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Post-Amazon California: 2 Ways SMBs Can Adapt

Amazon.com is dropping its affiliate program in California, stripping some smaller businesses of a significant revenue stream. Here's two ways online retailers can keep the registers ringing.

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Amazon.com is mothballing its Amazon Associates Program in California, eliminating a viable revenue stream for some smaller businesses there.

The move comes as a result of legislation that will require Amazon and other online retailers to begin collecting sales tax on orders placed in the state. Amazon sent a letter to program participants recently that said "we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective." Governor Jerry Brown signed the bill on Wednesday.

SMBs impacted by the shutdown essentially have two options, according to ChannelAdvisor CEO Scot Wingo.

The first involves moving the business to an Amazon-friendly state such as Washington--but it's not the kind of move that requires boxes and a truck. Rather, it's a virtual move for legal and tax purposes.

Wingo said in an interview that this can be complicated and potentially expensive for small companies. It's based on the legal concept of nexus, which determines whether a business has a physical presence in a particular state. It's not for the faint of heart, but it can be done. Wingo said it's likely that larger affiliates will do just that rather than lose their Amazon commissions.

"They tend to have pretty virtual businesses, so they will move the business but physically stay in the state," Wingo said. SMBs that do so properly, Wingo said, can effectively shift their nexus out of California to a different state--each of which has different regulatory landscapes.

Those SMBs without the wherewithal to set up virtual shop in an Amazon-friendly state have to go with Plan B. That, according to Wingo, means revising their affiliate revenue strategies and replacing the big whale--Amazon--with several or more smaller fish.

"There are still tons of other affiliate programs out there," Wingo said, but because of Amazon's massive selection, a replacement strategy is almost certain to require multiple sites.

Wingo recommends LinkShare and CommissionJunction as two sources of other programs. He also advises that California SMBs pick affiliate programs offered by businesses that have a brick-and-mortar presence in the state. Wingo said because these businesses--such as Barnes & Noble--already collect sales tax on Web orders, they're less likely to drop their affiliate plans over Internet taxation issues; online-only retailer Overstock.com is also closing its program in California.

It's not the first time Amazon has shuttered its affiliate program in a state over a sales tax standoff, but it's by far the biggest. EconPost lists California as the eighth-largest economy in the world--a rung above Russia. The state is home to more than 700,000 small businesses, according to U.S. Small Business Administration data. Wingo said SMBs that rely on affiliate revenue in other states should start planning for an Amazon-less future.

"It's definitely something that any affiliate needs to have on their radar," Wingo said. "Even if you're not in California, you should be thinking about what are you going to do when it happens in your state."

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