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Yesterday, California became the latest state to pass an affiliate tax law.

With a single stroke of a pen, California's governor signed AB 28 1x and may have struck the biggest blow ever to the affiliate business model in the United States.

That's because California isn't just home to a large number of affiliates, it is also widely considered to be the center of the technology universe.

The impact started to be felt in California even before the law was signed. Hours before, Amazon alerted its California affiliates that their relationship with the online retailer was about to be terminated unless the law was vetoed.

Its email stated, in part:

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue.

This isn't the first time, of course, Amazon has sent such an email. The company has cut ties with affiliates in other large states, including New York and Illinois, over laws similar in nature to California's.

But Amazon's termination of California affiliates represents perhaps the most symbolic event yet in the fight against tax laws it believes are unconstitutional.

From San Francisco and Silicon Valley all the way down to Los Angeles and San Diego, the state is home to some of technology's biggest stalwarts and most prominent upstarts.

Every year, literally thousands of new technology businesses are launched in California. They range from basement startups run by single entrepreneurs to startups with tens of millions of dollars in VC funding.

Thanks to California's new law, however, all of those businesses will have more limited opportunities to develop affiliate-based business models.

After all, Amazon's Associates program is one of the most popular affiliate programs out there, and you can be sure that Amazon is just the first in a long line of other affiliate program operators that will be leaving their California affiliates behind in the days to come.

Sadly, just about everyone is a loser here. California, which anticipates that it will raise $200m in additional tax revenue annually from the new law, will learn the hard way, just as other states have, that affiliate taxes simply don't work.

Affiliate program operators terminate their affiliates, as Amazon has already done, and larger businesses that can't afford to lose their affiliate program revenue relocate to other states.

This, of course, actually has a negative impact on tax revenue, as the relocating companies take with them their corporate income tax payments, as well as the personal income and sales taxes that employees pay.

There may, however, be a silver lining in all of this. Given the number of technology companies in California and the sway the technology industry has in the state, one has to believe that there will be some sort of backlash against the new law.

Once the state realizes that it isn't raising any new revenue from the law, and is forced to face the ugly fact that its ever-important technology industry is locked out from participating in major affiliate programs, it may just come to its senses and reverse course.

If it doesn't, and affiliate tax laws aren't found to be unconstitutional, this business model may soon be effectively dead in the United States.

Patricio Robles

Published 30 June, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2402 more posts from this author

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Heather Paulson

Affiliate programs have always been found to be the most cost effective ROI concerning online marketing is concerned. merchants simply pay a commission to the affiliate once there is a bonafide sale, rather then paying for impressions or clicks.

Introductions of a few tax laws will hardly hurt this very strong marketing channel and your inference that this channel would become inn affective or closed is rather extreme in opinion.

Affiliate marketing is the strongest channel concerning sales aquisition next to search and is going to remain so into the future.

about 5 years ago

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Cameron

Affiliates in California are such a big part of how money is generated for small businesses. It gets me thinking of how many people have just learned how to be self-sufficient by providing leads to big brand companies.

As a freelance writer who uses revenue sharing writing sites it is such a loss for those who are trying to make it in this economy. It is as if the little guy does not count anymore.

about 5 years ago

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IT Consultancy

I would imagine so, since US based affiliate programs have to issue tax forms to US affiliates.

about 5 years ago

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Innes Donaldson

I think so or they are certainly nearly gone. Affiliate schemes have nowhere near the presence and pizzazz they used to have!

about 5 years ago

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Adam Richardson

Hi Patricio,

Other states have passed the same laws as well, making some peoples plans to simply relocate within the US a little scary. A better (safer and ideal long term plan) is to simply take your business where it is appreciated and open an LLC in an offshore country or jurisdiction where it can operate freely.
Forget the ridiculous Hollywood connotations of the word "offshore" (besides, I'm talking about structuring your business - even one as small as an Amazon affiliate - offshore, not banking - although there is certainly nothing wrong with that either) and do your due diligence. As happens all to often, Google is the black hole of accurate information on this subject - and your local accountant/lawyer knows nothing about it because they can't make any money on you structuring yourself out of the country.

For what its worth I like the QWealthReport.com for information on whats possible in this area. Try the promo code "JULY" for $10 off their membership, but also enjoy the blog / free reports. I also read Sovereign Man, but I know the Q Wealth guys better.

about 5 years ago

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Couponsophy

While some big merchants have terminated affiliates, smart and flexible affiliate marketers will adapt. There are plenty of companies that haven't terminated affiliates, and some out of state merchants have even pledged to keep their affiliates. California-based companies with affiliate programs are not affected by the law.

Is it bad for California? Yes. Does it mean the death of affiliate marketing? No, I don't think so. The industry will adapt if it has to.

about 5 years ago

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