June 1, 2011, 6:09 PM

Affiliate group sues Illinois over sales tax law

The federal court suit claims Illinois’ law violates U.S. statutes.

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An organization that represents online affiliates filed suit today in federal court challenging the constitutionality of an Illinois law aimed at forcing more web retailers to collect sales tax from Illinois consumers.

The Performance Marketing Association says the Illinois law enacted in March is leading major online retailers, including Amazon.com Inc. and Overstock.com Inc., to cut their ties with web publishers and bloggers in Illinois in order to avoid having to collect sales tax from Illinois consumers and remit those taxes to the cash-strapped state.

The suit claims the law oversteps the state’s power to regulate interstate commerce by asserting that an online retailer based in another step establishes a legal presence, or nexus, in Illinois by advertising on the sites of Illinois affiliates. Retailers place ads on affiliate sites and pay a fee to the affiliate if a click on an ad leads to a sale. The affiliate has no other connection to the retailer, and does not deliver product.

“We’re striking back at a law that not only unfairly targets our industry but also would arbitrarily broaden the state’s definition of nexus,” says Rebecca Madigan, executive director of the Performance Marketing Association. “That’s a direct violation of the Commerce Clause and flies in the face of decisions already established by the Supreme Court.” The Commerce Clause of the U.S. Constitution empowers the federal government to regulate interstate commerce. A 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota established that Internet retailers need only collect sales tax in states where they have a physical presence, which typically has meant a store, corporate office or distribution center.

Several states have passed laws in the past year that extend the definition of nexus to include advertising on the web sites of in-state affiliates. That in turn has led some major online retailers, notably Amazon and Overstock, to cut ties with affiliates in states that pass such legislation. Gov. Rick Perry of Texas took note of how e-retailers have responded in other states in vetoing a bill this week that would have extended the reach of nexus in Texas.

The Performance Marketing Association says Illinois affiliates will lose 25-35% of their revenue as a result of retailers cutting ties to avoid the sales tax obligation. The association says there are at least 9,000 web site operators in Illinois that act as affiliates, hosting ads for web retailers, and that they generate $744 million in advertising revenue and pay $22 million in state income tax. There are 200,000 online affiliates operating nationwide, Madigan says.

The association filed the suit in the U.S. District Court for the Northern District of Illinois, which is based in Chicago.

Amazon is No. 1 in the Internet Retailer Top 500 Guide; Overstock is No. 27.

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