Illinois Supreme Court Strikes Down "Amazon Tax"

By Anna Rose Welch, Editorial & Community Director, Advancing RNA

Tax law found to discriminate against electronic commerce, be in violation of Tax Freedom Act

On Friday, the Illinois Supreme Court struck down the law commonly known as the Amazon Tax that requires large, out of state retailers, like Amazon, to collect sales taxes from its in-state, online performance marketers. Following a victory in the lower state courts, the Illinois Supreme Court ruled the law “void and unenforceable” because it violated the Tax Freedom Act of 1998, prohibiting discriminatory taxes on e-commerce.

Striking Down The Law Encourages Reestablishment Of Affiliate Programs

Under the law, out-of state retailers were required to charge sales taxes for any in-state performance marketer reaching more than $10,000 through the affiliate’s clickable links. However, other offline performance marketers had no such threshold, and out-of-state retailers were not obligated to collect sales taxes from in print or over-the-air broadcast affiliates.

The law was responsible for a large exodus of affiliate companies from Illinois in 2011. The Performance Marketing Association (PMA) estimates that roughly one-third of the 9000 affiliates in the state of Illinois moved operations out of state, downsized, and an additional 3,000 went out of business. Similarly, the PMA says that roughly one-third of affiliate businesses left the 12 other states that have been enforcing the Amazon Tax since 2008 when New York became the first state to initiate it.

Now that the tax has been struck down, there has been some speculation about the number of companies that will be returning to Illinois. While some of the larger retailers like Overstock.com, Amazon.com, and CouponCabin.com have expressed excitement at the prospect of reestablishing offices in Illinois, other companies like Fat Wallet, which relocated to Beloit, WI, are content to remain in current locations because of the large amount of money that another relocation would cost the company.

Nationwide Sales Tax System Deemed Important, Up For Discussion

There are currently 12 states remaining that require collection of the “Amazon Tax.” New York, like Illinois, also strived to eliminate the law this past March. However, the New York Court of Appeals upheld the lower court ruling to maintain the law. Currently, both Amazon and Overstock have filed petitions to have the case reviewed by the Supreme Court, in the hopes that the court maintains the 1992 ruling that only retailers with in-state stores or distribution centers will be required to collect sales taxes. Overstock executive vice chairman, Jon Johnson, notes that the company plans to revise its petition to the Supreme Court to note the law’s overturning in Illinois to encourage the Supreme Court to review the New York ruling.

Amazon also says that the opposing rulings in Illinois and New York call attention to the need for a nationwide system of collecting sales taxes. This new system has been proposed by the Marketplace Fairness Act, which passed the Senate in April and is up for review in the House.

In a statement following the ruling, Amazon said that, “This [Illinois Supreme Court Decision] again shows that federal legislation is the only way to resolve the sales tax and protect states’ rights to make their own revenue policy choices.” While it is unknown whether the Supreme Court will in fact review the New York ruling, the overturning in Illinois marks the return of several important retailers and affiliate programs to the state.

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