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Tuesday, October 22, 2013

Illinois Supreme Court Strikes Down Internet Sales Tax

In 2011, Illinois passed Public Act 96-1544, a so-called "click-through" (aka "Amazon tax") law that imposes the state sales tax on out-of-state internet retailers that have a contract with a person in Illinois who displays a link on his or her website.  This type of contractual relationship is known as "performance marketing" and involves an affiliate relationship between the person who hosts the link and the retailer.  Shortly after the law was enacted, a trade group that represents performance marketing businesses filed a lawsuit claiming the law was unconstitutional because it imposed a use tax on activities that lacked a substantial nexus with the state of Illinois and the law was preempted by federal law.  The trial court ruled in favor of the plaintiffs, and the state appealed.  In Performance Marketing Assoc., Inc. v. Hamer, the Illinois Supreme Court struck down the state law, finding it preempted by federal law.
The Internet Tax Freedom Act prohibits a state from imposing discriminatory taxes on electronic commerce.  The plaintiffs argued that the state tax applied only to out-of-state internet retailers who entered into affiliate agreements to publish links on the internet, but did not apply to retailers who enter into affiliate agreements with print or over-the-air publishers or broadcasters.  As a result, the use tax discriminated between out-of-state retailers based on the method of publication of the affiliate advertisement (Internet vs. other broadcast).  The Illinois Supreme Court agreed, finding the use tax discriminatory because it treated like agreements differently.  The Court did not address the unconstitutional argument, having found the tax invalid based on the preemption argument.


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