By Jason Bramwell
A two-year-old Illinois law that required all businesses to collect state sales tax on purchases made by Illinois residents – whether or not the merchant had a physical presence in the state – was invalidated by the Illinois Supreme Court October 18.
The Illinois law aimed to level the playing field between online and "brick-and-mortar" merchants. It required out-of-state retailers to collect state taxes on annual sales of more than $10,000 that involve in-state affiliates, or website operators and bloggers, that draw consumers to the retailers' sites in exchange for a cut of each sale, according to an Associated Press article on October 18.
The Los Angeles–based Performance Marketing Association (PMA) filed a lawsuit against the Illinois Department of Revenue in 2011 to block the law, stating it was unconstitutional and discriminated against Internet-based performance marketers because out-of-state retailers that place ads in newspapers or radio stations were not subjected to the same tax rule.
According to the PMA, there were approximately 9,000 Illinois-based affiliates in 2010, which generated $744 million in advertising revenue. After the law took effect in 2011, out-of-state retailers, such as Amazon.com and Overstock.com, terminated their relationships with affiliates to avoid sales tax obligations. Rather than lose so-called "click-through-nexus" payments, the PMA estimated that one-third of affiliates left the state, while two-thirds either downsized or went out of business.
"An Internet affiliate displaying a link on its website does not know the identity of Internet users who click on the link, and after a user connects to the retailer's website, the affiliate has no further involvement with the user," wrote Illinois Supreme Court Justice Anne Burke, representing the court's majority. "It is clear, therefore, that there is no interaction between an affiliate and a customer, and no 'active' solicitation occurs on the part of the Internet affiliate. The click-through link makes it easier for the customer to reach the out-of-state retailer, but the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts."
Justice Lloyd Karmeier dissented, writing that the state statute "does not impose any new taxes or increase any existing taxes."
"Substantive tax liability under Illinois law is unaffected," Karmeier wrote. "Sales transactions subject to use and service use taxes are the same now as they were before the [Main Street Fairness Act] took effect. What the law does, instead, is simply amend the definition of retailers and servicemen who are obligated to collect and remit Illinois use and service use taxes to the Department of Revenue."
PMA Executive Director Rebecca Madigan said in a written statement that she hopes the 9,000 affiliates will now be able to resume business in Illinois.
"About 1,000 out-of-state merchants can now reinstate their advertising agreements with Illinois-based affiliate marketers, without threat of getting trapped with nexus," she said. "Unfortunately, twelve other states passed similar laws, devastating more than 90,000 small businesses around the country. We hope this decision helps other states avoid this kind of costly litigation and the damage to a thriving small business sector."
The Illinois Department of Revenue told the Associated Press that it is considering asking the US Supreme Court to intervene. In August, Amazon.com sought a review of the New York Court of Appeals' March ruling
upholding the law there. New York was among the first states to argue that a business with affiliates within its borders gives a company a physical presence there.