The Illinois Supreme Court, affirming a lower court decision, invalidated the state's "click-through" nexus law. [1] This law required out-of-state Internet retailers who use in-state web marketing "affiliates" to collect sales tax on all of the retailer's sales in Illinois. The Court found that the Illinois law was preempted by the federal Internet Tax Freedom Act ("ITFA"), which prohibits "discriminatory taxes on electronic commerce."
Notable Takeaways:
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There is a threshold question of whether a commission-based web link on an affiliate's site should be considered "mere advertising" or "active solicitation" (e.g., should a link that directs you a retailer's website be treated any differently than print or radio advertising with a promo code that directs you to call a phone number or visit a company's website).
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The ITFA, by its own terms, expires in November 2014, thereby raising the question of what happens next year.
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Because the Court ruled on the basis of federal preemption by the ITFA, it did not specifically address the alternative argument raised by plaintiff/Appellee that the state's law violated the Commerce Clause of the U.S. Constitution
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Illinois modeled its statute on a New York law, which the New York high court earlier this year held did not violate the Constitution, and therefore upheld the law's validity. Notably, Amazon and Overstock.com were plaintiffs in that case and have appealed to the U.S. Supreme Court.
As a consequence of these cases, there is now a split between the New York and Illinois high courts on a substantially similar law, but for different reasons. While there is certainty regarding click-through nexus in Illinois (for at least the next year), these two decisions create more uncertainty nationwide and leaves unanswered what to do a year from now (assuming the ITFA is not extended).
A permanent resolution of this issue is only likely to occur if either: (1) the U.S. Supreme Court takes and decides these cases, or (2) Congress passes unifying legislation such as the currently pending Marketplace Fairness Act.
Stay tuned...
For more information on this decision and its implications click here.
[1] Performance Marketing Association, Inc. v. Hamer, Sup. Ct. of Ill., Docket No. 114496, 2013 IL 114496 (Oct. 18, 2013).
