This is extremely urgent information for all merchants - please spread the word! I just got off the Linkshare/DMA New York Tax conference call with DMA Tax Counsel George Isaacson. George stressed upfront that this was not strategy call – the primary purpose of the call was to analyze the law and more specifically the May 8 Technical Services Bulletin and to try to interpret the enforcement policy.

Tons of important information came up in this call and it will take me some time to complete this blog post. HOWEVER merchants only have 10 days to comply, June 1 is right around the corner, So 1st I’m going to cover essential information that merchants with affiliates in New York should consider implementing right away. Then I will add more info from the call to this post or do a part 2, so stay tuned for complete details later. Here’s the most important part, with more details and background info to follow.

MERCHANTS IF YOU HAVE NEW YORK AFFILIATES YOU SHOULD CONSIDER AMENDING YOUR TOS. HOWEVER there is no guarantee changing your TOS will protect you. The DMA call suggested it, but there are conflicting interpretations of the law, so it may not!

1st of all, merchants need to read the May 8 Technical Services Bulletin. The TSB is not the law only a attempt at clarification. In a nutshell (depending on interpretation - you need to read and have your attorney advise you!) it could be that merchants could REBUT the presumption of nexus IF New York affiliates only use links and USE NO OTHER MEANS OF SOLICITATION for the merchant.

Here is part of the wording from the doc - HOWEVER be sure to read the last blockquote on this page as it seems to contradict the following paragraph and says if links are pay for performance links, a seller may not rebut.

“A seller may rebut the presumption that it is soliciting sales in New York State through resident representatives. For purposes of administering the new presumption, the Tax Department will deem the presumption rebutted where the seller is able to establish that the only activity of its resident representatives in New York State on behalf of the seller is a link provided on the representatives’ Web sites to the seller’s Web site and none of the resident representatives engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller.”

So if any of your NY affiliates go beyond web-based links (banners are never mentioned) and engage in any other form of solicitation defined in the document as “flyers, newsletters, telephone calls or e-mails or any other means of solicitation” to customers in the state of New York, then you can’t rebut the law and your company is considered to have nexus in NY and is liable for the tax. (SEE IMPORTANT CONTRADICTIONS IN UPDATE BELOW)

So the biggest concern merchants should have is emails, including email newsletters, since most affiliates don’t use flyers or telemarketing.

George recommended that merchants amend their TOS. I don’t have an exact quote from him and you need to check with your own attorney on specific wording. But in a nutshell what merchants need to cover in their TOS is something like this: Affiliates based in the state of New York can only use affiliate links provided by the merchant. No emails, no email newsletters to any New York residents. Also no flyers, brochures, printed newsletters, telephone calls or any other means of solicitation on behalf of the merchant are allowed BY NY affiliates - to NY consumers. Be as specific as you can. There are probably other promotion methods that should be spelled out too.

I personally would add some very strong wording about NY affiliates that don’t comply and are found to be using other methods of promotion in NY will be terminated, without payment immediately. I asked George the question: “if merchants add this to their TOS but some affiliates still send emails and NY audits and determines the merchant has nexus because a few affiliates are still emailing, would the merchant still be liable?” He felt that having a strong TOS and being able to prove the merchant is diligent about trying to enforce it, would go a long way. May be a good idea, that in addition to changing your TOS you send an email to affiliates about it and save for legal purposes. If you terminate some affiliates who don’t comply - be sure to save proof of that for legal purposes so you will have more legal grounds to defend yourself. NOTE: simply changing your TOS may not protect you, but it could possibly help defend your position if audited.

One of the big problems some merchants are facing right now is that they have not been able to get the info they need from networks to find out IF THEY ARE EVEN LIABLE for charging/reporting/paying the NY sales tax.

The magic number is $10,000 in sales made by NY affiliates TO NY CUSTOMERS over the past 4 quarters (see actual wording below.)

“cumulative gross receipts from sales by the seller to customers in New York State as a result of referrals to the seller by all of the seller’s resident representatives under the type of contract or agreement described above total more than $10,000 during the preceding four quarterly sales tax periods”

Merchants with affiliate programs on networks are not privy to affiliate addresses and have no way to run a report of sales based on affiliates in New York. The exception being Shareasale who jumped right on this and set up a report for merchants, Kudos again to Brian and team! The last I heard merchants on the major affiliate networks have been unable to get sales figures for NY-based affiliates.

The “to customers in New York State” is a new distinction from what we can tell. It’s good news in a way in that some merchants now won’t hit that threshold, but throws another big new wrinkle into the picture. The networks could possibly run a report for merchants based on total sales from NY affiliates. HOWEVER the networks don’t capture personal data on the customer, like where he lives. So there is no way for a network to tell a merchant how many sales from NY affiliates were to NY customers - NONE! So it’s impossible for any merchant working with a network to know if they meet that 10K criteria. as it’s currently written!

