Statute providing for Internet sales tax on out of state sales and sales through affiliates struck down in Illinois.
Link: Performance Marketing Association, Inc. v. Hamer (Illinois Supreme Court)
Like many states, Illinois desperately wants to collect an Internet sales tax when its citizens buy stuff over the Internet. Generally, a state cannot impose duties to collect taxes on out of state retailers and must rely on people to report their own purchases and pay the sales taxes directly to the state. Good luck with that.
In order to get to the Internet sales, Illinois changed its sales tax law to change the definition of “maintaining a place of business in this state” to include:
“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.”
In other words, Illinois can get to Amazon and its sales if someone in Illinois signs up for their affiliate program and includes an Amazon ad on their website.
The performance marketing industry has been fighting these laws across the United States and made it to the Illinois Supreme Court.
The court noted that the statute does not require tax collection by out-of-state retailers who enter into performance marketing contracts with offline and over-the-air broadcasters. As a result, the amended statute is targeted solely at “online” performance marketing.
The plaintiffs argued that the federal Internet Tax Freedom Act (the “ITFA”) preempts the Illinois statute and that the Illinois statute violates the commerce clause of the U.S. Constitution. The ITFA prohibits a state from imposing discriminating taxes on e-commerce. This includes revenue raising measures and the imposition of obligations to collect sales taxes.
The court concluded that the statute uses performance marketing over the Internet as the basis for imposing a use tax collection obligation on an out-of-state retailer. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois will not trigger an Illinois use tax collection obligation. As a result, the statute imposes a discriminatory tax on electronic commerce within the meaning of the ITFA. Accordingly, it is expressly preempted by the ITFA and is therefore void and unenforceable.
Because the court made its decision based on preemption, it did not make a decision based on the alternative argument that the statute violates the commerce clause of the Constitution.