United States: Illinois Supreme Court Holds Click-Through Nexus Statute Preempted By Internet Tax Freedom Act

On October 18, 2013, the Illinois Supreme Court affirmed a circuit court holding that Illinois' click-through nexus law is preempted under the Supremacy Clause of the U.S. Constitution due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the Internet Tax Freedom Act ("ITFA").1 The decision upheld the circuit court's granting of summary judgment in the underlying case.2


In 2011, the Illinois legislature enacted click-through nexus legislation (the "Act") requiring certain out-of-state retailers to collect and remit Illinois sales or use tax on items and services sold for use in Illinois through in-state "affiliates." The Act targets out-of-state retailers which enter into agreements with in-state "affiliates" who use Internet links to draw consumers to the retailers' sites in exchange for a fee or commission on any subsequent sales.3 This affiliate relationship is known as "performance marketing." Typically the affiliate refers Illinois customers to the out-of-state retailer through a link on the affiliate's Web site. In effect, the Act only applies in the context of online sales made by Internet vendors lacking a physical presence within the state.

History of Underlying Case

On June 1, 2011, the Performance Marketing Association ("PMA"), a not-for-profit trade association representing the performance marketing industry, filed a lawsuit against the Illinois Department of Revenue in U.S. District Court.4 Soon thereafter, the PMA dismissed the federal lawsuit and filed a new petition in Illinois circuit court on July 27, 2011.5 The PMA claimed that the Act was unlawful on three grounds: (i) the Act violates the Commerce Clause of the U.S. Constitution by imposing a tax on retailers that have no business location, property, employee, or other physical presence in Illinois;6 (ii) the Act violates the Commerce Clause as unduly burdensome to interstate commerce; and (iii) the Act is preempted by the ITFA, which contains a prohibition against a state imposing a "discriminatory tax" on "electronic commerce."

The PMA and the Department each filed cross-motions for summary judgment. The circuit court granted PMA's motion for summary judgment, holding that the Act violated the substantial nexus requirement of the Commerce Clause and was expressly preempted by the ITFA.7 The circuit court did not provide a detailed legal analysis for the decision and did not reach the merits of the PMA's claim that the Act was a burden on interstate commerce. Also, the circuit court noted that the decision was directly appealable to the Illinois Supreme Court because the holding invalidated a state statute.8

The Department subsequently appealed the decision to the Illinois Supreme Court.

Illinois Supreme Court Affirms Summary Judgment

In affirming the circuit court's decision, the Illinois Supreme Court first addressed the issue of whether the Act is preempted by the ITFA pursuant to the Supremacy Clause.9 The PMA argued that the Act was expressly preempted by the prohibition of any discriminatory tax on electronic commerce contained in the ITFA.10 The ITFA defines a discriminatory tax to include an obligation to collect and remit sales tax on an Internet transaction in a different manner than if the same transaction had occurred as a traditional face-to-face purchase.11 The PMA argued that the Act expanded the definition of retailer and servicemen to require out-of-state Internet retailers entering into affiliate agreements with Illinois parties to unfairly collect sales tax on their transactions. At the same time, out-of-state retailers who entered into affiliate agreements with Illinois parties that advertise in print, television, and other "offline" media would not be obligated to collect use tax on their sales. In short, the Act targets Internet affiliates but ignores affiliate agreements that generate sales through non-electronic means.

The Department conceded that the Act specifically targets online performance marketing contracts. However, it argued that Illinois statutes already impose a use tax collection obligation on "offline" affiliate agreements. The Department referred to provisions of the Use Tax Act that include "offline" performance marketing in the definition of doing business in the state.12 According to the Department, the Use Tax Act provides an equivalent duty to collect tax which is comparable to the duty imposed on Internet affiliates by the Act.

The Illinois Supreme Court rejected the Department's argument, explaining that online marketing is inherently "broadcast" to a worldwide audience and is accessible to anyone, from anywhere in the world. "Offline" marketing, which the Department argues is subject to tax under the Use Tax Act, would only apply to marketing that was directed to consumers located within Illinois. The Act imposes a duty to collect tax on online marketing that is far beyond the scope of what is required under the Use Tax Act. The Court held that this disparity constituted a discriminatory tax that was prohibited by the ITFA.

