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.

Background

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

Commentary

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.

Footnotes

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)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions