Illinois Court Rules Affiliate Nexus Law Violates Internet Tax Freedom Act

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On October 18, the Supreme Court of the State of Illinois affirmed by a count of 6 to 1 a lower court’s ruling that the state’s affiliate nexus law is invalid. In the majority opinion, Justice Anne Burke ruled that the sales tax fairness law was a discriminatory tax on electronic commerce and, as such, violated the Internet Tax Freedom Act of 1998. The Performance Marketing Association (PMA), whose members include, challenged the state law in 2011, contending it unfairly targeted affiliates and arbitrarily broadened the definition of nexus.

Affiliate nexus laws have now been challenged in two states, Illinois and New York, with two completely different results.

In March 2013, in a challenge brought by and, the New York State Court of Appeals ruled 4-1 in favor of the state’s sales tax fairness law, dismissing arguments made by Amazon and Overstock that the law was unconstitutional. Both companies argued that their online affiliates were not sales agents, but were, in fact, advertisers, despite the fact that their affiliates worked for commission. The online giants recently petitioned the U.S. Supreme Court to hear the case, arguing that that they should not be required to collect and remit sale tax in the state since they do not have substantial in-state nexus (for a previous article on the New York State challenge, click here).

Regarding the Illinois decision, ABA CEO Oren Teicher said, “As we head into the holiday season, this is an untimely blow to Illinois-based small businesses — which will continue to compete with remote retailers at an unfair disadvantage.” He added that the Illinois’s ruling made clear that sales tax fairness was an issue that, ultimately, would be best dealt with at a federal level. “We will continue to strongly support states’ efforts to level the playing field,” Teicher said. “But we have always stressed that a federal solution to this issue would be best.”

In what was a fairly scathing dissent, Justice Karmeier noted that the majority decision marked the “first time a court of review in the United States has determined that the Internet Tax Freedom Act preempts a state from enacting an [affiliate nexus] tax law to facilitate the collection of existing use taxes to which the state is legally entitled.”

Justice Karmeier urged the majority to reverse its decision, noting that the Performance Marketing Association was burdened to prove that the affiliate nexus law was invalid, and that it failed to “overcome that presumption” of validity. Pointing to the New York State’s rejection of Amazon and Overstock’s commerce clause challenge, he wrote: “The majority has elected to ignore the commerce clause issues entirely and decide the case based solely on federal preemption grounds. The decision is a puzzling one…. I would hold that the tax-related obligations imposed by [the affiliate nexus law] apply to an activity with a substantial nexus to Illinois and that PMA’s claim that the law is facially invalid under the commerce clause should therefore have been rejected by the circuit court.”

The affiliate nexus law is not discriminatory, Karmeier continued. “The obligation they impose with respect to collecting and remitting use and service use taxes falls on retailers … just as it does in all other transactions, electronic or otherwise, where the sales activity of the vendor or service provider has a substantial nexus with Illinois.”

Teicher said, “We agree with Justice [Lloyd] Karmeier’s dissenting opinion that the majority opinion is confounding.  As New York State correctly ruled, online affiliates clearly follow a sales agent model. This cannot be disputed and sales agents constitute nexus in a state. And while the majority ruling surmised that the sales tax law constituted a discriminatory tax, I think exempting a select group of corporate retailers that have nexus in the state from collecting a tax that bricks-and-mortar stores of all sizes collect is discriminatory. We do not believe this legal challenge was about fairness; it was about online corporate giants doing whatever it takes to maintain their unfair advantage over main street retailers.”