Alternatively, the Department argued that the Internet links used by the affiliates are active solicitation efforts performed on behalf of the out-of-state retailer. In general, active solicitation activities performed in Illinois by out-of-state retailers obligate the retailers to collect and remit use tax under Illinois law. The Department attempted to extend this definition to click-through advertising to support the claim that in-state affiliates create nexus for out-of-state retailers. The Court rejected this contention, pointing to the fact that affiliates do not receive or transmit orders, process payments, or provide any customer service indicating an active role in the solicitation of sales. As with the first argument, the Court found that Internet marketing with "click-through" links is no different than traditional "offline" marketing.

The Court affirmed the judgment in favor of the PMA, finding that the Act imposes a discriminatory tax on electronic commerce contrary to the provisions contained in the ITFA. The Court found that because the Act is in direct conflict with the ITFA, it is expressly preempted and is void and unenforceable. Upon reaching the conclusion on the preemption issue, the Court declined to evaluate the merits of the Commerce Clause arguments.


Justice Karmeier filed a dissent, disagreeing with the majority holding on the preemption issue, as well as the unwillingness of the majority to address the Commerce Clause arguments. The dissent noted that the expanded definition contained in the Act does not constitute a new tax. Instead, it shifts the burden of the use tax from the consumer to the vendor.13 Justice Karmeier argued that use tax obligations left to individual consumers are often not remitted and are therefore underreported. Further, the Act creates fairness in the marketplace, wherein out-of-state Internet retailers are obligated to include use tax in the purchase price similar to in-state retailers.

The dissent criticized the decision of the majority failing to address the Commerce Clause arguments. According to the dissent, the majority preemption holding did not indicate that the statute itself is invalid. The only analysis performed by the Court was to determine whether the statute conflicts with federal law. By failing to address the Commerce Clause argument, the actual substance of the Act was not reached.

Further, the dissenting justice explained that the case was before the Illinois Supreme Court only because the circuit court held the Act was facially invalid based on the Commerce Clause argument. If the circuit court had only reached a decision based on the preemption argument, the case would have proceeded through the normal appellate process. The dissent noted the "ponderous" result of the Court hearing a case on direct review because of a certain claim, then failing to consider the merits of that claim.14

The dissent discussed that the ITFA is scheduled to sunset on November 1, 2014. Once the federal statute expires, the dissent pointed out that the Act will be revived without any further action by the legislature. At that time, the Commerce Clause argument will still be in dispute. Without the issue being resolved, the same issue could likely be back before the court for determination.

Justice Karmeier further mentioned developments in other states regarding similar claims and considered how the Illinois case analysis compares. The dissent concluded that the Act regulates an activity with substantial nexus to Illinois and, therefore, PMA's Commerce Clause arguments are invalid.


Despite the clear victory for online retailers and the performance marketing and advertising industries, the Illinois Supreme Court left much unresolved. The decision was made without considering the actual substance of the Act. Without a clear holding on the Commerce Clause issues, the future of click-through and affiliate nexus in Illinois remains unclear. Regardless of this uncertainty, however, until the expiration of the ITFA or successful appeal to the U.S. Supreme Court, the Illinois Supreme Court decision suspends the click-through nexus statute rendering the law void and unenforceable.

As mentioned in the dissent, one significant area of concern surrounds the ITFA sunset on November 1, 2014. Congress has previously extended the sunset date for the ITFA, and legislation to permanently extend the ITFA is currently being considered.15 The majority held that the Act is preempted by the conflicting ITFA, and is, therefore, invalid as a violation of the Supremacy Clause of the U.S. Constitution. If the ITFA is not extended by Congress, the Act will no longer be preempted by a federal law, and will, therefore, again become effective. If the Court had ruled on the Commerce Clause issue, then it is likely that a stronger conclusion could have been reached with a more permanent result. As it stands, the same Commerce Clause questions may remain unresolved once the ITFA expires, resulting in additional litigation to resolve the uncertainty.

An additional legislative option to remedy the click-through nexus provisions to avoid the preemption issues with the ITFA would be to simply rewrite the Act. Other states have taken similar action to successfully avoid preemption issues.16 In essence, the statute could be amended so that any affiliate sales, not just sales generated by Internet links, create nexus and trigger use tax collection responsibility. Thus, the prohibition against electronic commerce discrimination contained in the ITFA could be avoided.

