By Jamey Dunn
The Illinois Supreme Court today struck down a law that requires online sellers to collect state taxes if they partner with an Internet marketer located in Illinois.
Although Illinois residents owe taxes on anything they purchase online, the U.S. Supreme Court ruled in 1992 that the state cannot make retailers collect the tax if they do not have a physical location in the state. Illinoisans are supposed to send the tax they owe on those purchases to the state. However, few residents actually send the money, and the state is missing out on revenues. In 2011, Gov. Pat Quinn signed a law that would require online retailers to collect tax on sales in the state if they worked with marketers located in Illinois. Supporters of the law argued that the online marketers are the physical location, or nexus, in the state that require sellers, such as Amazon.com, to collect the tax. For more on the law, see Illinois Issues April 2011.
After the bill was signed into law, Amazon and Overstock.com cut ties with their online marketers in Illinois. Some of those marketers, including Fat Wallet and CouponCabin, left the state after Amazon severed ties.
But today, the court ruled that the marketers, who direct their users to sales on retail sites across the Internet, were unfairly targeted under the law because it does not apply to their analog advertising counterparts such as newspapers. “The Act does not require use tax collection by out-of-state retailers who enter into performance marketing contracts with ‘offline’ Illinois print publishers and over the-air broadcasters,” Illinois Supreme Court Justice Anne Burke wrote in her majority opinion. Burke wrote that this practice is prohibited by the federal Internet Tax Freedom Act (ITFA), which bans “discriminatory taxes on electronic commerce.”
She goes on to write: “In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, will not trigger an Illinois use tax collection obligation. The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the ITFA.”
One retailer who left the state after the law was signed said he feels vindicated, but he does not know if his business will return to Illinois. “We have been tracking this case closely since we were forced to move outside the state in 2011, and we are happy that the Supreme Court agreed with the Cook County Circuit Court and reached what we believe to be the correct decision,” Scott Kluth, founder and chief executive officer of CouponCabin.com, said in an email. “We have received inquiries regarding whether we intend to remain in Indiana, and we plan to review our options about moving back to Illinois in April 2014, when our lease in Indiana is up for renewal. For now, we're heads down and focused on our busiest time of the year, the fast-approaching holiday shopping season.”
All of the justices sided with Burke except Justice Lloyd Karmeier, who wrote the dissenting opinions. The court avoided the larger constitutional question of whether the tax is allowable under the Commerce Clause of the U.S. Constitution. Karmeier argued that this was a mistake because he said that the issues will likely end up in court again. “A new commerce clause challenge is certain to follow. A year from now we could therefore find ourselves in precisely the same position we are in today, facing the same commerce clause challenge brought by and against the very same litigants. The delay will have accomplished nothing. The issue has been fully briefed and argued and is ripe for a decision now. We should make one,” he wrote. Karmeier said that not requiring online retailers to collect the state taxes associated with their sales means that much of those taxes will go uncollected and local merchants, who have to collect sales tax, are at a disadvantage. “As consumers realize that they can avoid their use tax liability by turning to out-of state Internet retailers with no physical presence here, retailers and servicemen with places of business located within Illinois are placed at a competitive disadvantage because they, unlike their out-of-state Internet competitors, must include the tax in the amount they charge and then assume responsibility for remitting that tax money to the State.”
That is the argument Illinois retailers make in favor of the law. “It's disappointing that the Illinois Supreme Court did not address the constitutionality of the issue but, rather, erred in its conclusion that the act violated the Internet Tax Freedom Act. We haven't given up. There are other avenues for appeal we hope the state will take,” David Vite, president and chief executive officer of the Illinois Retail Merchants Association, said in a written statement. Vite said the ruling emphasized the need for Congress to pass a federal law addressing the issue. “Working with a hodgepodge of laws around the country is intolerable, and brick and mortar retailers continue to be at a substantial disadvantage to their online competitors.”
Senate President John Cullerton, who sponsored the Illinois law, agreed. “The ruling highlights the need for federal action to level the playing field for traditional retailers,” he said in a prepared statement. Cullerton plans to consult Attorney General Lisa Madigan to see if there is any state level legislation that could address the issues the court had with the law.
Talks at the federal level about setting a national standard have been ongoing for years but have yet to produce results. For more on the ongoing debate in Congress, see Illinois Issues June 2012.