This visit we talked about Colorado, object of the paeans of the late John Denver and also the latest battleground over the Internet sales tax or affiliate tax (also known as the “Amazon tax” because of the online retailer’s starring role in the drama). As everyone knows, the states are parched for revenue in the Great Recession, and the idea of solving fiscal problems by reducing spending is anathema. Moreover, in-state brick-and-mortar retailers have been smarting for years over the competitive advantage enjoyed by many online businesses like Amazon that do not charge sales tax. However, as the Supreme Court has held, states can’t simply require out-of-state retailers with no physical presence (or “nexus”) in the state to charge sales tax on purchases by state residents, since this violates the constitutional prohibition on burdening interstate commerce.

What a few states have done, following New York’s lead in 2008, is pass laws taking the position that the use of in-state affiliates — websites featuring links to refer Internet traffic to the out-of-state retailer’s site — amounts to having an independent sales force in the taxing state and provides the nexus needed for the state to constitutionally exercise its taxing power over interstate commerce. (Indeed, the New York statute used affiliate nexus to require the collection of tax on ALL online sales to New York residents, not just on those sales referred by in-state affiliates.) Online businesses, affiliates and their lobbyists in the Performance Marketing Association (PMA) countered that affiliate marketing should not be likened to engaging a force of door-to-door salesmen, but is actually nothing more than the rental of advertising space.

Great album, but if you order it online in Colorado you may get a tax notice.

Amazon, to shield itself from sales tax nexus, has been terminating its affiliate relationships in the taxing states. While some affiliates are large, sophisticated businesses (sometimes with their own networks of sub-affiliate publishers), many are home businesses operated by bloggers and small website owners who have managed to monetize their site traffic to the tune of a few hundred dollars per month or more. Amazon’s understandable but still draconian response to the affiliate tax laws threatens an important source of income for these creative and enterprising individuals in difficult times.

Aggressive lobbying by the PMA and others has stalled or killed affiliate tax initiatives in other states, with California’s Governor Schwarzenegger vetoing the legislature’s bill last year. As of the date of this post, Rhode Island has reported collecting no revenue from its affiliate tax. With tax-and-spend fatigue growing on both the national and state levels, there is increasing recognition that the affiliate tax is punishing in-state web entrepreneurs while hardly filling state coffers.

Which brings me to Colorado. Colorado represents a twist on the affiliate tax paradigm. The PMA successfully lobbied to remove explicit affiliate provisions from the bill. As approved by the Governor and effective as of March 1, House Bill 10-1193 says nothing about affiliates or collecting taxes on sales referred by affiliates.

What it does is impose stringent tax notice and reporting obligations on retailers doing business in Colorado (a category which is broadly defined to include anyone “soliciting [transactions in tangible property], either by direct representatives, indirect representatives, manufacturers’ agents, or by distribution of catalogues or other advertising, or by use of any communication media, … or by any other means whatsoever”) that do not collect Colorado sales tax. These retailers are required to (1) notify annually by first-class mail all Colorado purchasers that sales or use tax is due for which they are required to file a return with the state, and provide these purchasers with detailed information itemizing taxable and exempt purchases, purchase dates, amount of each purchase, etc., and (2) file an annual statement for each purchaser with the Colorado Department of Revenue showing the total amount paid for Colorado purchases during the preceding calendar year. Failure to provide the required notices and reporting can subject an online retailer to penalties of up to $10 per violation (which could get expensive if a retailer has hundreds of thousands of customers in Colorado).

In response to passage of House Bill 1193, Amazon promptly terminated all of its Colorado affiliates. The reason was not immediately clear, since the bill’s requirements are not targeted to affiliate marketing and on its face applies to Amazon’s direct sales. In addition to punishing Colorado, I suspect Amazon also wanted to preserve its ability to argue that the bill unreasonably burdens interstate commerce and cannot be constitutionally applied to Amazon without an affiliate network to provide a ghost of an in-state footprint. (Recall that the New York Supreme Court didn’t buy the argument that affiliates are advertisers rather than an independent sales force, which is sufficient to create sales tax nexus.)

