Performance Marketing Association Suit Challenging Illinois Affiliate Nexus Law Now in State Court

On July 27, the Performance Marketing Association (“PMA”) filed a complaint in the Illinois Circuit Court for Cook County, challenging the new Illinois “affiliate nexus” law (“HB 3659”). In the complaint, the PMA asserts the same claims first raised in its complaint filed in the United States District Court in Chicago on June 1. As detailed in the complaint, the PMA alleges that HB 3659 violates the Commerce Clause and impermissibly discriminates against electronic commerce in violation of the Internet Tax Freedom Act (“ITFA”).

In connection with filing the suit in state court, the PMA has voluntarily dismissed the federal court action.  The voluntary dismissal will prevent a protracted dispute with the Defendant, the Director of the Illinois Department of Revenue, regarding whether the federal court has jurisdiction over the case. Brann & Isaacson attorneys George Isaacson and Matt Schaefer are counsel to the PMA in the case.

After An Earlier Veto, Texas Enacts Nexus-Expanding Legislation In Response To Dispute With Amazon Over Distribution Center

As many readers may be aware, last October, the Texas Comptroller issued a $269 million assessment against Amazon.com for uncollected use tax for the period December 2005 to December 2009. News reports indicated that the assessment was based primarily on the grounds that a related entity, Amazon.com KYDC LLC, operates a distribution center in Irving, Texas (near the Dallas/Forth Worth airport). Amazon disagrees with the assessment, and later sued to obtain the Comptroller’s audit file containing information regarding the basis for the assessment.

July 19 marked the latest volley in the battle between Amazon.com and the State of Texas. Other e-commerce sellers and direct marketers should now ensure that they do not suffer collateral damage.

In response to the contentious dispute that had developed between the State and Amazon, the Texas legislature introduced a number of bills in its 2011 legislative session intended, in effect, to make clear that Amazon.com is obligated to collect and remit Texas use tax. One version of such legislation made its way to Texas Governor Rick Perry in late May, only to be vetoed by the Governor, who has expressed opposition to Amazon nexus legislation. The Texas legislature, however, re-inserted the nexus-expanding language from the bill Perry vetoed into a broad budgetbill, SB 1, which passed in late June.

Tax Agencies Should Read the Language of the Statute and May Not Expand the Law’s Requirements

As some of our readers are aware, on June 28, 2011, California’s Governor Brown signed into law a bill (ABX1 28) that provides for “click-through nexus” under certain circumstances. This law is similar to “click-through nexus” legislation adopted in New York, Rhode Island, North Carolina, and Arkansas (which we have written about extensively in the past), inasmuch as it creates a rebuttal presumption of nexus if a company’s annual sales to California exceed $500,000 and if the company’s California sales exceed $10,000 from links or other referrals from companies (“affiliates”) who receive a commission from such referrals.

Unlike the Illinois and Connecticut statutes, which automatically create nexus in the event that sales from affiliates exceed the threshold, the California law provides that the retailer can rebut the determination of nexus based on affiliate relationships. Nevertheless, in a recent notice issued by the California Board of Equalization (Notice L-284, issued July 2011), the Board states that there are only two conditions to a finding that a retailer must be registered for sales and use tax collection: (1) that sales from affiliates exceeded $10,000 in the last 12 months; and (2) that the retailer’s total sales to California exceed $500,000 in the last 12 months. According to the Board, if a business meets the foregoing requirements and is not already registered with the Board, it must complete a “California Certificate of Registration—Use Tax.”

Bills Introduced in Congress to Override Quill in Favor of Streamlined Sales and Use Tax Agreement

On July 29, 2011, the so-called “Main Street Fairness Act” was introduced in both houses of Congress. The bills, introduced as H.R. 2701 in the House of Representatives and as S. 1452 in the Senate, are identical. Under the proposed law, Member States in the Streamlined Sales and Use Tax Agreement (SSUTA) would be authorized to require remote sellers (i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme Court in Quill Corp. v. North Dakota. There are currently 24 full and associate member states in the SSUTA, representing approximately 36% of the population of the United States. Many larger states, including California, Florida, Illinois, New York, Pennsylvania and Texas are not SSUTA members.

Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems.  The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.

We will keep you apprised of further developments regarding the bills.