On Oct. 18, the Illinois Supreme Court voided the state’s Internet sales tax law, saying it discriminates against digital advertising.
The so-called “Amazon law” says that when a local affiliate in Illinois provides a link to an e-commerce site, that constitutes a physical presence (or “nexus”) for the e-tailer, meaning in-state purchases are subject to state sales tax. The legislation’s passage caused some big e-commerce sites, including Amazon and Blue Nile, to cut their ties with local affiliates in Illinois.
However, in response to a suit brought by the Performance Marketing Association, the state’s high court ruled that linking to another website is simply another form of advertising.
“The click-through link makes it easier for the customer to reach the out-of-state retailer, but the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts,” the 6-1 ruling states.
The law had already been struck down in Circuit Court last May, and this high court ruling upholds that decision. However, the opinion did not address whether the Commerce Clause of the U.S. Constitution allows the legislation.
However, Justice Lloyd Karmeier argued in his dissenting opinion that, because online sales taxes are under-reported, the state is being deprived of a source of “needed revenue.”
According to the Associated Press, Illinois might appeal to the U.S. Supreme Court, which also could hear a challenge to New York state’s online sales tax law upheld by the state’s highest court in May.
“About 1,000 out-of-state merchants can now reinstate their advertising agreements with Illinois-based affiliate marketers, without threat of getting trapped with nexus,” Rebecca Madigan, executive director of the PMA, said in a statement. “Unfortunately, 12 other states passed similar laws, devastating over 90,000 small businesses around the country. We hope this decision helps other states avoid this kind of costly litigation and the damage to a thriving small business sector.”
The PMA says that it favors a federal solution to the online sales tax issue.
JCK covered the online sales tax debate in its August issue.