Investors Leery When Affiliate Nexus Tax Bills PendingWritten by Pace Lattin
June 28, 2011 # 4:35 pm # Marketing Insights # No Comments
Many online marketers are looking to take their businesses to the next level by seeking outside investments. However, pending legislation in many states – especially California – has venture capitalists, angel investors, institutional lenders and potential merger partners concerned about putting money into companies that might be legally constricted from reaching their potential and their limit the investors’ ability to recoup the investment.
According to a new study from the Pepperdine Private Capital Markets Project (PPCMP) this week, most business owners and lenders remain concerned about familiar difficulties – uncertainty, taxes and regulations.
When asked about emerging issues facing business both lenders (22 percent) and business owners (31 percent) see government regulations and taxes as the top issue.
“Uncertainty surrounding the debt limit, future taxes and implementation of newly passed regulations are likely to be driving the concern by private businesses and lenders,” says Dr. John Paglia, lead researcher of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. “Policy makers need to look towards implementing policies that will help lower the debt while providing stability and predictability to the market.”
Affiliate turned app developer Keith Posehn has seen firsthand how this uncertainly about taxes has impacted his business. Posehn, who is currently trying to raise additional funding for his mobile app start-up AppZorz, says it has been rough with the pending legislation in California that threatens to stifle his ability to partner with other companies.
“I’m making the rounds trying to get funding and venture capitalists keep asking why I am starting a business in California and then suggesting I move out of state,” Posehn says. “Investors are not so keen on the risks associated with these laws and how they could hamper my ability to do business.” Hear more from Posehn on the the PMA Industry Report Podcast.
The pending legislation includes three bills being proposed in California (AB 153, AB 155 and SB 234). The first two bills seek to use affiliate marketers to establish nexus for out-of-state retailers in an effort to force those retailers to collect sales tax for online purchases from residents of California. Rather than jump through the hoops to collect that sales tax, out-of-state merchants are simply cutting ties with affiliate marketers. This means they can still sell to California residents and not collect sales tax. But it also means that those affiliate businesses lose a significant portion of their income. In addition, the state never gets the additional sales tax revenue that was projected and the state also loses a portion of the income tax that was being paid by the affiliate business.
SB 234, which does not specifically use affiliates to establish nexus (a physical presence in the state) looks to give California’s Board of Equalization discretion over determining nexus, which could be interpreted by the BOE to mean that if a company posts data on server, uses consultants, does advertising or partners with an out-of-state merchant, that company would establish nexus for that out-of-state retailer and this makes the merchant liable for collecting sales tax in California.
Similar laws are pending in other states including Massachusetts, Minnesota, Louisiana and Pennsylvania.
Oliver Roup, CEO of Google Ventures-backed VigLink, says that his investors are very concerned about how these laws will impact his business if passed. Roup is seriously considering moving to another state if the laws are enacted. He already moved his 6 person office in Chicago to Indiana when a similar law passed in March.
“It is a real concern for investors. They don’t like the uncertainty. And we need to consider all options in order to keep our business growing.” Roup says. Hear more from Roup on the PMA Industry Report Podcast.
San Francisco-based VigLink is on track for a record year of growth and continues to add employees. The company has 16 employees and just hired two more earlier this month. There are plans to have a total of 20 workers in San Francisco by the end of the year. However, Roup estimated that his revenue could be cut immediately by 35 to 50 percent if the bill passes.
These laws threaten to hamstring the online marketing space at a time when outside investments in businesses are at levels not seen since 1999 before the tech bubble burst. Fueling the investment fever are high-profile IPOs such as LinkedIn along with Facebook and Groupon announcing they are preparing for mammoth IPOs as well.
A new report by Fenwick & West, a nationwide top law firm that specializes in representing technology and medical companies, showed that of all Silicon Valley venture capital backed sectors software as a service and mobile app topped the list. Also ranking at the top were digital media/Internet, computer hardware and clean technology.