Illinois Supreme Court: Amazon Tax “Preempted”, Avoids Constitutional Question

In a 6-1 ruling, the Illinois Supreme Court has held that the state’s Amazon Tax is unenforceable since it conflicts with a federal law prohibiting discrimination against internet commerce.  The suit was brought by the Performance Marketing Association (PMA) and the ruling affirms a lower court ruling invalidating the statute.

In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, will not trigger an Illinois use tax collection obligation. The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the [Internet Tax Freedom Act (ITFA) (47 U.S.C. § 151 note (2000)] and are therefore void and unenforceable. Because we hold that the provisions of the Act are void based on preemption, we do not reach plaintiff’s alternative argument that the new definitions provisions of the Act violate the commerce clause of the United States Constitution. 

This case is the first to uphold the ITFA.

According to the PMA, Illinois-based affiliates numbered at least 9,000 and in 2010 generated $744 million in advertising revenue.  When the law took effect in 2011, those affiliates experienced economic devastation when out-of-state retailers, wanting to avoid sales tax collection obligations, simply terminate their relationships with affiliates.  In fact, the PMA estimates about 1/3 left the state, 1/3 downsized, and 1/3 went out of business.

We are ecstatic!” said Rebecca Madigan, Executive Director of the PMA.  “We are now looking forward to those 9,000 affiliate marketers getting back in business in Illinois. About 1,000 out-of-state merchants can now reinstate their advertising agreements with Illinois-based affiliate marketers, without threat of getting trapped with nexus.” Madigan continues, “Unfortunately, 12 other states passed similar laws, devastating over 90,000 small businesses around the country. We hope this decision helps other states avoid this kind of costly litigation and the damage to a thriving small business sector.”

Proponents of this law claimed that the law leveled the playing field between online merchants and brick-and-mortar retailers because both would now be required to remit a user tax.  The goal is to add new tax revenue to state coffers, but the PMA noted that the opposite actually occurred as online retailers opted to dissolve relationships rather than collect state sales tax.

“This was a lose-lose situation for the state,” added Madigan.  “The state collected no new use tax revenue from those retailers that terminated their relationships with local Illinois affiliates, and the affiliates themselves lost millions of dollars in advertising revenue.  That means less income tax revenue for the state and fewer jobs for the people of Illinois.  Proponents of the nexus tax would have you believe that they have small business interests at heart, but the truth is, the nexus tax law hurt small businesses and unfairly discriminated against one of the fastest growing market segments in the nation.”

Given that two state high courts – Nw York and Illinois – have ruled on the Amazon Tax and come to different results, it is more likely now that the Supreme Court will step in to clarify the issue.   A petition to review the New York ruling is already pending before the Court.

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