Illinois Supreme Court Strikes Down State’s Click-Through Nexus Bill

Oct. 24, 2013

On Oct. 18, the Illinois Supreme Court in Performance Marketing Association Inc. vs. Brian Hamer held that the state’s sales tax click-through nexus bill was pre-empted by the federal Internet Tax Freedom Act (ITFA). Following the lead of other states, Illinois adopted a click-through nexus expanding the sales tax collection requirements for out-of-state Internet retailers. The Illinois decision is a rare taxpayer win in this area, as many states’ courts have upheld similar statutes.

Under the Illinois click-through nexus standard, an out-of-state retailer is presumed to have nexus and is required to collect sales tax from Illinois customers when all of the following three conditions are met:

  1. An Illinois business maintains a link to an out-of-state Internet retailer on its website.
  2. The Illinois business receives a commission from the out-of-state Internet retailer based on sales to Illinois customers who reach the out-of-state Internet retailer through the link on the Illinois business’s website.
  3. The cumulative receipts from sales of tangible personal property by the out-of-state Internet retailer to Illinois customers who reach the retailer via the link exceed $10,000 during the preceding four quarterly periods ending on the last day of March, June, September, and December.

In its analysis, the court focused on the fact that Illinois’ tax treatment differed between “performance marketing” arrangements using the Internet and those using traditional print and broadcast media. “Performance marketing” refers to marketing or advertising programs in which a person or organization that publishes or displays an advertisement (often referred to as an affiliate or publisher) is paid by the retailer when a specific action, such as a sale, is completed. In performance marketing, the retailer tracks the success or performance of the marketing campaign and sets the affiliate’s compensation accordingly. The court noted that Illinois’ presumption of nexus from performance marketing arrangements applied only to Internet arrangements and not to performance marketing arrangements using traditional print and broadcast media.

The court then turned to an analysis of the Illinois statute under ITFA. One of the provisions of the act precludes the imposition of discriminatory taxes on electronic commerce. Because the Illinois statute requires sales tax collection only for Internet-based performance marketing arrangements but not all performance marketing arrangements, it was found to be in violation of ITFA. The court also limited its decision to discrimination under ITFA and declined to rule on whether the statute was discriminatory under the commerce clause.

It remains to be seen if the state of Illinois will appeal the decision. Additionally, this decision will have diminished importance if the Marketplace Fairness Act is enacted.

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