Thursday, June 2, 2011

Performance Marketing Association Files Lawsuit Challenging Illinois Affiliate Nexus Law

Performance Marketing Association, Inc. (“the PMA”), the leading trade association in the United States representing the interests of businesses, organizations, and individuals using and supporting performance marketing methods, filed a lawsuit yesterday in Federal District Court in Chicago against the Director of the Illinois Department of Revenue, Brian A. Hamer. The lawsuit challenges the constitutionality of the Illinois affiliate nexus law, HB 3659Brann & Isaacson attorneys George Isaacson and Matthew Schaefer are counsel to the PMA in connection with the suit.

The case is captioned Performance Marketing Association, Inc. v. Hamer, Federal District Court, Northern District of Illinois, case no. 1:11-cv-03690. A copy of the PMA’s Complaint is available here.

In its complaint, the PMA asserts that HB 3659 unlawfully targets the business of online performance marketing in order to expand Illinois’ regulatory authority beyond its borders. We have previously written about HB 3659 several times, including here and here. The PMA alleges that the law, which goes into effect July 1, 2011, violates the Commerce Clause of the United States Constitution, and the federal Internet Tax Freedom Act (“ITFA”), by using the relationships between Illinois publishers of online advertisements and out-of-state advertisers as grounds for imposing use tax collection and reporting obligations on Internet retailers located outside the state. The enactment HB 3659 has damaged thousands of Illinois publishers through the loss of advertising contracts with Internet retailers.

Under the Commerce Clause, and in accordance with the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a retailer without a “substantial nexus” with Illinois, defined as a business location or some other physical presence in the state, has no obligation to collect Illinois use tax. HB 3659 purports to make the mere display of online advertisements through an Illinois publisher sufficient “physical presence” in the state to require out-of-state retailers to register and collect Illinois use tax. Retailers using other forms of non-local advertising, however, are not similarly required to register and collect Illinois use tax.

In response to the enactment of the bill, many out-of-state Internet retailers have terminated their relationships with Illinois publishers to avoid the effect of HB 3659. As a result, HB 3659 has caused thousands of Illinois publishers to lose valuable contracts and advertising revenue. No additional use tax revenue will be collected and remitted by retailers who terminate their advertising contracts, although they can continue to reach Illinois consumers through other forms of advertising.

The PMA challenges the Illinois affiliate nexus law on the three separate grounds, asserting that HB 3659: (1) violates the Commerce Clause’s “substantial nexus” requirement, by attempting to impose tax obligations on out-of-state Internet retailers based solely on the display of online advertising by Illinois publishers; (2) improperly seeks to regulate interstate commerce occurring entirely outside of Illinois, by including within its sweep transactions between non-Illinois retailers and non-Illinois consumers, thus creating a per se violation of the Commerce Clause; and (3) discriminates against electronic commerce in violation of the federal Internet Tax Freedom Act by imposing an obligation to collect Illinois use tax on retailers who complete sales through online performance marketing, but not imposing a similar obligation on retailers who accomplish transactions through other forms of non-local advertising.  The PMA has asked the federal District Court to declare HB 3659 unconstitutional and in violation of the ITFA. Under the applicable rules, the State has 21 days to file an answer to the PMA’s Complaint.

We will keep you posted on further developments.

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