If you have affiliates in those states, you’ll need to develop a plan to deal with this to limit your liability. The good news is most (I believe all but two states) have ways to rebut or simply comply without incurring any liability.
California and New York for instance allow you to have your in-state affiliates sign a simple affidavit that says they are not targeting their in state consumers directly, but they are targeting all web consumers.
For more information visit the Performance Marketing Association’s website here: http://thepma.org/internet-sales-tax-reform/.
Several advertisers have either removed affiliates from states that have not only passed this legislation but are considering it. And a few have simply closed their affiliate programs completely as compliance became too costly for them. I don’t recommend doing that. Complying with a majority of the states is not prohibitive.
The FTC guidelines, and the potential ramifications of remaining ignorant about them, can be frightening. If you aren’t aware of what I’m referring to, please continue to read on.
In March of 2013, the FTC issued updated guidance on its advertising disclosure laws that clearly place affiliate activities under these regulations. In the past affiliates needed to provide clear and conspicuous disclosure that their content contains or is advertising. These new clarifications outlined that this disclosure was no longer the case. Typically affiliates included a disclosure on a separate page with a link in their footer on each page. That disclosure protected the affiliate and protected the advertiser. Unfortunately, that is no longer the case. The FTC now requires disclosure at the top/front of the ad that it is an advertisement – on every single ad without needing to scroll down to view a disclosure.
Why should advertisers/merchants care? In 2011 Legacy Learning was the first casualty of these guidelines and received a fine of $250,000 from the FTC, plus the legal and attorney fees. And here is the kicker, they were not doing anything that most in our industry and most likely you are not doing. You need to have an auditing and enforcement process in place to protect you, your affiliates, and your affiliate manager.
The FTC said so – “Advertisers need to have reasonable programs in place to train and monitor members of their network. The scope of the program depends on the risk that deceptive practices by network participants could cause consumer harm – either physical injury or financial loss.” Read more at: http://business.ftc.gov/documents/bus71-ftcs-revised-endorsement-guideswhat-people-are-asking.
How could you possibly monitor every single ad for your company and products on every single website? The FTC understands that is not realistic and provided additional guidance: “It would be unrealistic to say you had to be aware of every single statement made by a member of your network. But it’s up to you to make an effort to know where your people are talking about your product. It’s unlikely that the activity of a rogue blogger would be the basis of a law enforcement action if your company has a reasonable training and monitoring program.”
So, you are covered if you have a monitoring and enforcement plan in place.
The FTC recommends that you have a process where you regularly monitor your affiliate partners on a reasonable basis and follow up with affiliates that may have questionable practices.
We recommend a few extra things:
- Have a written plan on who you audit, when you audit, and how you audit. In writing. Written down. Did I say you should have it written down? We audit our top performing affiliates and 20-30 random affiliate partners each month.
- Include language in your affiliate program’s terms and conditions that require affiliates to comply with these FTC guidelines.
- Keep track of your auditing process and your findings. We keep an electronic and physical copy. If the FTC comes-a-knockin’ we want them to see that our processes are tight and well tracked for each of our clients. I recommend you do the same.
Compliance is important, even vital, to the health of your affiliate program, and in fact your career. I wouldn’t want to face a client, let alone my boss or the CEO if the FTC fined my company for 250 million dollars. It’s scary. But, it’s also easy to comply. A good plan, executed regularly, that is tracked and enforced is going to provide you the protection you need.
Don’t let these two legislative and regulatory requirements (obstacles) get in the way of your online marketing growth. It only takes a few minutes to get familiar and have a plan in place to protect you, your company, your affiliates, and the channel’s revenue.
A special thanks goes out to Tricia Meyer, owner of SunshineRewards.com for her detailed analysis of this issue and bringing this to the forefront of the online marketing industry.