While Amazon’s actions may strike us as a bit churlish and heavy-handed, the plain fact of the matter is that laws like this are not revenue generators and impose unnecessary costs on businesses — devastating costs, in fact, when you see things from the affiliates’ point of view. While Baer Business Law welcomes the opportunity to assist marketers and publishers in the affiliate space on affiliate tax compliance matters, it is my firm belief that a crazy quiltwork of divergent laws benefits no one but lawyers. Rather, there should be a uniform Internet sales and use tax law, implemented either by act of Congress or by multistate participation in a streamlined sales initiative.

The impetus toward affilliate taxation has slowed somewhat, but as long as state legislatures continue to defer the day when they learn to operate like a business, they must continue to stretch their manicured fingers toward virgin sources of revenue. Of course, a public suffering from tax-and-spend fatigue may send a different message in November.

NOTE: The views expressed in this post are solely those of the author.

In my view, the disclosure requirements don’t apply to a typical sponsored ad run by an affiliate site because someone looking at the ad is likely to understand it as advertising for which the site is (presumably) being compensated. The disclosure requirements apply to an “endorsement,” which the new rules define as an advertising message that consumers will likely believe reflects the opinions, beliefs, findings or experience of a party OTHER THAN THE SPONSORING ADVERTISER, whether the endorser’s statements are the same as or different from the sponsoring advertiser’s. If a consumer perusing a site is likely to think it is the site owner or blogger speaking, not the seller of the product being written about, then there may be a disclosure obligation if the site owner or blogger is being comped or incentivized somehow for making the posts.

If disclosure is required, it must be “clear and conspicuous.” In FTC parlance, this requires, among other things, putting the disclosure somewhere near the post that constitutes the “endorsement” (i.e., the advertising). I would NOT bury it in the site T&C’s — the FTC has criticized this practice in other contexts (such as behavioral advertising) where it favors clear disclosures. So if there are multiple posts that constitute endorsements, you may need to include a short disclosure at the end of each post (unless you can associate a single disclosure with multiple posts in a way that makes it clear the disclosure relates to all of them).

Having said that, I also don’t think it is necessary to include a paragraph of legalese in each case. You might think about including a simple link entitled “Advertising Disclosure” after each post that causes a pop-up box to appear with a one-sentence disclosure (e.g., “The product reviewed here was provided by ____ free of charge.”). The bottom line is that I don’t believe the FTC is going to take a hard line on bloggers, particularly where there is some good-faith attempt to comply (as described above). The FTC itself has signaled that its primary target for enforcement will be advertisers, not bloggers. On the other hand, the product sellers may end up dictating what sort of disclosure they want, since they are also liable if bloggers don’t make the required disclosure.

Finally, with regard to affiliates who are also bloggers, a big question is what kind of incentive are they getting for writing favorable blog posts? Is it merely the affiliate advertising revenue (i.e., they want to say good things about the product they are running affiliate ads for) or are they getting something else too?

The latter case is easy — I would say include disclosure near the relevant blog posts, as discussed above. In the former case, one could make the argument that the presence of the ad means consumers are likely to suspect that the site owner has a compensated relationship with the product seller and therefore that the blog posts are sponsored advertising; ergo, no additional disclosure is needed. To be safe, I would probably still include some kind of short disclosure about the relationship, but the point is at least arguable. I think an ordinary blogger/affiliate running a site out of his house who isn’t realizing a significant amount of revenue and hasn’t previously been warned by the FTC is not facing a huge risk. (That said, if the FTC reads this blog or my article and comments on ReveNews, they may disagree with me!)

Now for my own disclosure: the foregoing is provided for informational purposes only and does not constitute legal advice on a specific matter. You should consult with an attorney (hopefully me!) before taking any definite action on this or any other legal matter.

Last year ICANN embarked on a major initiative to authorize potentially hundreds of new generic top-level domains (gTLDs) starting in 2010. In addition to the 21 current gTLDs (which include the ubiquitous .com, .net and .org), you could soon see domain names ending in .paris, .food, .google and other terms. ICANN believes that gTLD expansion will add choice and flexibility to the Internet address system; however, wary trademark owners, especially financial institutions and financial services associations (including Bank of America Corp. and the American Bankers Association), have objected to its plans, anticipating an explosion in cybersquatting, typosquatting and phishing incidents and a spike in trademark abuse prevention and defensive domain name registration costs (millions of new domain names mean millions more that could end up in the hands of baddies).

