United States: Illinois Amends Click-Through Nexus Statutes To Address Internet Tax Freedom Act Violation

On August 26, Illinois Governor Pat Quinn approved legislation that amends the state's sales and use tax click-through nexus statutes.1 In 2013, the Illinois Supreme Court held in Performance Marketing Association, Inc. v. Hamer that the state's click-through nexus statutes were void and unenforceable due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the Internet Tax Freedom Act (ITFA).2 The legislation addresses this decision by expanding the nexus provisions to include situations where potential customers are referred to out-of-state retailers by a promotional code or other mechanism beyond an Internet link that allows the retailer to track purchases. Also, the legislation adds provisions that permit the retailer to rebut the presumption of nexus. This legislation is effective January 1, 2015.


In 2011, Illinois enacted click-through nexus legislation (the "2011 Act") that required certain out-of-state retailers to collect and remit Illinois sale or use tax on items and services sold for use in Illinois through in-state "affiliates."3 The 2011 Act targeted out-of-state retailers which entered into agreements with in-state "affiliates" that used Internet links to draw consumers to the retailers' sites in exchange for a fee or commission on any subsequent sales. 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 2011 Act only applied in the context of online sales made by Internet vendors lacking a physical presence within the state.

In Performance Marketing Association, the Illinois Supreme Court held that the 2011 Act was preempted under the Supremacy Clause of the U.S. Constitution because the 2011 Act imposed a discriminatory tax on electronic commerce4 contrary to the provisions contained in the ITFA. 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.5 The Court found that because the 2011 Act was in direct conflict with the ITFA, it was expressly preempted and was void and unenforceable. The taxpayer also argued that the 2011 Act violated the Commerce Clause of the U.S. Constitution by imposing a tax on retailers that had no physical presence in Illinois and by being unduly burdensome to interstate commerce. However, the Court declined to evaluate the merits of the Commerce Clause arguments.

Nexus Standard Amended

The statutes continue to provide that retailers are present in Illinois and therefore, must collect and remit tax if they contract with a person located in the state who, for a commission or other consideration based upon the sale of tangible personal property or services, refers potential customers to the retailer.6 Prior to amendment, the referrals were limited to the use of a link on the person's Internet Web site. As amended, the statutes now include referrals by providing to the potential customers a promotional code or other mechanism that allows the retailer to track purchases referred by such persons. Examples of this type of mechanism include but are not limited to the use of a link on the person's Internet Web site, promotional codes distributed through the person's hand-delivered or mailed material, and promotional codes distributed by the person through radio or other broadcast media. As before, this provision only applies if the cumulative gross receipts from sales to customers in Illinois who are referred to retailers under these contracts exceed $10,000 during the preceding four quarterly periods.

Under a new provision, a retailer that meets these requirements is presumed to be maintaining a place of business in Illinois but may rebut this presumption by submitting proof that the referrals or other activities pursued within the state were not sufficient to meet the nexus standards of the U.S. Constitution during the preceding four quarterly periods.7


The Performance Marketing Association case was significant because this was the first (and to date, the only) instance that a state's high court has struck down a click-through nexus statute for violating the ITFA. The newly enacted Illinois legislation is an effort to amend the Illinois click-through nexus provisions so that they no longer violate the federal prohibition against discriminatory state taxes on electronic commerce contained in the ITFA. The provisions are expanded to include potential customer referrals through promotional codes that do not constitute electronic commerce. Thus, this arguably will no longer be a discriminatory tax that violates ITFA because electronic commerce transactions are not treated differently than transactions that are not conducted electronically. Although the Illinois Supreme Court did not address the statutes' lack of a rebuttable presumption, the legislation further strengthens the statutes by adding a rebuttable presumption that frequently is a feature of the click-through nexus legislation enacted by other states.8 Under this provision, retailers can offer proof that they do not have sufficient nexus with the state under the U.S. Constitution and should not be subject to its tax.

This amendment may have cured the ITFA violation, but it remains to be seen whether the new statute is constitutionally flawed in other respects. For example, the specific addition of language to include promotional codes distributed by mail or broadcast media may create a Commerce Clause violation that is not present in other states' click-through nexus statutes. Additionally, as noted above, the plaintiff in the Performance Marketing Association case raised a Commerce Clause challenge to the state's original click-through nexus statute, which the Illinois Supreme Court did not address in its opinion. Thus, it appears likely that the amended statute may be subject additional scrutiny in the future.


1 P.A. 98-1089 (S.B. 352), Laws 2014, effective Jan. 1, 2015.

2 998 N.E.2d 54 (Ill. 2013). For a discussion of this case, see GT SALT Alert: Illinois Supreme Court Holds Click-Through Nexus Statute Preempted by Internet Tax Freedom Act.

3 P.A. 96-1544 (H.B. 3659), Laws 2011; 35 ILL. COMP. STAT. 105/2; 35 ILL. COMP. STAT. 110/2.

4 "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).

5 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).

6 35 ILL. COMP. STAT. 105/2; 35 ILL. COMP. STAT. 110/2.

7 Id.

8 For example, the click-through nexus legislation enacted by the following states provides retailers with an opportunity to rebut the nexus presumption: Arkansas (ARK. CODE ANN. § 26-52-117(e)); California (CAL. REV. & TAX. CODE § 6203(c)(5)(E)); Georgia (GA. CODE ANN. § 48-8-2(8)(M)); Kansas (KAN. STAT. ANN. § 79-3702(h)(2)(C)); Maine (ME. REV. STAT. ANN., tit. 36, § 1754-B(1- A)(C)); Minnesota (MINN. STAT. § 297A.66(4a)); Missouri (MO. REV. STAT. § 144.605(2)(e), (f)); New Jersey (N.J. REV. STAT. § 54:32B-2(i)(1)(C)); New York (N.Y. TAX LAW § 1101(b)(8)(vi)); North Carolina (N.C. GEN. STAT. § 105-164.8(b)(3)); and Rhode Island (R.I. GEN. LAWS § 44-18- 15(a)(2)).

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