Illinois Circuit Court: Amazon Law Unconstitutional
On July 1, 2011, the Illinois General Assembly enacted legislation, euphemistically referred to as “Illinois’ Amazon Law.” The law requires online retailers, such as Amazon, to collect Illinois use taxes because they use independent Illinois-based online marketers to direct customers to the retailers’ websites -- so-called “click through nexus.” Shortly after Illinois Governor Pat Quinn signed the law, formally entitled the “Main Street Fairness Act,” the Performance Marketing Association, a trade association that includes online retailers among its members, filed suit in Cook County Illinois Circuit Court challenging Illinois’ Amazon Law. In a decision issued on May 7, 2012, Cook County Circuit Judge Robert Lopez Cepero ruled that Illinois’ Amazon Law was unconstitutional. It is expected that the Illinois Department of Revenue will appeal this decision directly to the Illinois Supreme Court.
The Illinois Amazon Law is similar to legislation recently enacted in a number of other states, which include Arkansas, Connecticut, New York, North Carolina and Rhode Island. The Illinois act amends and expands the Illinois Use Tax Act’s statutory definition of a retailer required to collect Illinois use tax. The amendment was aimed at the activities of independent deal and coupon marketers based in Illinois that earned a commission from online retailers for directing shopping traffic to the retailers’ website. The amendment required the retailers to collect Illinois use tax on their internet sales based on the premise that the independent marketers created substantial physical presence in Illinois for the online retailers. Proponents of the law believed that under constitutional law jurisprudence, this connection would require the online retailers to collect Illinois use tax on their sales. By expanding the standard for use tax collection nexus, the Illinois General Assembly hoped the state would collect the 6.25 percent Illinois use tax on all purchases made by Illinois residents, both from “brick and mortar” Illinois retailers as well as their online competitors. After this legislation was enacted, online retailers threatened to terminate their business relationships with Illinois independent marketers rather than be forced to collect use taxes on their Illinois sales. A number of Illinois based marketers (e.g., Coupon Cabin and Fat Wallet) physically moved outside of Illinois in order to avoid termination of their business relationship with online retailers.
The Circuit Court order holding Illinois’ Amazon Law unconstitutional was issued in response to cross-motions for summary judgment filed by the plaintiff and defendants in Performance Marketing Association, Inc. v Hamer. The order was limited to three pages and contained little legal analysis. The order simply ruled, without further explanation, that the Act violated the Commerce Clause of the United States Constitution because it imposed use tax collection responsibility on online retailers that did not have a substantial physical presence in Illinois. The order also ruled that the Act was preempted by the Constitution’s Supremacy Clause by virtue of the federal moratorium against discriminatory state taxes on electronic commerce embodied in the federal Internet Tax Freedom Act, which is in effect until November 1, 2014.
Where the Circuit Court has ruled that a state statute is unconstitutional, direct appeal of Circuit Court rulings to the Illinois Supreme Court is permitted under Illinois Supreme Court Rule 302(a). The Illinois Department of Revenue has announced that it will appeal the Circuit Court ruling in Performance Marketing Association Inc. v. Hamer to the Illinois Supreme Court under Rule 302(a). The Illinois Retail Merchants Association, a trade association that includes Illinois-based “brick and mortar” retailers among its members, has expressed its intention to file amicus curiae briefs in support of the Department’s appeal. It is expected that the Illinois Supreme Court will hear the Department’s appeal in its upcoming fall session.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.