On October 18th, the Illinois Supreme Court ruled in the case of Performance Marketing v. Hamer to support a lower court decision throwing out a 2011 Illinois state law that established affiliate nexus in the state. Performance Marketing, an advocacy association for affiliate marketers, had been suing the state on behalf of Illinois-based affiliates who had been harmed by the law.
“Affiliate nexus” laws – also called the Amazon tax after its most high profile target – use members of an online retailer’s affiliate program to establish the physical presence that activates the requirement of the company collecting sales tax in that state. The intent of state legislatures in enacting the laws is to collect more sales tax by forcing online retailers to collect if they have affiliates in the state. However, in the 12 states that have enacted the laws to date the opposite has happened, as most retailers have opted to terminate their local affiliates rather than collect sales tax because of their activities.
“This was a lose-lose situation for the state,” says Rebecca Madigan, Executive Director of the Performance Marketing Association. “The state collected no new use tax revenue from those retailers that terminated their relationships with local Illinois affiliates, and the affiliates themselves lost millions of dollars in advertising revenue. That means less income tax revenue for the state and fewer jobs for the people of Illinois. Proponents of the nexus tax would have you believe that they have small business interests at heart, but the truth is, the nexus tax law hurt small businesses and unfairly discriminated against one of the fastest growing market segments in the nation.”
PMA estimates that 9,000 Illinois affiliates with 2010 advertising revenue of $744 million were affected by the law, and that 1/3 of these went out of business, 1/3 downsized, and 1/3 moved out of the state.
The legal decision paves the way for retailers like Amazon.com to welcome Illinois-based affiliates back into their programs, but the future of the issue is far from clear. The court ruled the law unenforceable by declaring that it violates the federal Internet Tax Freedom Act, which expires November 1st, 2014. The expiration of that law would negate the Supreme Court decision, leaving the Illinois law enforceable again. There’s also the possibility that the state could appeal to the U.S. Supreme Court for a ruling. Another affiliate law case, in which a law from New York was upheld by their state Supreme Court, also looks to be appealed to the Supreme Court in the near future and the presence of dual conflicting cases on the issue may encourage the Supreme Court to take up the issue.
The legal wranglings may become moot, however, if the Marketplace Fairness Act that just passed the U.S Senate can pass the U.S House and become law like is widely expected (although the Democratic sponsored law may face some challenge in House). The law would allow (but not require) states to require online retailers to collect sales tax, regardless of their physical presence in the state, and would likely trigger a flood of state laws taxing online sales without affecting affiliates. Amazon, somewhat surprisingly, is actively supporting the bill, as it would level the playing field for them with other online retailers as they are increasingly building more and more local distribution centers and establishing local presences that require them to collect sales tax.