The court rules against a law that required tax collection from retail affiliates.
Paul Demery , Managing Editor, B2B E-commerce
When the state of Illinois passed a law in 2011 requiring online retailers to collect sales tax if they received sales through Illinois-based affiliate web sites, such as blogs and coupon sites, online retailers including Amazon.com Inc. and Overstock.com Inc. cut off their in-state affiliates. As a result, thousands of affiliate site owners moved their tax-generating operations to another state, according to the Performance Marketing Association, an industry group that challenged the state law in court.
But an action today by the Illinois Supreme Court, the state’s top court, has the trade group cheering, Overstock taking another look at Illinois affiliates and at least one major affiliate web site, CouponCabin.com, considering reestablishing offices in Illinois. The court agreed with a lower court ruling, finding that the state law went against existing federal law that restricts states to mandating sales collection only when a retailer has an in-state physical presence.
“We’re digesting the court’s decision, and if it feels like a final-final, we’d like to take advantage again of the good affiliate markets in Illinois,” says Jon Johnson, executive vice chairman of Overstock. “Affiliate marketing is a great way to market.”
Amazon added in a prepared statement that it was “excited to soon re-open our Associates [affililates] program in Illinois.”
Scott Kluth, founder and CEO of CouponCabin, says he’s pleased with the state Supreme Court decision and is considering his company’s options. “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,” he says.
Not all affiliates who left are considering moving back to their prior states. Fat Wallet is now quite happy to be based on Beloit, WI, a spokesman says. Adds Rebecca Madigan, executive director of the PMA: “I’ve spoken to a few affiliate company owners who have moved out of state and it was so extremely costly for them to move, they’re not sure if they’ll move back.”
After winning its case in lower state courts, the PMA’s case was upheld today by the Illinois Supreme Court, which ruled the law as “void and unenforceable” and pre-empted by the Internet Tax Freedom Act of 1998, which prohibits discriminatory taxes on electronic commerce. “This means that advertisers are free to reinstate their Illinois affiliates whose contracts were terminated out of fear of the ‘click-through’ nexus law,” the PMA said in a blog posting today. The law, similar to ones in New York and other states, had sought to classify in-state web affiliate businesses as an extended physical presence of their client online retailers, and then require those retailers to collect sales tax.
When the Illinois law was passed in 2011, the PMA estimated there were 9,000 affiliate web sites in the state, and that about one-third moved their operations out of state, Madigan says. She adds that, in 2010, the state’s affiliate web sites did $744 million in combined revenue and paid an estimated $22 million in state income tax.
The PMA estimates that about one-third of affiliates also left the 12 other states that have enacted affiliate tax laws since 2008, when New York became the first to pass one. The laws have been commonly called an “Amazon Tax” because they are aimed at forcing sales tax collection by big web-only retailers like Amazon.com, No. 1 in the Internet Retailer Top 500.
The Illinois court’s ruling took the opposite direction of a March 28 ruling from New York’s highest court, the New York Court of Appeals, which upheld a lower court ruling in favor of New York’s Amazon Tax law. Amazon and Overstock have each filed petitions to have that ruling reviewed by the United States Supreme Court. Overstock’s Johnson says Overstock hopes the high court will be more likely to abide by a prior U.S. Supreme Court ruling, in 1992, that ruled that states can only require retailers to collect sales tax if they have an in-state physical presence, such as stores or distribution centers.
What remains to be seen, Johnson says, is whether today’s court ruling in Illinois will make it more likely that the U.S. Supreme Court will review the New York ruling. “We’re looking into amending our petition to the U.S. Supreme Court to note this decision in Illinois,” he says.
Amazon added that having opposing court rulings in New York and Illinois creates a greater need for a new federal law that would provide for a nationwide system of sales tax collection, as proposed by the Marketplace Fairness Act legislation, which passed the Senate in April and is now before the House. “This [Illinois Supreme Court] decision again shows that federal legislation is the only way to resolve the sales tax issue and protect states' rights to make their own revenue policy choices," Amazon said in the statement today.