Our preview of the oral arguments at the Illinois Supreme Court during the May term concludes with Performance Marketing Association, Inc. v. Hamer. PMA will be heard by the Court during the 9:00 a.m. session on Thursday, May 16.
PMA arises from an amendment to the Illinois Use Tax Act known as the “Click-Through” Act or the “Amazon tax.” Here’s how it works: everyone has seen third-party advertisements on high-traffic websites, inviting visitors to click on the ad to get more information about a product or special deal. Typically, the third-party advertiser pays the owner of the website based on the number of people who “click through” and buy something. And that’s the nexus that the “Click-Through” Act is based on – any website that has one or more contracts with such advertisers who are “located in Illinois” is defined as a “retailer maintaining a place a business in this State.” And that means that as long as the website realizes $10,000 a year in gross receipts from “click-through” commissions, the site has to charge users for state sales taxes.
The Performance Marketing Association is a nonprofit trade association incorporated in Delaware. It’s the largest trade association in the country representing the “performance marketing” industry – businesses who use marketing methods similar to the internet “click-through” ad. Performance marketing has become relatively commonplace; according to the complaint, there are over 200,000 online publishers nationwide, and over 5,000 advertisers using or supporting performance marketing arrangements.
After the Illinois statute was passed, the PMA filed suit in Cook County Circuit Court. In the complaint, PMA alleges that many internet-based businesses have responded to the Act by simply cancelling all contracts with Illinois publishers. As a result, the plaintiff alleges that Illinois-based publishers have lost millions, and many will go out of business. According to PMA, the “Click-Through” Act violates the dormant Commerce Clause by burdening interstate commerce and attempting to regulate non-Illinois commerce, as well as violating the federal Internet Tax Freedom Act, which bans all state taxes which target electronic commerce for special burdens. The complaint sought a declaratory judgment enjoining enforcement of the Act, as well as an award of costs and fees.
On May 7, 2012, the Circuit Court granted PMA’s motion for summary judgment, finding that (1) the Act failed the “substantial nexus” requirement for permissible regulations of interstate commerce, and therefore violated the Commerce Clause; and (2) because the Act burdened electronic commerce, it was preempted by the Internet Tax Freedom Act. Because the order struck down a statute on constitutional grounds, the State’s appeal bypassed the Appellate Court and went directly to the Supreme Court.
Not surprisingly, PMA has attracted considerable notice, including an amicus brief from the Multistate Tax Commission, the administrative agency for the Multistate Tax Compact. According to the Commission’s brief, the Act cannot be facially unconstitutional because it does not, by its terms, discriminate against interstate commerce. Nor does the Act violate the Internet Tax Freedom Act, according to the Commission, since the Act’s expanded definition of retailers subject to sales tax includes vendors who use any type of in-state representatives soliciting business on a commission basis, rather than singling out electronic publishing for special burdens.
We expect PMA to be decided in the fall.