Thursday, October 31st, 2013

‘Amazon Tax’ Struck Down

In 2011, Illinois passed what became known as the “Amazon Tax” by expanding the scope of businesses that had to collect Illinois sales tax.  Previously, all online retailers without a physical presence in the state were not required to collect Illinois sales tax.  Instead, the individual consumer was expected to report non-taxed online purchases on his or her tax return and pay a “use tax” at that time.  The Amazon Tax required certain online retailers to collect and remit sales tax for Illinois purchasers if the retailer conducted “performance marketing” through a company that operated in Illinois.

Performance marketing is an advertisement agreement in which the retailer—Amazon, Overstock, or eBay, for example—pays the advertiser—Facebook, Google, or Northwest Herald online—a commission based upon the number of referrals the advertiser sends to the retailer.  Some advertisers are smaller companies that conduct the majority of their business online and may have a specialized clientele desirable to major online retailers.  While performance marketing is not exclusive to internet sales, almost all major internet retailers utilize advertisers based in Illinois.

The Illinois Supreme Court struck down the 2011 Illinois law because it conflicted with existing federal law.  The Internet Tax and Freedom Act (ITFA) already precludes taxes exclusive to internet sales, but the Amazon Tax requires internet retailers with performance marketing agreements to collect state sales tax.  By contrast, the Amazon Tax does not apply to print publishers or radio broadcasting companies. Thus, the Supreme Court stated that because the ITFA does not allow state laws that discriminate against internet activity, and because Illinois law taxes only internet transactions, the law conflicts with federal law and is invalid.

This matter is likely not fully resolved.  New York passed a similar Amazon Tax, but the law was upheld.  The fact that two states reached opposite conclusions paves the way for an appeal to the United States Supreme Court and possibly federal law governing how states can or cannot tax individuals for interstate purchases.  The concept of internet taxation also raises longer-term concerns with traditional point-of-sale vs. destination source taxing if federal law would attempt to dictate a unified method of internet sales taxation.

From a municipal perspective, the ruling may have positive implications for local businesses.  Some major online retailers enacted policies where they would not enter performance marketing agreements with Illinois companies or other states that adopted similar Amazon Taxes.  The consequence is that several Illinois advertisers at least contemplated moving to another state, such as Indiana or Wisconsin, especially if they were already operating near another state’s border.  For the time being, businesses interested in being an online advertiser have no disincentive to begin or continue operating in Illinois.