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As state tax policy has continued trying to keep up with the evolving changing of our nation's economy, one key issue has been the proper means of subjecting Internet-based retail transactions to state level sales & use taxation. Following the 2008 enactment of a click-through nexus law in New York, Illinois (like several other states) enacted its own "click-through nexus" statute that went into effect on July 1, 2011. While Amazon.com, LLC v New York State Dept. of Taxation & Fin., 81 A.D.3d 183 (N.Y. App. Div. 1st Dep't 2010) upheld the validity of the New York law, the U.S. District Court for the Northern District of Illinois recently found the Illinois law unconstitutional. With several other states passing similar statutes (notably Georgia, North Carolina, and Texas), the apparent conflict between the decisions in New York and Illinois creates significant uncertainty for taxpayers across the nation as they look to determine their compliance obligations.
Performance Marketing Association Case
In Performance Marketing Ass'n, Inc. v. Hamer, Director, Illinois Department of Revenue, the Performance Marketing Association (PMA) filed a declaratory judgment action challenging the statute and alleged that the Illinois click-through nexus law violated the Commerce Clause to the U.S. Constitution by unduly burdening interstate commerce and that such law violated the federal Internet Tax Freedom Act. PMA sought not only a declaration by the court that the Illinois law was unconstitutional and violated federal law, but also a permanent injunction against the Illinois Department of Revenue prohibiting any enforcement actions.
A key background fact to keep in mind is that all of these statures basically take the same approach. These statutes target bloggers, or other "in-state publishers of on-line advertisements", who provide a link on their websites to the websites of an out-of-state internet seller. Under the terms of the contracts with the internet sellers, the Illinois publisher of online advertisements usually is compensated in the form of a commission based on a percentage of sales made by the internet seller to Illinois residents. Under the Illinois law, if the out-of-state internet seller's gross receipts from such sales were at least $10,000, then the seller is deemed to be a "retailer maintaining a place of business in this State." Under the U.S. Supreme Court's decision in Quill Corp. v. N.D., 504 U.S. 298 (U.S. 1992) and other cases, a physical presence is required before a state may exercise tax jurisdiction over out-of-state taxpayers. Even though the internet seller does not have direct physical presence in Illinois, the challenged law effectively classifies the blogger as the internet seller's agent or representative in Illinois -- similar to the approach of other similar state statutes.
While the court's final decision is not yet available, the judge issued a bench decision granting PMA's request for a declaratory judgment, but not surprisingly, the state is expected to appeal the decision. This decision is an encouraging development in taxpayer's efforts to challenge these extremely broad statutes, but this case is almost certainly not the last word in this controversial extension of state tax jurisdiction.
RELATED LINKS: For additional insight on sales tax nexus issues, see:
1-12 Bender's State Taxation: Principles and Practice § 12.04 - Attributional and Agency Nexus: General Concepts
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