Amazon Affiliate Tax: Jerry West Has A Bad Solution
Like many Internet marketers, it took Jerry West losing 40% of his affiliate commissions to suddenly realize that there are some big legal issues facing online marketing. This is known as cleaning up a mess after the fact rather than taking reasonable steps to avoid the problem in the first place.
For an overview of the affiliate tax mess, check out:
Internet Taxes Threaten Your Online Business (May 2008)
Internet Taxes: State Governments Want You to Become Their Tax Collector (May 2009)
and
Special Report: The Future of Affiliate Marketing (June 2009 PDF file)
After consulting with his lawyer and accountant, Jerry claims that he has found the “Amazon Affiliate Tax Solution.” Although this might be the solution for Jerry (and I’m certainly not going to offer legal advice in this blog post), his solution is a horrible idea for many affiliate marketers because it exposes them to additional taxes and even potential personal liability.
Although you can watch his video at the link above, Jerry’s affiliate marketing solution in a nutshell involves setting up a foreign corporation in a state where you do not live that doesn’t have Internet affiliate taxes (Nevada was used as an example) and hiring a virtual office “for about $200 per month” to field all your affiliate mail and transfer incoming phone calls directly to you in the state where you live and actually run your business operations. You run the rest of your business using a second corporation based in your home state.
The main flaws in Jerry’s solution were pointed out by me last year in a special report “Scam Artists and Your Business” (PDF file).
Here are some of the key dangers created by the scheme:
(1) Affiliate program operaters can still be required to collect affiliate taxes because the out-of-state company is essentially a sham or alter ego of your in-state company. At best, you’re engaging in unethical conduct. At worst, you’re engaging in fraud. Want to explain explain as an affiliate or as a defendant in a lawsuit the scheme and claim you were only acting unethically rather than illegally? Who do you think affiliate program operators will go after when they get stuck with tax bills because of your conduct?
(2) State governments where both of your corporations are based can argue that Company 1 should be registered to do business in State 2 (where you don’t live) and Company 2 should be registered to do business in State 1 (where you do live). Think of the joys of paying franchise and income taxes in two states for two companies, both in the state where each company is incorporated and in the other state as a foreign entity.
(3) The failure to observe corporate formalities can lead to personal liability because the corporate shield gets pierced. Going to run separate bank accounts for two businesses in two states? Not going to commingle the funds, are you? How about meetings of directors and shareholders? Corporate resolutions? Like to travel alot? How about paying for lawyers and accountants in two states to handle the mess of paperwork?
Unfortunately, people want a quick fix for their problems. If that’s what you’re looking for, Jerry West offers it with additional risks to your ethics, your business, and your personal assets…plus you’ll always be wondering if either a state department of revenue or your affiliate program operators will catch you.
What’s the best solution until the courts sort out the affiliate tax?
Move your online business operations to a state that doesn’t impose affiliate taxes. That doesn’t mean pretending to move and hope you don’t get caught.
A final few things to note.
1. This is not an attack on Jerry West. He’s got a good rep for delivering for StomperNet.
2. Virtual offices (and executive suites) do provide Internet marketers with valuable services. Just don’t use them for unethical or illegal purposes.
3. Yes, these affiliate taxes are a raw deal and the politicians who voted for them should be tarred and feathered. But railing against the unfairness of the taxes won’t solve anything. Take legal (hint: see a qualified Internet business lawyer) appropriate action to protect your business and then vote for your financial self-interest in the next election.
07/18/09 Update: Jerry West has subsequently revised his content to respond to this post. You’ll find my response at Jerry West: Lawyer Wannabe Gives More Bad Amazon Affiliate Tax Advice.
About the Author
With an advanced international law degree from Georgetown University and more than 15 years of real world legal experience, Attorney Mike Young is President of the Internet Ethics Council and creator of Website Legal Forms Generator software. He helps entrepreneurs protect and grow their businesses online.
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I’m glad you didn’t attack Jerry personally. Hopefully your readers will see that. I know you mentioned this but it’s worth saying again just in case there was any doubt.
Really the lesson here is not to take ANYTHING you hear as legal advise. You can take some ideas from what people are saying and run it by an experienced lawyer but if anybody takes advise from a blog or a newsletter…well…
They’re taking a big risk.
Thanks for the alternative explanation. It really is some good food for thought now and in the future when similar “legal” conversations that are bound to pop up.
Bottom line, get a lawyer before you make business decisions. Especially decisions of this magnitude.
Good advice.
Out-of-state corporations are in many (if not a majority) of cases just plain DUMB for small operators looking to be clever with tax liabilities. (For general asset production, privacy, and liability, that’s a different story.)
If you visit your own state’s tax board web site, you will almost ALWAYS see extensive references to this practice where they say they consider YOUR PHYSICAL PRESENCE in the state enough to treat you as a business despite any “sham” corporation you set up in another state.
Anybody who does this is rolling the dice. And tax liabilities multiply and stick to you like glue. I wouldn’t even consider it.
