Overview

The Illinois Supreme Court in Performance Marketing Association, Inc. v. Hamer, 2013 IL 114496 (October 18, 2013) struck down Illinois’ law imposing “click through” nexus for use tax collection purposes. The law at issue, 35 Ill. Comp. Stat. 105/2, expanded the definition of retailers obligated to collect sales tax to include Internet retailers, such as Amazon, that have no physical presence in Illinois, but contract with Internet marketers in Illinois who refer potential customers to the Internet retailers through a link on the Illinois business’ website (so-called “click-through” nexus). This law is frequently referred to as the Amazon tax, although in fact it does not impose a tax but simply expands the definition of retailers required to collect Illinois use tax. As previously reported in May 2012, the Cook County Circuit Court, in its decision in this litigation issued an order declaring the click-through nexus law unconstitutional under the Commerce Clause and separately invalid because it was preempted by the federal Internet Tax Freedom Act. Because the Circuit Court’s decision involved the click-through nexus law’s constitutionality, the Illinois Department of Revenue appealed the court’s ruling directly to the Illinois Supreme Court under Illinois Supreme Court Rule 302(a). The Illinois Supreme Court, however, did not reach the constitutional challenge to this law in its decision. Instead the court ruled that Illinois’ click-through nexus law was invalid under the federal Internet Tax Freedom Act.

Facts

Illinois’s use tax law has long required any retailer conducting business in Illinois to collect use tax on retail sales to Illinois customers. Illinois’ click through nexus law amended the Illinois use tax act to also require use tax collection by an online retailer, even though it does not conduct business in Illinois, but which has contracted with an Illinois Internet marketer that displays a link on its website connecting an Internet user to the online retailer’s website. Such Internet marketers include comparison shopping websites, which allow online retailers to publish deals and rebate offers on a variety of products and services. The online retailer and Illinois Internet marketer enter an agreement (generically “performance marketing contract”) under which the Internet marketer will be compensated by the online retailer based on the number of customers clicking through the Internet marketer’s website to the online retailer’s website.

Court’s Decision

The court did not reach the Commerce Clause challenge in which the plaintiff argued that the click through nexus law was invalid because it imposed a use tax collection obligation on retailers without substantial physical presence in Illinois. Instead, the court observed that these types of business relationships, where marketers are compensated based on the success of a marketing campaign, are not limited to the Internet – they also exist in print and broadcast media. The court accordingly concluded that Illinois’ click through nexus law imposed a tax that discriminated against electronic commerce. The federal Internet Tax Freedom Act P.L. 105-277 (“ITFA”), prohibits states from imposing discriminatory taxes on electronic commerce. Under the U.S. Constitution’s Supremacy Clause a federal statute preempts state law in cases where there is a conflict between the two. The court ruled that the Illinois click through nexus law violated the ITFA because the Illinois use tax statute did not impose a similar obligation on print and broadcast advertisements. Accordingly, the Illinois Supreme Court affirmed the lower court’s grant of summary judgment that the Illinois law was preempted by the federal ITFA.

Perspective

The Illinois Supreme Court’s decision is unique in it preempted click-through nexus in Illinois based on the ITFA. Other state courts which have considered the issue have addressed the validity of such laws on Commerce Clause grounds. Most recently, the United States Supreme Court on December 2, 2013 refused to accept Amazon’s appeal of a New York Court of Appeals decision in March 2013 upholding the constitutionality of New York’s click through nexus law.

As a practical matter, however, the victory for Illinois taxpayers in Performance Marketing may be short-lived.  The ITFA is currently set to expire on November 1, 2014. Although this federal statute has been extended by Congressional action before, it is unclear whether it will be extended once again by Congress. In the event the ITFA
is not extended by Congress, as noted in the dissenting opinion in the Illinois Supreme Court’s decision in Performance Marketing, Illinois’ click through nexus law will once again take effect. The ITFA discrimination provisions, preempt, that is simply suspend, application of the Illinois law. Once the ITFA expires, the Illinois law, which remains on the books, will once again take effect.

In the wake of the Illinois General Assembly’s enactment in 2011 of Illinois’ click through nexus law, Internet retailers announced they would severe business ties with Illinois based Internet marketers. To avoid this, a number of Illinois based Internet marketers such as Coupon Cabin and Fat Wallet moved across state borders to Indiana and Wisconsin which have not adopted Amazon tax laws. While there was speculation that such Internet marketers could move back to Illinois if Illinois’ click through nexus law was struck down, such businesses would be well advised to monitor congressional action on extension of the ITFA and plan future business operations (i.e. a future move back to Illinois) accordingly.