On Wednesday, June 1, the Performance Marketing Association, a trade association of online affiliates and large online retailers — including Amazon.com — filed a lawsuit with the U.S. District Court for the Northern District of Illinois challenging the constitutionality of HB 3659, an affiliate nexus law passed in March. The PMA argues that the law is “financially devastating to thousands of the state’s small businesses” and is a violation of the 1998 Internet Tax Freedom Act.
In a statement Rebecca Madigan, executive director of the PMA, said her association challenged the law because HB 3659 was a “calculated assault on the burgeoning performance marketing industry and a misguided attempt by the state legislature and Governor Quinn to shore up the state’s budget deficit on the backs of small business.” She claimed the law was unfair because it targeted affiliates and arbitrarily broadened the definition of nexus.
The American Booksellers Association, along with the Illinois Retailer Merchants Association, was a leading proponent in the effort to pass HB3659 earlier this year. A similar affiliate nexus law passed in New York State in 2008 that was subsequently challenged by Amazon.com, a member of PMA, has already lost twice. Most recently, New York’s appellate court ruled that the state’s affiliate nexus law was constitutional and that online affiliates are indeed sales agents, thereby triggering nexus in a state.
“It’s astounding to see PMA and its supporters turn reality on its head with their claims that somehow sales tax equity is unfair to small businesses,” said ABA CEO Oren Teicher. “The reality is that this lawsuit is nothing other than PMA’s attempt to maintain an unfair competitive edge over the hundreds of thousands of small business retailers in Illinois and elsewhere. What’s not fair is when large retailers that have nexus in a state through a broad network of online sales agents, or in some states — even warehouses — skirt their duty to collect and remit sales tax. The bottom line is that online affiliates — who promote products in an effort to earn commissions from the sales of these products — are by any definition ‘sales agents.’ Retailers that maintain such affiliate relationships in Illinois have nexus in the state and should be collecting sales tax, just like the Main Street retailers throughout the state.”
While PMA’s release painted proponents of sales tax fairness as “big box” stores, Teicher noted that “ABA and a coalition of independent trade associations, all of which boast memberships made up of mostly small business, have been working for sales tax equity for more than a decade, and it was only recently that large stores joined the effort, which underscores how serious this issue has become for retailers of all sizes.”
Teicher continued, “It was small businesses, like independent bookstores, that first began to feel the effects of this unfair competitive inequity, which has forced them to lay off workers, cut their benefits, and, in many cases, shut their doors. For PMA to claim to be fighting on behalf of small businesses while defending an inequity that erodes the foundation of Main Street is almost beyond belief.”