Thursday, April 26, 2012

Court Rules that the Illinois Internet Affiliate Nexus Law is Unconstitutional and Violates the Internet Tax Freedom Act

Yesterday (April 25, 2012), Judge Robert Lopez Cepero of the Illinois Circuit Court for Cook County granted summary judgment in favor of the Performance Marketing Association (“PMA”) in its constitutional challenge to the Illinois "Internet affiliate nexus" statute, Public Act 96-1544 (the “Act”), which took effect in July 2011. Judge Cepero ruled from the bench, after oral argument by the parties’ counsel, that the Illinois law is both unconstitutional under the “substantial nexus” requirement of the Commerce Clause and violates the federal Internet Tax Freedom Act's moratorium against discriminatory state taxes on electronic commerce. The Court will enter a formal order encapsulating its rulings, although Judge Cepero indicated that he does not plan to issue a written opinion, separate from his remarks made on the record at the hearing. The Defendant, the Director of the Illinois Department of Revenue, is said to be reviewing his options, but is expected to appeal the ruling directly to the Illinois Supreme Court. (George Isaacson and Matt Schaefer of Brann & Isaacson represent the PMA in the case.)

Like other “Internet affiliate nexus” laws, the Illinois statute seeks to impose a use tax collection obligation upon out-of-state Internet retailers who enter into contracts with affiliates located in the state, under which the affiliate places a link on its website connecting Internet users to the retailer’s website, and receives commissions or other compensation based on sales made to such customers. Under the terms of the Act, any Internet retailer that realized $10,000 in annual sales from customers who reached its website through links on the sites of Illinois Internet affiliates would be required to collect Illinois use tax. The Court held, however, that the activity described in the Illinois law was not sufficient to create use tax nexus with Illinois for purposes of the Commerce Clause. The Court also held that imposing a use tax collection obligation upon Internet retailers engaged in such online linking relationships, but not on other retailers engaged in similar offline adverting arrangements, is “premature” in light of the ITFA's moratorium, which remains in effect until November 1, 2014.

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