It has already happened in other states such as New York and North Carolina. States have changed their tax laws so that companies such as Amazon that have affiliates in that state will be required to collect and pay sales taxes on sales made in that state. The immediate response by Amazon and many other companies has been to drop all affiliates in those states so they can continue to avoid collecting sales taxes in those states. This has been devastating to many affiliate marketers.

California, the state I live in, is seriously considering this action yet again. It’s a proposal that has been beaten back a couple times now, but it just won’t go away. The state needs money and this looks like an easy way for them to get a lot of it very quickly. AB 153 and AB 155 are proposals that might have a huge effect on affiliates in California. Hearings will be on March 7, 2011 in Sacramento, for any affiliates who can get there and testify about the impact these would have on their businesses.

Too bad it doesn’t seem to work. Once the affiliates are dropped, the companies no longer have a presence to concern themselves with, and can continue to refuse to collect the sales tax. Meanwhile affiliates have less of an income and pay less income tax. Not exactly what the states hope for.

That said, I can see where it’s not unreasonable to say that something needs to be done. Many people don’t realize they’re supposed to pay a use tax if they buy something out of state and their home state would have collected sales tax if the purchase had been made there. The use tax is the same amount as the sales tax, minus any sales tax paid to the state the purchase was made in, usually zero if you’re talking about online purchases. Yes, theoretically most states want you to pay on those purchases you make on vacation. But that’s not the focus here.

The focus here is on what you can do if you suddenly lose all income from Amazon and other such links. Being dropped from such profitable programs is painful if they’re your major income source, a potential financial disaster. You need to consider a backup plan if your state starts considering this kind of legislation with any seriousness at all.

What can you do?

Start by opposing the legislation as it appears in your state. If you don’t speak out, how will your legislators know how such a law would hurt you? Taking some time to fight the legislation before it’s passed gives you a chance to protect your income. Visit the Performance Marketing Association website to find out what’s going on in your state. There might be something you can do to help beyond simply emailing your legislators about the problem. They often aren’t familiar with affiliate marketing and don’t realize how ineffective these bills are at collecting taxes or how damaging they are to this kind of business. You can help to educate them.

For Californians, here’s a link to help you contact the Assemblymen on the Revenue and Taxation committee, as well as your own Assemblymen. Be polite and make it clear how damaging this could be to your business, plus how the bill will not bring in tax money to help the budget. Point out the responses to the bills passed in New York, Rhode Island and North Carolina, where affiliate contracts were simply terminated. Ask them directly to not support these bills.

As you fight, consider your options in case it does pass. Where else can you earn an income that won’t be lost? Are there other retailers you can affiliate with that are already in your state and therefore collect and pay sales taxes already? Will you need to go to AdSense? Are there any ebooks or other nontaxable items you could sell instead? Preparing now can limit the damage if things go wrong, as well as diversifying your income sources, always a good idea.

The problem with many of the options is that they aren’t necessarily as profitable for you as an affiliate. When you have a site set up to sell a particular product it’s not always easy to replace a merchant. Other merchants may not convert as well or may pay lower commissions. Amazon in particular is difficult to replace because even when customers you refer don’t buy exactly what you recommended, they may buy something else from a huge range of categories.

Whatever you do, don’t just sit and hope the bills don’t pass, or mope about the loss of income. Take action. That’s how you got your online business started in the first place and that’s what you need to do to keep it.