there’s one big fly in the ointment of the performance marketing business: the sales tax question.
In essence, VigLink and other companies that make money on affiliate commissions are caught in a battle between big online merchants like Amazon and state legislatures around the country. States pounded by the recession are looking for any way they can find to increase revenues, and one of them is to pass laws imposing sales taxes on the purchases state residents make from out-of-state e-retailers. Rhode Island, New York, North Carolina, South Carolina, Illinois, and Colorado have already done this, and there’s a bill moving through the California State Assembly that would add the Golden State to the list.
Part of the argument the states make is that even if an e-retailer is located outside a state’s borders, its payments to local affiliates establish a “nexus” or a legal basis for state taxation. Amazon, in an effort to nullify this argument, has responded by cutting off payments to affiliates in the states with Internet taxes, which ostensibly eliminates its nexus in those states.
If more states look to Internet sales taxes to help mend their budget woes, and if other e-retailers such as Overstock.com respond as Amazon has, it could obviously slow affiliate commissions to a trickle. Indeed, VigLink has already suffered a direct blow: after Illinois passed its own law, the startup had to shut down its Chicago office and move all of the former DrivingRevenue employees (including the company’s entire sales team) to Indiana. The company had no choice: “We send Amazon lots of traffic and we get paid through their system, and their reaction was that they needed to cut off any affiliate that has a business presence in Illinois,” says Roup.
If the House-approved California law makes it through the state Senate and is signed by Governor Jerry Brown, VigLink and quite a few other companies might have to leave the state if they want to keep doing business with Amazon and the other big online merchants. Roup says he isn’t sure yet where the company might end up—when I suggested Las Vegas, he didn’t offer any pushback. “We’ve discussed a number of options, and we’re confident we have a business model in any case,” Roup says. “But it certainly would be a big problem. In Illinois, it caused us to move jobs out of the state, and that’s a possibility we would consider here.”
Roup says he understands both camps’ positions. The states “absolutely need to do something about revenues,” he says, while Amazon is “behaving rationally for their own business.” In states where consumers know they’ll have to pay sales tax, they buy less from e-retailers; for Amazon and other online merchants, Roup says, the hit they’d face from that dropoff in business is probably bigger than the hit they take by ending affiliate commissions and the incoming traffic these commissions generate.
But Roup says he’s hopeful that that the sales tax issue will eventually be settled at the federal level. If there were a single, harmonized sales tax regime across the country, it would free online merchants and their affiliates from the state-by-state cat-and-mouse game created by the nexus laws. Amazon CEO Jeff Bezos has indicated that he would prefer this solution, and Illinois Senator Dick Durbin has said he will propose such legislation in Congress.
In the meantime, VigLink still has plenty of its Series B money left, is hiring aggressively, and is “growing fast in customers and revenues,” according to Roup. If the company can get a reprieve from the sales tax mess, he thinks it might have a shot at real Google-scale growth, especially as it learns more about which types of affiliate links are the most lucrative. “Measuring how well a link is performing; doing more with the good ones and removing the bad ones; the decision on where to link—all of those things can improve over time with data,” Roup says. “I don’t want to put words in Google’s mouth, but I asserted that this business has the potential of an AdSense or an Adwords—and they invested.”