In response to these objections, ICANN convened the Implementation Recommendation Team (IRT), a group of intellectual property experts, in March 2009 to examine the problem. On May 29, 2009 the IRT published its Final Report on Trademark Protection in new gTLDs for public comment. If you enjoy the sensation of being repeatedly slammed in the head with a large brick, I invite you to read the report. If you enjoy the sensation of being slammed in the head once or twice with a brick of more middling size, you can check out an article I wrote www.revenews.com summarizing the high points (such as they are) of the Final Report.

A couple of key issues bear mentioning here. First, the report calls for the creation of both (1) an IP Clearinghouse to serve as a repository of data about asserted trademark rights (both registered and unregistered trademarks) throughout the world and a validator of these rights where trademark claims impact domain name registrations, and (2) a Globally Protected Marks List (GPML) of select trademarks which have a large number of registrations in numerous countries and, accordingly, are targeted for the highest levels of abuse. Third-party applications for top-level domains that match or are confusingly similar to trademarks in the GPML (such as, hypothetically speaking, .apple) would initially be blocked, as would third-party applications for second-level domains that are identical to marks on the list (apple.computer, again hypothetically speaking).

Applicants to be domain name registry operators for the new gTLDs would also be encouraged to offer a Pre-Launch IP Claims Service, whereby, if a third party attempts to register a second-level domain that matches a trademark contained and validated in the IP Clearinghouse (and that is not a Globally Protected Mark subject to blocking), the registry would notify both the trademark owner and the registrant. The registrant receiving the notice would not be blocked from registering the domain name, provided that it makes certain contractual representations and warranties – i.e., it has a right or legitimate interest in the domain name, will not use it in bad faith and (under penalty of cancellation of the domain name) has provided accurate contact information.

Finally, the IRT report also recommends that all gTLD registries be required to participate in a new Uniform Rapid Suspension System (URS), sort of a cheaper, fast-track, limited-purpose version of ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP) for super-bad cybersquatters. In clear-cut cases where there is no “genuine contestable issue” about the registrant’s bad-faith registration and use of an abusive domain name, the trademark owner could have the registration frozen for its natural life, and Internet users attempting to access that domain name would see a specific error webpage. Complaints would be submitted (by e-mail, if the complainant chooses) to a third party selected by ICANN, which would retain a qualified legal expert to render a decision. Fees would be assessed by the third party on a cost-recovery basis. All in all, the process would be more streamlined and less formal than under the UDRP.

All of these trademark rights protection mechanisms will provide a much needed supplement to the wheezing and expensive UDRP (mandatory arbitration that costs thousands of dollars in legal and filing fees per squatter). Nevertheless, with a huge increase in the number of potentially problematic domain names, brand protection and trademark abuse prevention will remain an administratively complex and costly process.

One idea I had is that trademark owners could effectively deputize their online marketing affiliates by license agreement to snap up domain names on their behalf and point these URLs to approved ad copy. Affiliates could be paid a premium commission for clicks or transactions resulting from Internet traffic visiting the new domain names, to compensate the affiliate for both its initiative in opening up new real estate and the mitigation of trademark risk to the merchant from having the domain name in “friendly” hands. The affiliate contract/license agreement could even contain a buyout clause giving the trademark owner the option to purchase the domain name registration from the affiliate at a designated price (the affiliate’s out-of-pocket costs plus some kind of premium). For the trademark owner, in addition to increased Internet traffic, this arrangement would mean lowering its trademark abuse and brand protection costs – fewer domain name registrations to acquire and maintain, fewer disputes to pursue under either the URS or UDRP.

Well, that’s enough for one afternoon (blogging, not work). At the risk of sounding like a philistine, for today’s happy hour recommendation, try the roof of TGI Friday’s on the Ben Franklin Parkway between 17th and 18th Streets. It’s certainly no gastropub, just fun in the sun. (In these hazy, languid days of August, I’m very low-maintenance!)