I have covered the State of Illinois passing HB3659, commonly referred to as the “Amazon Tax”, before the governor signed it and after it was signed into law because it affected me and my income once Amazon disconnected all Illinois-based Amazon Associates. Since then, I’ve had moderate success regaining that lost revenue stream through other affiliate programs and Skimlinks but it doesn’t compare to the simplicity of the Amazon Associates program.
Today, I learned that at the beginning of this month a group sued the state of Illinois over this law. Performance Marketing Association, the group behind the lawsuit, provided a summary of background information and their legal claims. More formally, the tax is called a nexus tax because the common approach to passing the law is to expand affiliates to be considered the same as a physical nexus in the state. Since it took one lobbyist group, the Illinois Retail Merchants Association, to get the law passed in the first place, perhaps another can get it repealed.
The issue is a national one and I’m glad the PMA is taking a stand for Illinois affiliates.
The Performance Marketing Association has provided a summary and press release regarding the lawsuit. I’ve included the summary below because I believe it is very well written and explains the issues at hand very well.
Overview: On June 1, 2011, the Performance Marketing Association (“PMA”) filed a lawsuit in Federal District Court in Chicago against the Director of the Illinois Department of Revenue, Brian A. Hamer, challenging the constitutionality of a new Illinois law that targets the business of online performance marketing as a basis for unlawfully expanding Illinois’ regulatory authority beyond its borders.
Illinois House Bill 3659 (“HB 3659”), enacted in March 2011, violates the Commerce Clause of the United States Constitution, and the federal Internet Tax Freedom Act (“ITFA”), by using the relationships between Illinois publishers of online advertisements and out-of-state advertisers as grounds for imposing use tax collection and reporting obligations on Internet retailers located outside the state. The enactment HB 3659 has damaged thousands of Illinois publishers through the loss of advertising contracts with Internet retailers.
Background: Effective July 1, 2011, HB 3659 amends the definition in Illinois use tax law of “retailer maintaining a place of business in this State” to include any retailer that (a) has one or more contracts with publishers “located in Illinois,” pursuant to which the publisher displays an advertisement on its website that links Internet users to the retailer’s website, in return for which the publisher receives compensation based on sales made to customers who reached the retailers website via the link; and (b) realizes at least $10,000 in gross receipts from such sales over a one-year period.
Under the Commerce Clause, a retailer without a “substantial nexus” with Illinois, defined as a business location or other physical presence in the state, has no obligation to collect Illinois use tax, in accordance with the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). HB 3659 purports to make the mere display of online advertisements through an Illinois publisher sufficient “physical presence” in the state to require out-of-state retailers to register and collect Illinois use tax. Retailers using other forms of non-local advertising are not, however, similarly required to register and collect Illinois use tax.
Many out-of-state Internet retailers, in response to the enactment of HB 3659, have terminated their relationships with Illinois publishers, thereby avoiding the effect of HB 3659. As a result, HB 3659 has caused thousands of Illinois publishers to lose valuable contracts and advertising revenue. No additional use tax revenue will be collected and remitted by those retailers who terminate their advertising contracts, although they can continue to reach Illinois consumers through other forms of advertising.
The PMA’s Legal Claims: The PMA asserts that HB 3659 violates federal law in three different ways:
Count I – Violation of the Commerce Clause’s “Substantial Nexus” Requirement –Under the Commerce Clause, the appearance of advertisements for an out-of-state retailer, that include a link to its website, on the websites of publishers located in Illinois, is not sufficient to constitute the required “substantial nexus” between the retailer and the state. HB 3659, by purporting to impose tax obligations based solely on the display of online advertising by Illinois publishers, violates the Commerce Clause.
Count II – Violation of the Commerce Clause’s Prohibition on Regulating Commerce Outside the State – The Commerce Clause strictly limits the power of the states, including Illinois, to regulate interstate commerce occurring outside the state’s borders. The expanded definition of “retailer engaged in business in this State” under HB 3659 will, by its plain terms, include within its regulatory sweep transactions between non-Illinois retailers and non-Illinois consumers. By regulating commerce occurring entirely outside of Illinois’ borders, HB 3659 is per se invalid under the Commerce Clause.
Count III – Violation of the Federal Internet Tax Freedom Act – The ITFA prohibits a state, in the case of electronic commerce, from imposing an obligation to collect tax on a different person or entity than in the case of transactions involving similar goods accomplished through other means. HB 3659 imposes an obligation to collect Illinois use tax on retailers who complete sales through online performance marketing, but no similar obligation is imposed on retailers who accomplish transactions through other forms of non-local advertising. HB 3659, therefore, discriminates against electronic commerce in violation of the ITFA.
The PMA requests that the Federal District Court issue a declaration that HB 3659 violates the Commerce Clause of the United States Constitution and the federal ITFA.
About the PMA: The PMA is the leading trade association in the United States representing the interests of businesses, organizations, and individuals using and supporting performance marketing methods. Performance marketing is a form of advertising in which the business that displays the advertisement, know as a “publisher” or “affiliate,” is paid by the advertiser when a specific action is completed, such as when a consumer makes a purchase or completes a lead form. The PMA has filed its suit in federal court on behalf of its Illinois members who publish online advertisements for Internet retailers.
The PMA provides a write-up of Affiliate Nexus Tax Basics and links to the Illinois General Assembly for the full text of HB3659.
The interesting thing is that it would be in Illinois’ interest to lose this lawsuit. They have lost businesses and income since the law went into effect without gaining the desired use tax as affiliate programs like Amazon’s have just closed up shop for Illinois residents.
Here’s to hoping the next update on this issue is even more positive for Illinois affiliates once the lawsuit gets a court date.