Although California Bill 178 is not yet passed, it is my recommendation that California affiliates begin to prepare their websites and business model. Starting the process now will ensure that they are ready in case the law passes and merchants begin to sever relationships with California affiliates. New York Affiliates were caught by surprise, no one had anticipated that terminations would occur. California Affiliates are at a slight advantage because they know that if the law passes terminations are very likely. As I indicated the other day, California Bill 178 is stricter, there seems to be little wiggle room. Since the potential damage is great, preparation is crucial.
The first step for California Affiliates is to identify the risk for each of their relationships. Examine each merchant and divide them into three categories. Category one will be those merchants who collect California sales tax on online sales. The second category are those merchants who only sell non taxable items. The third category are your vulnerable merchants.
- Examine the website of each merchant. Does the merchant through their online website charge sales tax to California residents? Do not assume that because they have a brick and mortar store in California that they also charge tax online. As NY Affiliates discovered, stores often set up separate companies to deal with online sales. Verify that the merchant collects the tax for online sales. If the tax is collected online, the merchant can be considered safe. If they do not collect the tax continue to the next step.
- Is the item taxable? If the merchant only sells non taxable items, the relationship is not at risk.
- If the tax is not collected and the item is taxable your relationship is vulnerable. Your relationship with these merchants can not be considered safe. Do not assume that because you are on friendly terms with the program manager and are a good or even top producer that your business relationship is safe. As NY Affiliates found out the decisions are often made at the corporate level or by lawyers and accountants. The decision to collect the sales tax will not come easy to many merchants. Many will decide that it is not worth the hassle to collect the tax or that their customers will not want to pay the tax resulting in lost sales.
Once you have identified which of your relationships are vulnerable begin to find replacement merchants. These will be your back ups in case you are terminated once the law takes effect. For every vulnerable merchant find two or more replacements. Make sure these replacements charge California sales tax with online sales. Once you have a couple of merchants that are potential replacements I suggest applying to the program if you do not already have a relationship and begin to test much like you would under normal circumstances.
Keep your lists of merchants accurate. As you join new merchants add them to the proper list. Each merchant name should have good contact information and details on the tax condition. Once the law passes contact every merchant who is on your vulnerable list; ask them what they plan to do. I suggest that in addition to emailing the merchant you address the issue publicly. Do not wait for the merchant or program manager announces a decision to ask questions. Be proactive and reach out to them as soon as the law is passed.
Some merchants will give you advance notice before terminating, if you are lucky it will be a week or two. Others may not know until the last minute and you will be terminated with little notice. California Affiliates have the advantage of having seen what happened to NY Affiliates. Understand that terminations will happen. You need to be prepared.
Some merchants will let you know that they are terminating you because of the tax. But, as any New York Affiliate can tell you, there will also be merchants who will just terminate you without mentioning that it is due to the sales tax, instead you will just receive a generic reason.
California Affiliates need to prepare themselves, do not be lulled into a false sense of security thinking the law will not pass. Prepare yourself and your business. If the law passes you will be in a better position to survive. If California Bill 178 is not passed you can breathe a little sigh of relief.
Merchants outside of California and New York can also take steps. The easiest answer is to collect and remit the tax.
As you know the tax law was upheld in NY. Other states are poised to take similar actions, California is just the second. Dozens of other states are ready to enforce the tax laws. The tax is already due, all that is changing is the method of collection. Your customers owe the tax anyway. Contact a sales tax attorney and ask them. Then call your accountant or accounting department and start collecting the tax.
If you have already removed NY affiliates, and are ready to remove California Affiliates, will you be prepared to remove affiliates from dozens of states as similar legislation is passed?
I urge everyone involved to learn from New York. Prepare. Keep communication open and honest. Remember, we are ALL business people.