Even Brian’s report won’t work (I don’t think) because it’s pulling total sales volume, not sales volume only from NY consumers. I would think for a network to pull personally identifiable data, like a consumer’s address from a merchant’s cart, would violate a few privacy policies and make consumers pretty upset that their addresses were being passed to a 3rd party!

Maybe I’m wrong… maybe they could just pass the state parameter, HOWEVER considering the major networks have not been able to provide ANY reports to merchants yet and considering some backend changes in tracking and reporting between merchant and network would need to made and considering it can take the big networks MONTHS to implement changes sometimes… merchants need the info now in order to be in compliance or know if they are off the hook. I don’t see a way for them to get this data in the next week.

SO that makes this TOS issue even more important! Based on IF the DMA’s interpretation of the TSB is correct - that IF you can prove your affiliates do no other form of solicitation in the state of New York besides links - then you could possibly rebut regardless of your NY sales volume! (Check with your attny and see update in orange below from another attorney.)

Now what I’m not clear on is how you rebut and what proof you need to show prior to June 1 that you don’t feel you are not liable for the tax. Another concern I have is IF you change your TOS today and get affiliates in compliance before June 1, then are you safe because prior to your TOS change you were not in compliance. Could they still charge you for the back taxes???

There are still lots of unanswered questions. You still may want to consider changing your TOS right away and document all efforts to enforce it. You need to talk to your attorney about wording on your TOS. AND VERY IMPORTANTLY you need to find out what you need to do to register and/or rebut prior to the June 1 amnesty date. REMEMBER if they charge you for back taxes, that is tax you never collected from the consumer, so it comes right out of your pocket.

Many merchants are having a hard time getting answers about this from their attorneys who either don’t fully understand affiliate marketing or who don’t know enough about this NY law. I HAVE A CALL TODAY WITH THE BIGGEST, MOST WELL KNOWN INTERNET ATTORNEY. I will see if there is any way he can help us collectively, or if I can get any advice from him, or at the very least give you his contact info, if this is an issue he thinks he can help merchants with.

UPDATE 1:30 PM: INTERPRETATION OF THE TSB as it Relates to Affiliate Links: Just had a very long detailed conversation with John Dozier Esq., Managing Partner of Dozier Internet Law. John is one of the leading Internet attorneys out there, understands affiliate marketing and has handled numerous affiliate marketing related cases on a variety of issues. We went over the TSB in detail and the way he reads it, is not as clear cut as it was when we discussed it on the DMA call.

If you carefully and critically read every place in the TSB doc that mentions advertising or placing links, some of the information even sounds contradictory. In some places it sounds as if they are saying regular advertising links are not a problem, but affiliate links are because compensation is based on a pay per sale model. So many potentially problematic issues came up and everything is all based on interpretation because it’s not clearly written. This part of the TSB seems to say advertising links are OK but pay per sale affiliate links are NOT!

“In addition, an agreement to place an advertisement does not give rise to the presumption described above. For this purpose, placing an advertisement does NOT include the placement of a link on a Web site that, directly or indirectly, links to the Web site of a seller, where the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link.”

The bottom line too is, this TSB document is not the law and is not binding. It’s only an attempt to clarify and explain the law and is subject to change.

SO ALL THAT SAID: If I were a merchant I would not try to figure it out, I would contact John at Dozier Internet Law right away, to get some help. I would maybe also go ahead and do the TOS changes to be on the safe side. BUT REALIZE that simply changing your TOS in and of itself will not protect you and may not be grounds to rebut. Based on the way NY interprets and enforces the law, just having pay per sale affiliate links even with no other solicitation still could constitute nexus.

Based on everything that happened on those 2 calls and the fact that there are a ton of other issues people haven’t even thought about yet… I’m going to say this is WAY more complicated than people realize and there are a bunch of loopholes and gotchas. I wish I had recorded and was able to share both calls with you, so you could hear 1st hand the viewpoints from 2 very knowledgeable lawyers.

I will continue to report on news as I find it, but for me to try and explain complicated phone calls with attorneys and translate interpretations of this law this when I’m not not a lawyer, is just really not a good idea. You just need to get a really good lawyer that understands affiliate marketing, Internet marketing and tax law!

Add questions or any new developments in the comments below.

Complete Coverage of the New York Affiliate Tax Issues Here

Lisa at Revenue posted her analysis: DMA Call to Interpret NY Affiliate Tax