Illinois Click-Through Nexus Law Preempted by the Internet Tax Freedom Act

by Eversheds Sutherland (US) LLP

In a 6-1 decision, the Illinois Supreme Court affirmed an Illinois Circuit Court holding that Illinois Public Act 96-1544 (The Click-Through Nexus Act), requiring out-of-state retailers to collect and remit use tax, violates the Internet Tax Freedom Act (ITFA). Performance Marketing Ass’n v. Hamer, Docket No. 114496 (Oct. 18, 2013).


Illinois’s Click-Through Nexus Act was enacted in 2011. The Act amended the definition of a “retailer maintaining a place of business in the state” for sales and use tax purposes to include retailers having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person’s internet website.

This provision is commonly referred to as “click-through nexus,” and is intended to impose a tax collection and remittance requirement on out-of-state retailers that contract with in-state persons to refer customers via a website link.

Sutherland Observation: Eleven other states also maintain similar “click-through nexus” provisions. However, Illinois and New York are the only two states where litigation has developed challenging the constitutionality and validity of such provisions., LLC v. NY Dep’t of Taxation and Finance, 20 N.Y.3d 586 (2013). Other states that maintain click-through nexus provisions also permit the provision to be rebutted by showing the in-state person does not solicit sales. Illinois’s Click-Through Nexus Act does not contain a rebuttable presumption, and the lack of a presumption influenced the lower court in reaching its decision that the law violated the dormant Commerce Clause.

In 2011, the plaintiff, Performance Marketing Association (PMA), successfully challenged the Click-Through Nexus Act, asserting two primary arguments: (1) the Click-Through Nexus Act violated the U.S Constitution’s Commerce Clause, because it imposed a tax collection and remittance requirements on out-of-state retailers without substantial nexus in the state; and (2) the ITFA, which expressly prohibits discriminatory taxes on electronic commerce, preempts the Act. Performance Marketing Ass’n, Inc. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct. May 11, 2013).

Sutherland Observation: The majority declined to address the argument that the Click-Through-Nexus Act violated the Commerce Clause. The dissenting opinion took exception with the lack of a Commerce Clause analysis. Specifically, the dissent pointed to the, LLC v. NY Department of Taxation and Finance decision, in which the New York Court of Appeals determined that New York’s presumptive click-through nexus law did not violate the dormant Commerce Clause because, in its view, out-of-state retailers to which the click-through nexus statute applied have substantial nexus with the state. 20 N.Y.3d 586 (2013).

Illinois’s Click-Through Nexus Provision Is a Discriminatory Tax

The ITFA was originally enacted into federal law in 1998. Section 1101(a)(2) of the ITFA expressly prohibits states from imposing “discriminatory taxes” on electronic commerce. The ITFA defines a discriminatory tax as one that

imposes an obligation to collect or pay tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means. 47 U.S.C. § 151.

Applying the ITFA’s discriminatory tax prohibition, the Illinois Supreme Court held that the Click-Through Nexus Act conflicted with the federal ITFA by imposing tax collection requirements on out-of-state retailers engaged in an Internet-based activity and not imposing similar requirements on activities conducted through traditional media such as magazines, newspapers, and television.

While Illinois sales and use tax law statutorily provides that there is a sales and use tax collection requirement on traditional activities, such as television and newspapers, the court found that traditional commerce is favored (in violation of the ITFA’s ban on discrimination against electronic commerce) because the collection requirements are limited to activities directed toward in-state consumers. Conversely, the Click-Through Nexus Act did not limit the applicability of the click-through nexus provisions to sales made to in-state consumers.

Sutherland Observation: In reaching its decision, the court found that the Internet is not geographically limited. However, the dissent sought to characterize the click-through activities as solicitations directed toward Illinois consumers. Although consumers nationwide and worldwide could access the Illinois affiliates’ websites, the dissent determined that the intent of such arrangements was to target Illinois consumers.


In contrast to this Illinois taxpayer victory, the U.S. Court of Appeals for the Tenth Circuit recently vacated a permanent injunction that was issued by a U.S. District Court, restricting the enforcement of Colorado’s use tax reporting requirements. Unlike state “click-through nexus” laws, Colorado’s use tax reporting requirements impose reporting requirements on out-of-state retailers to facilitate the enforcement of use tax on Colorado residents.

Furthermore, although Illinois taxpayers successfully challenged the click-through nexus regime on ITFA grounds, the question remains as to whether click-through nexus statutes violate the U.S. Constitution’s Commerce Clause. In August 2013, and filed petitions for certiorari to the U.S. Supreme Court to determine whether New York’s click-through nexus law violates the U.S. Constitution’s Commerce Clause. Thus, states’ efforts to force out-of-state retailers to collect state sales and use tax continue to quickly evolve.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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