Illinois Supreme Court Strikes Down Internet Tax

Published October 18, 2013

Efforts to tax Internet sales wherever they occur suffered a blow with a 6 to 1 ruling against Illinois’ “Amazon tax” by the state’s supreme court.

Illinois enacted a “click-through” nexus law in 2011 that effectively says if an Internet retailer has referral contracts with in-state affiliates, the retailer must collect Illinois sales tax on in-state sales, even if the retailer is located in another state. Such laws were originally aimed at the nation’s largest online retailer – – hence the term “Amazon tax.” The Illinois law is so broadly written that all paid-per-click advertising, also called performance marketing, would result in sales taxes being owed.

“The ruling is welcome news for Illinois taxpayers and the companies that hope to do business with them. By ruling against the so-called ‘Amazon tax,’ the Illinois Supreme Court reaffirmed that the years-long campaign to extract more taxes from Internet-based businesses is unconstitutional and misguided,” said Andrew Moylan, a senior fellow and tax policy analyst at the R Street Institute in Washington, DC, about the October ruling. “Instead of targeting the Internet, states should pursue broad reforms that make their tax systems simpler and less burdensome.”

Tax Causes Huge Ad Revenue Loss

“The Illinois Supreme Court – in this ruling, at least – are heroes of commonsense, the U.S. Constitution’s Commerce Clause, and overly taxed businesses,” said Bruce Walker, a Heartland Institute policy advisor for technology and telecom issues. He said the tax was “a classic example of governments seeking to kill the goose that lays the golden egg – in this instance Illinois’ gluttonous appetite for revenues at the expense of Performance Marketing Association affiliates conducting business in the state. An estimated 9,000 affiliates generated $744 million in advertising revenue prior to enactment of the statute in 2010. After the law took effect, affiliates’ revenues fell by more than $550 million.”

The Performance Marketing Association brought the lawsuit. “The ruling by the Illinois Supreme Court that Public Act 96-1544 is ‘void and unenforceable’ results in a judicial finding that the statute was never legally valid and, therefore, it is not currently in effect. This means that advertisers are free to reinstate their Illinois affiliates whose contracts were terminated out of fear of the ‘click through’ nexus law,” said the association in a statement on its Web site.

Court Focuses on Disparities

In its ruling, the court noted an Internet affiliate “does not receive or transmit customer orders, process customer payments, deliver purchased products, or provide presale or post-sale customer services. Further, 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. 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.”

Furthermore, the court noted, Illinois does not require tax collection by out-of-state retailers who have performance marketing contracts with “‘offline’ print publishers and over-the-air broadcasters, . . . which indicates that many out-of-state retailers with no physical presence in the state engage in performance marketing through a variety of media such as catalogs, magazines, newspapers, television and radio, that are accessible by, or distributed to, consumers in Illinois, but are directed at a regional, national and even international audience.”

Because of these disparities, the court struck down the Illinois law.