In Performance Marketing Association, Inc. v. Hamer, Docket No. 114496 (Oct. 18, 2013), the Illinois Supreme Court invalidated a state law that was designed to impose taxes on Internet retailers, such as Amazon and Overstock, that otherwise were not subject to state sales tax. These laws are commonly referred to as "Amazon" laws after the online retail giant. This Illinois ruling is notable in that it conflicts with prior case law regarding whether or not Internet retailers are subject to state sales and use taxes.
In March of 2013, the New York Court of Appeals (the highest court in the state) upheld as constitutional the New York Amazon law (which was very similar to the overturned Illinois statute in Performance Marketing Association). In Amazon.com, LLC v. NY Dept. of Taxn. & Fin., 987 N.E.2d 621 (N.Y. 2013), the court held that New York's Amazon law – which required online retailers to collect and remit sales and use tax to the state – was not unconstitutional under the U.S. Constitution’s dormant Commerce Clause (the “Commerce Clause”).
Under the Commerce Clause, states may not impose an undue tax burden on interstate commerce. This has been interpreted to mean, generally, that a retailer must have a varying amount of contact with a state in order to be subject to the state’s taxes (i.e., the retailer must have “substantial nexus” with the taxing state). The New York court found that Amazon solicited help from New York vendors in advertising Amazon’s website: New York vendors would link to Amazon and would be paid if whoever clicked on that link ended up actually purchasing something from Amazon. The court found that this solicitation constituted “substantial nexus,” and that Amazon would therefore be required to collect sales and use taxes on their sales to New York residents.
The Amazon case has been appealed to the Supreme Court, but the Court has not yet decided whether it will hear the case.
Performance Marketing Association:
Illinois enacted its own Amazon law in 2011 to help level the playing field for Illinois retailers who, because of their physical presence in the state, were required to collect and remit sales and use tax to the state. The Illinois statute (which was also commonly referred to as the “click-through” nexus law) required certain out-of-state retailers that engaged in “performance marketing” to collect sales and use tax and remit it to the state.
“Performance marketing” refers to programs where retailers pay for advertising only when a specific, desired action (e.g., a sale) is completed. For example, like in New York, local Illinois websites would post a link to an out-of-state retailer’s website. The local website would then be paid by the out-of-state retailer if a consumer clicked on the link and then made a purchase from that retailer. Under the click-through nexus statute, out-of-state retailers who used such arrangements to generate sales of over $10,000 per year in Illinois were required to collect and remit use tax.
However, the Illinois Supreme Court did not rely on the Commerce Clause to find whether or not performance marketing created “substantial nexus” with the state of Illinois. Instead, the court relied on the Internet Tax Freedom Act (the “ITFA”). Performance Marketing Association, a trade group, cleverly challenged the click-through nexus law under the ITFA as well as the Commerce Clause. The Illinois Supreme Court held that the challenged statute was invalid under the ITFA (and thus did not rule on the Commerce Clause issue) because out-of-state retailers that used traditional marketing (e.g., print media, radio or TV) were not obligated to collect and remit sales and use taxes under the click-through nexus law. Therefore, the court found that the click-through nexus law discriminated against electronic commerce under the ITFA and was thus invalid.
Despite conflicting case law coming out of two highly influential state supreme courts, most experts believe that it is unlikely that the Supreme Court will get involved and settle this issue. This belief is, in part, due to the fact that Supreme Court rarely decides to hear state tax issues (i.e., it has not ruled on a nexus case since 1992 – Quill v. North Dakota, 504 U.S. 298 (1992)). It does not help matters that the Illinois court decided its case on different grounds than the New York court. The fact that the ITFA is actually scheduled to expire next year (though it has previously been extended several times) further complicates matters.
Ideally, Congress would enact a standard, federal law that would force states to impose sales and use taxes in a uniform fashion. The U.S. Senate has actually passed such a law: The Marketplace Fairness Act of 2013 (which imposes a duty to collect state sales and use tax if an online retailer has least $1 million in sales in that state). However, it does not appear likely that it will pass the contentious U.S. House of Representatives anytime soon.
Thus, for the foreseeable future, sales and use tax laws will continue to vary from state-to-state.
It is important for e-commerce merchants (especially those who sell products all over the country) to make sure that they are in full compliance with the sales and use tax laws of the states where they conduct business. E-commerce merchants must also carefully monitor any changes in how such laws are implemented and enforced, as states have become more and more aggressive in imposing taxes on out-of-state retailers.
Due to the complex and frequently changing nature of state sales and use laws, it is advisable to consult a tax professional for advice if you are unsure whether or not you are in compliance with such taxes.