Mike,
I work with Jerry and you obviously didn’t watch the entire video or pay attention. He clearly states to run this solution by your attorney and your accountant as they know your business best. Of course there will be more tax issues, but wouldn’t you rather pay more in taxes on 100% of your revenue than the same tax rate on 0%? The bottom line, merchants are terminating affiliate agreements left and right if you have a mailing address in North Carolina. There isn’t anything unethical in setting up a business in another state, just as their isn’t anything unethical in setting up a company in Nevada or Delaware.
Your solution in moving the business to another state isn’t practical with the state of the current real estate market.
Mike,
That you work with Jerry is absolutely irrelevant except that it shows bias in your response.
I did watch the entire video. It doesn’t cut it to post “Amazon Affiliate Tax Solution” and then in the middle of the video make a quick disclaimer about seeking professional advice.
Of course, there isn’t anything unethical about setting up a business in another state. However, it is highly unethical and at least borders on fraudulent to run two separate business entities as essentially one business, pretend otherwise, and lie to affiliate program operators as to where you actually run your business operations.
As for moving to another state, it may not be practical for you, but it is the best solution until the courts resolve the constitutionality of the new tax legislation.
Best wishes,
-Mike
Tom,
Thanks for your response and providing readers with the tip about visiting their state department of revenue’s website in order to learn how domestic and foreign businesses are treated for taxing purposes.
Best wishes,
-Mike
Jason,
Thanks for emphasizing that not attacking Jerry personally. I do wish he would focus on his expertise and not tell people on his blog and in his autoresponders what should be done from a legal standpoint. Disclaimers don’t cut it.
That would be like me giving out SEO advice on this site but making a small disclaimer in each post that I wasn’t an SEO expert. The major difference between the two is that botched legal advice will cost an affiliate marketer alot more money than a bad SEO tip.
I respect what Jerry does for StomperNet. Should stick with what he knows.
Best wishes,
-Mike
I really enjoyed your article. Now I understand why there are so many lawyer jokes.
Jerry,
I respect your SEO work.
Just don’t pretend to be a lawyer.
As for the “lawyer jokes,” attacking my profession is a straw argument. You dropped the ball by giving bad advice. Whether a lawyer pointed this out or your family doctor, it wouldn’t make a difference.
You goofed up. Nothing personal. We all do from time to time.
Do what you want with your own business.
However, if you care about your blog’s readers, you’ll pull your post before it does more damage.
Sincerely,
-Mike
Ahh nothing like a good flame war to keep things hot in the summer
I applaud Jerry for trying to educate affiliate about the problem, but I don’t see why he tries to give out legal tax “solutions” other than getting more traffic…
Jerry’s good at SEO and from what I can tell this was done to get more traffic to his blog – where at the top of the post there’s a big graphic linking to an upcoming affiliate training course.
I’d suggest the solution is to move to Canada – you can still get direct flights to Vegas from most of our top cities
But I’m no lawyer so check with a Canadian tax and immigration lawyer before you pack your skis.
Cheers.
Peter,
Move to Canada? Now there’s a thought. My great-grandmother was Canadian. Back to the ‘old country’ perhaps. After recent trip to Vancouver, could see that as a viable alternative to the U.S. Some clients think so anyway.
As for traffic generation, perhaps I should play SEO expert and start offering SEO solutions on this blog.
Best wishes,
-Mike
Mike Haynes: The qualifier of, “He clearly states to run this solution by your attorney and your accountant” does not make it acceptable (or prudent) for Jerry to dispense such advice. It’s also not really a “solution,” it’s more of a “gambit,” with substantial risk attached.
California is one state that is actively warning its residents against this:
“Generally, an out-of-state corporation is commercially domiciled in California if its principal office or place of business is located here, or if its business is managed or controlled from California.”
Note the phrase, “managed or controlled from California.”
Worth reading, even if you live elsewhere, as other states take the same view:
http://www.ftb.ca.gov/forms/misc/689.pdf
Thanks, Tom, for posting the info. Nevada is such a popular state for tax evasion setups because of its proximity to California and the “Golden” State’s anti-business climate. Of course, the asset protection gurus never bother to tell people of the risks involved when pitching a Nevada corporation or limited liability company as the solution.
Best wishes,
-Mike
Mr. Young,
What is your position with offshore banking, and running your online business through “panama” as an example?
Is it better to be physically living their, than being here in the US and moving funds through banks, corporations.
Matias,
Thanks for your inquiry. In 1989, one of the reasons that the United States cited for removing Manuel Noriega from power was in Panama was money laundering. Post-9/11, stating national security reasons, the United States has taken an aggressive stance against offshore banking. U.S. banks, VISA, MasterCard, etc. all cooperate with the federal government today when allegations are made of either tax evasion or terrorist funding.
The biggest asset protection gurus in the U.S. selling offshore banking (including best selling books at the time) circa 2001 are out of business. Many are in jail. In one instance, the IRS raided the guru’s office and the guru had lists of all his clients he helped evade taxes with offshore banking. Want to guess who the IRS went after for tax evasion using that list?
To answer your question, offshore banking is a risky thing these days. There’s almost a presumption by the government that an individual or small business engaged in such activities is doing something illegal and you get to try to prove your innocence…not vice versa.
Best wishes,
-Mike