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Illinois Amazon Tax Is Discriminatory

  • Oct 21, 2013 | Gail Cole

 A shot in a highly contentious battle: Illinois Amazon tax ruled discriminatory:.

The Illinois Supreme Court has ruled that the state’s 2011 amendment to Use Tax Act, which took effect July 1, 2011, is a “discriminatory tax on electronic commerce….” In so doing, the high court upheld the determination of the lower court.

The click-through nexus law--or Amazon tax, as it is often called--imposes a sales tax collection obligation on out-of-state retailers whose “cumulative gross receipts from sales of tangible personal property by the retailer to customers who are referred to the retailer by the persons in this State…” exceed $10,000 during the preceding year.

Those referrals come from “performance marketing,” in which “the display of advertising is paid for when a specific action, such as a sale, is completed.” The 2011 Illinois law refers specifically to Internet referral sales, when an out-of-state retailer has “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.”

The Supreme Court noted in its ruling that “’performance marketing,’ when engaged in through print media or on-the-air broadcasting, does not give rise to tax obligations under the Illinois statute.” Given that, the law discriminates against electronic commerce, which is forbidden under federal law under the Internet Tax Freedom Act.”

Many states have enacted affiliate nexus laws similar to the 2011 Illinois law, most recently Minnesota, Missouri and Maine. Critics of these and other laws often point to the United States Commerce Clause and argue that these laws violate it. The Illinois Supreme Court did not rule on this issue, focusing instead on the Internet Tax Freedom Act and the discriminatory nature of the Illinois law, which taxes sales generated from Internet advertising but not sales generated from print or on-the-air advertising.

A contentious battle

The Chicago Tribune called the ruling “another shot in the highly contentious nationwide battle over who should collect online sales tax and how.” And a contentious battle it is, indeed.

Online retailers: Online retailers argue that collecting sales tax in states where they do not have a physical presence creates an undue burden. Amazon, at least, is willing to play hardball over the issue: When Illinois passed the 2011 Use Tax Act, Amazon severed its relationship with Illinois affiliates. The online retail giant recently did the same in Minnesota, Missouri and Maine.

Main Street: Brick-and-mortar businesses, often called Main Street retailers, argue that their businesses are suffering because customers can purchase the items they sell online, without sales tax.

States: States point out that their sales tax revenue has decreased with the rise of internet shopping. Without that revenue, they argue, essential services will suffer.

All sides have money at stake.

Many state lawmakers and retailers, including Amazon, are hoping for a federal solution to this issue. The Marketplace Fairness Act of 2013 would, if enacted, grant states the right to impose a sales tax collection obligation on remote retailers, provided the states simplify their sales tax laws.

Interested in learning more about the Illinois case? Read the full Supreme Court ruling.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.