Some background. I was part of the 1992 Supreme Court Quill case that said you only had to collect sales tax if a entity had a retail location, a distribution operation, or a sales team in a state. At the time of the decision, there was no concept of affiliate marketing of using blogs, coupon sites, or buying links to other websites.
When the state of Illinois passed a law in 2011 requiring online retailers to collect sales tax if they received sales through Illinois-based affiliate web sites, such as blogs and coupon sites, online retailers including Amazon.com Inc. and Overstock.com Inc. cut off their in-state affiliates. As a result, thousands of affiliate site owners moved their tax-generating operations to another state, according to the Performance Marketing Association (PMA), an industry group that challenged the state law in court.
After winning its case in lower state courts, the PMA’s case was upheld today by the Illinois Supreme Court, which ruled the law as “void and unenforceable” and was pre-empted by the Internet Tax Freedom Act of 1998, which prohibits discriminatory taxes on electronic commerce. “This means that advertisers are free to reinstate their Illinois affiliates whose contracts were terminated out of fear of the ‘click-through’ nexus law,” the PMA said in a blog posting today. The law, similar to ones in New York and other states, had sought to classify in-state web affiliate businesses as an extended physical presence of their client online retailers, and then require those retailers to collect sales tax.
The PMA estimates that about one-third of affiliates also left the 12 other states that have enacted affiliate tax laws since 2008, when New York became the first to pass one. The laws have been commonly called an “Amazon Tax” because they are aimed at forcing sales tax collection by big web-only retailers like Amazon.com, No. 1 in the Internet Retailer Top 500.
The Illinois court’s ruling took the opposite direction of a March 28 ruling from New York’s highest court, the New York Court of Appeals, which upheld a lower court ruling in favor of New York’s Amazon Tax law. Amazon and Overstock have each filed petitions to have that ruling reviewed by the United States Supreme Court.
What remains to be seen is whether today’s court ruling in Illinois will make it more likely that the U.S. Supreme Court will review the New York ruling.
We are still waiting for Congress to finalize a federal law that would provide for a nationwide system of sales tax collection, as proposed by the Marketplace Fairness Act legislation, which passed the Senate in April and is now before the House that can go to the Supreme Court to decide if the Quill case decision will be changed.
NYC Wins When Everyone Can Vote!
Michael H. Drucker
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