Ruling that the law imposed a discriminatory tax upon online performance marketers, the Illinois Supreme Court struck down the state’s so-called “Amazon tax” in a recent opinion.
Taking a position different from other courts – for example, a decision from New York’s highest court earlier this year finding that the imposition of a similar tax did not violate the Commerce Clause – the Illinois court said the federal Tax Freedom Act preempted the state law.
In 2011 Illinois amended the Use Tax and Service Use Tax Acts to update the definition of a “retailer” or “serviceman” maintaining a place of business in the state. The revised definition included “a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person’s Internet website.”
Out-of-state online performance marketers were subject to the tax when they met a threshold of $10,000 per year in sales earned by consumer click-throughs.
The Performance Marketing Association responded with a lawsuit challenging the constitutionality of the law. The group argued that it violated the Commerce Clause of the federal Constitution because the new definition authorized the collection of use tax with respect to an activity that lacked a substantial nexus with the state of Illinois. In addition, the association argued that the provision was expressly preempted by the 2000 Internet Tax Freedom Act, which prohibits “discriminatory taxes in electronic commerce.”
Avoiding the Commerce Clause issue, which has split courts around the country, the Illinois Supreme Court found the ITFA preempted the state law.
The updated definition in the Illinois law targeted out-of-state Internet retailers, the PMA argued, and yet did not require use tax collection by out-of-state retailers that enter into performance marketing contracts with “offline” Illinois print publishers and over-the-air broadcasters.
Illinois pointed to other statutory provisions in state tax law that already imposed a use tax collection obligation on such offline performance marketing, but the court found those requirements applied only to in-state advertising.
According to the court, Internet advertising is different.
“Illinois law does not presently require out-of-state retailers who enter into performance marketing contracts for ‘offline’ print or broadcast advertising which is disseminated nationally, or internationally, to collect Illinois use tax,” the court stated. “However, under the Act, out-of-state retailers who enter into such contracts with Illinois Internet affiliates for the publication of online marketing – which is inherently national or international in scope and disseminated to a national or international audience – are required to collect Illinois use tax.”
“In this way, by singling out retailers with Internet performance marketing arrangements for use tax collection, the Act imposes discriminatory taxes within the meaning of the ITFA.”
The dissent argued that the form of advertising addressed by Illinois law has no direct analog outside the context of the Internet, making the discrimination argument moot.
To read the opinion in Performance Marketing Association v. Hamer, click here.
Why it matters: Courts continue to struggle with the so-called Amazon tax, reaching different results. About one dozen states enacted similar tax laws, most of which have faced legal challenges. The Direct Marketing Association scored a victory over Colorado’s version of the law, but Amazon and Overstock lost their challenge in New York’s highest court. The companies have appealed that decision to the U.S. Supreme Court, but the Justices have not yet determined whether or not to grant certiorari.