Many of these issues were explored when New York considered a similar constitutional challenge to click-through nexus legislation.17 In contrast to the New York legislation, the Illinois statute lacks a rebuttable presumption of nexus. A rebuttable presumption gives a taxpayer the ability to present evidence showing that affiliates do not engage in activities creating nexus and avoids potentially violating the due process guarantees of the U.S. Constitution.18 In order to avoid additional Constitutional challenges, the Illinois legislature could consider adding a rebuttable presumption to the current statutory scheme.

By not reaching the merits of the Commerce Clause argument, the Illinois Supreme Court has missed an opportunity to put forth Illinois' position in a nationwide discussion regarding the interaction of Internet affiliate tax collection and the Commerce Clause. Given that the issue was ripe and fully briefed, the Court declined to resolve a relevant question of law that may come before the Court in the future. While other states are actively working to resolve these issues, the Illinois Supreme Court decided to postpone resolution. It will be interesting to see whether the split between the New York and Illinois courts with respect to the constitutionality of click-through nexus laws, as well as the continued activities in this area by state legislatures, is addressed by the U.S. Supreme Court.


1 Performance Marketing Association, Inc. v. Hamer, Illinois Supreme Court, Doc. No. 114496, Oct. 18, 2013.

2 For further discussion of the circuit court decision, see GT SALT Alert: Illinois Circuit Court Holds Click-Through Nexus Statute Is Unconstitutional and Violates Internet Tax Freedom Act.

3 P.A. 96-1544 (H.B. 3659), Laws 2011; 35 ILL. COMP. STAT. 105/2.

4 Performance Marketing Association, Inc. v. Hamer, U.S. District Court, Northern District of Illinois, Eastern Division, No. 11-CV-3690, complaint filed on June 1, 2011.

5 Performance Marketing Association, Inc. v. Hamer, Circuit Court, First Judicial Circuit, No. 2011 CH 26333, complaint filed on July 27, 2011.

6 These factors are commonly considered to be factors that create substantial nexus with a state. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

7 Performance Marketing Association, Inc. v. Hamer, Circuit Court, First Judicial Circuit, No. 2011 CH 26333, Order Granting Plaintiff's Motion for Summary Judgment entered on May 7, 2012.

8"Appeals from final judgments of circuit courts shall be taken directly to the [Illinois] Supreme Court (1) in cases in which a statute of the United States or of this state has been held invalid, and (2) in proceedings commenced under Rule 21(c)(d) of this court. For purposes of this rule, invalidity does not include a determination that a statute of this state is preempted by federal law." Ill. S. Ct. R. 302(a).

9 The U.S. Constitution provides that federal law "shall be the supreme Law of the Land." See U.S. Const., art. VI, § 2. "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding."

10 "Electronic commerce" means "any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provision of Internet access." 47 U.S.C. § 151 at § 1105(3).

11 A discriminatory tax "imposes an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means." 47 U.S.C. § 151 at § 1105(2)(A)(iii).

12 35 ILL. COMP. STAT. 105/2(3).

13 See 35 ILL. COMP. STAT. 105/10; 35 ILL. COMP. STAT. 110/10.

14 Ill. S. Ct. R. 302(a) provides for direct review by the Illinois Supreme Court of circuit court cases where an Illinois state statute is held to be invalid. By granting plaintiff's summary judgment on the Commerce Clause claim, the circuit court held that the Act was invalid, thus, allowing direct appeal to the Illinois Supreme Court. Once before the Supreme Court, the Commerce Clause claim was not considered.

15 H.R. 3086, introduced Sep. 12, 2013.

16 New York successfully avoided the preemption issue by enacting a click-through nexus statute that states that affiliates can create nexus when referrals are made "by link on an internet website or otherwise." See N.Y. TAX LAW § 1101(b)(8)(vi). This effectively avoids the disparate treatment between electronic and "offline" commerce.

17 See Overstock.com, Inc. v. New York State Department of Taxation and Finance, 987 N.E.2d 621 (N.Y. 2013). In the New York case, the Court held that affiliates were much more active in soliciting sales from New York residents and, thus, were equivalent to sales agents soliciting sales for the Internet retailer. In addition, the New York statute contained a rebuttable presumption of nexus that is not contained in the Illinois statute. For further discussion of the New York case, see GT SALT Alert: New York State Court of Appeals Holds Click-Through Nexus Statute Is Facially Constitutional.

18 See Amazon.com LLC v. New York Department of Taxation and Finance, 913 N.Y.S.2d 129 (N.Y. App. Div. 2010).

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