Matthew Cheng is the brains behind the popular West New York-based “affiliate marketing” company eCoupons. He runs a website, eCoupons.com, that offers coupons that direct people to BestBuy, Amazon, and smaller businesses. If the customer purchases something, eCoupons receives a small commission.
In this way, eCoupons is considered an “affiliate” marketer for Best Buy.
But legislation introduced to the N.J. Senate in early February may force Cheng and nearly 700 other N.J.-based affiliate marketing businesses out of the state, Cheng said last week. It is possible that the Senate and Assembly may vote on the proposed bills as soon as March 15.
Cheng and his wife welcomed their daughter, albeit prematurely, into the world in January. She is due to return home from the hospital in April.
“At this rate,” Cheng said, “the legislation may be passed faster than we can get our daughter out of the hospital. And then we’ll have to move.”
What is an affiliate nexus tax?
Large online retailers such as Amazon who do not have a “physical presence” – or, an actual warehouse or office space – in a state like New Jersey, do not charge N.J. customers state sales tax.
In an effort to collect this tax, N.J. senators Paul Sarlo and Raymond Lesniak have introduced Senate Bill No. 1305, which will establish affiliate marketers like eCoupons as that physical presence. Online retailers would then have to charge state sales tax on all sales made through eCoupons because the company is physically located in the Garden State.
This sort of legislation has already been passed in Illinois, California, Connecticut, and New York, so “online retailers have simply terminated their advertising agreements with the affiliates in those states,” Cheng said.
The legislation would only affect Cheng’s business with online retailers that do not have what is known as a “brick-and-mortar” presence in New Jersey. Many of the retailers he deals with – such as Sony, Best Buy, and Apple – already charge state sales tax because they have warehouses or stores in-state.
However, between 30 and 40 percent of eCoupon’s revenue comes from online-only retailers such as Amazon that do not have a local physical presence. New Jersey affiliate marketers like eCoupons, Cheng added, are already required to pay state corporation and income taxes.
If the legislation passes, he said, he may be forced to move to a state without similar legislation.
“We’re caught between Main Street guys and online guys, though we’re advertising for both.” –Matthew Cheng
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The purpose behind the bill
The first example of such legislation was passed in New York in 2008 in an effort to level the playing field between online retailers and what are known as “Main Street businesses,” or businesses with a physical retail location. In a tough economy, Cheng said, people are looking to save a buck, and are drawn to companies that do not charge state sales tax.
“[This] is why online retailers will immediately end their contracts with us if this legislation is passed,” he said.
By law, customers are supposed to declare and pay sales tax on products purchased from such online, out-of-state retailers, when they file their taxes with the IRS. But they usually don’t. This gives the online retailers an advantage over physical stores while depriving states of tax revenue.
As well-intentioned as the legislation may seem, placing the tax burden on state-based affiliate marketers is “a huge stretch,” Cheng said. “From a business standpoint it’s very scary, because I don’t think they really understand the ramifications this legislation will have. We’re caught between Main Street guys and online guys, though we’re advertising for both.”
Amazon strikes a deal with the state
Piggy-backing on the aforementioned bill, bill no. 2608 was introduced to the N.J. Assembly on Feb. 22. Cheng said the bill “will give Amazon.com a 22-month deferral of sales tax collection in exchange for building warehouses in N.J. and make affiliate marketers the basis of a sales tax nexus for other online retailers.”
In plain English, Amazon has made the offer to the state of New Jersey to build warehouses here and provide extra jobs in exchange for not having to collect state sales tax for almost two years.
“Brick-and-mortar retailers are understandably very upset at Amazon, so they want to get at them any way that they can,” Cheng said. “Not also to mention N.J. is looking to create more jobs.”
The Assembly and state Senate session will consider this legislation on March 15.
Cheng said the affiliate marketers may be pushed to move even farther away.
“Affiliate marketers drive 10 to 30 percent of sales for larger companies,” Cheng added. “This could technically drive marketers out of the country completely.”
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