On the final argument day of the May term, the Illinois Supreme Court appeared troubled by the limitations of the record in Performance Marketing Association, Inc. v. Hamer. PMA involves the question of whether Illinois’ "Click-Through" Tax Act — which imposes a duty to collect sales taxes under certain circumstances on out-of-state retailers — facially violates either the Commerce Clause or the Supremacy Clause of the U.S. Constitution. Our detailed preview of the facts and lower court holding in PMA is here. The video and audio of the argument is available here.
PMA arises from an amendment to the Illinois Use Tax Act in which the Illinois Legislature attempted to capture the millions in sales taxes it purportedly loses due to internet purchases by Illinois residents from out-of-state retailers. Here’s how it works: everyone has seen third-party advertisements on high-traffic websites, inviting visitors to click on the ad to get more information about a product or special deal. Typically, the third-party advertiser pays the owner of the website based on the number of people who “click through” and buy something. And that’s the nexus that the “Click-Through” Act is based on – any website that has one or more contracts with such advertisers who are “located in Illinois” is defined as a “retailer maintaining a place a business in this State.” And that means that as long as the website realizes $10,000 a year in gross receipts from “click-through” commissions, the site has to charge users for state sales taxes. The Cook County Circuit Court struck down the Click-Through Act on two grounds, finding that it violated the commerce clause for lack of a specific nexus to Illinois, as well as being preempted by the Internet Tax Freedom Act. The Circuit Court’s summary judgment order went directly to the Supreme Court for review.
Counsel for the state began by arguing that the statute is facially constitutional. Justice Thomas asked whether, if the Court found that the Act was preempted, it would still have to reach the commerce clause holding. Counsel responded that since preemption is a constitutional holding, the doctrine of constitutional avoidance wouldn’t come into play. Justice Thomas pointed out that a bill is currently pending in Congress which is directly relevant to the issues. Counsel responded that while the pending statute might moot some of the case, it might not moot all issues. "Substantial nexus" — the constitutional standard — wasn’t a tough standard to meet, counsel argued. The presence of in-state representatives soliciting sales on a merchant’s behalf has been enough to trigger tax liability for at least half a century. Justice Theis pointed out that the statute uses the word "referral," and surely that’s what the Court should be looking at and interpreting. Counsel agreed, saying that the statute anticipates the presence of an instate agent who is actively trying to maximize sales. Justice Theis asked counsel to describe the relationship between the out-of-state retailer, the referring site and the customer. Counsel responded that an in-state website solicits sales for an out-of-state retailer, offering coupons or discounts to customers. Justice Theis asked where the coupons come from, and counsel responded that the relationship essentially amounts to the in-state referring site offering to share its commission on the sale with the in-state customer. Justice Theis asked what the stipulated facts suggested that these referring websites do: how does the Court know what the universe of websites involved are. Counsel responded that this illustrates the problem with a facial challenge; there are many types of relationships, and all must be non-taxable for a facial challenge to succeed. Justice Burke asked whether, if a customer goes to a typical in-state site, the site buys the product from the retailer on her behalf, or the customer buys it herself? Counsel responded that the customer goes directly to the out-of-state retailer’s site; if the retailer has an Illinois presence, it pays use tax, if it doesn’t, it doesn’t. Justice Theis again asked counsel to explain what the in-state referrers do so that the Court could determine whether it constitutes a nexus. Counsel pointed the Court to a newspaper article in the stipulated facts, which explains that most Illinois-based referral agents make money from commissions and advertising. Justice Thomas asked whether a finding that the Act is constitutional would eliminate the need for the use tax line on the Illinois income tax form. Counsel responded that it wouldn’t necessarily. Turning to the Internet Tax Freedom Act, Justice Thomas suggested that Congress intended to put a moratorium on state use taxes on internet purchases while it sorted out the situation. Counsel disagreed, arguing that if Congress had wanted to bar such taxes, it would have simply done so. In fact, Congress merely barred taxes which discriminate against internet purchases as compared to brick-and-mortar-merchant purchases. Justice Freeman asked counsel whether a mere link on a website constituted solicitation, if the in-state referrer takes no further action seeking to stimulate sales. Counsel responded that perhaps not; the statute assumes more than that. Chief Justice Kilbride asked what the factual activity was that created a substantial taxable nexus with Illinois. Counsel responded that it was the contract with the in-state referrer, and the passing of a customer through the link to the out-of-state retailer’s site.
Counsel for PMA began by arguing that the Court should find preemption and avoid the Commerce Clause issue entirely in order to wait for Congress to provide a uniform nationwide standard. Justice Burke asked whether it was necessary for the Circuit Court to resolve the Commerce Clause issue after finding preemption. Agreeing with counsel for the state, counsel responded that both were constitutional issues, so the doctrine of constitutional avoidance wouldn’t counsel avoiding one or the other. Counsel then explained that under the statute, only four criteria are necessary to make a taxable event: a referral contract, a web link, commissions, and receipts of $10,000 per year by the in-state entity. Whether or not some referring sites do more, the only question before the Court was whether this is enough. No court has so found, according to counsel. Justice Theis asked whether the case merely posed the narrow statutory interpretation question of what is meant by a referral. Counsel responded that the parties did not disagree about what a referral is. Justice Theis suggested an example: a customer sees a picture, clicks on it, and is taken to an out-of-state website to make a purchase. Was that all that was needed, meaning that coupons, promotional codes, sharing commissions and benefits for the consumer were irrelevant? Counsel responded that if an in-state referrer met the four criteria of the statute, nothing more was required. Some companies may do more, but such activities are irrelevant under the statute: only the four criteria matter. Justice Theis pointed out that a "referral" under the statute could mean many things under the statute for purposes of a facial challenge. Counsel responded that a "referral" was merely a click on a link – nothing else mattered. Continuing, counsel pointed out that the Internet Tax Freedom Act provides that internet transactions can’t be treated differently than physical transactions. Justice Thomas pointed out that the state was arguing that there was no discrimination against electronic transactions here. Counsel responded that he didn’t know what facts such a conclusion could be based on. Counsel concluded his argument by explaining that PMA represents intermediaries in the click-through relationship: the in-state referral agent. Its members will not be taxed if the statute is upheld; they are merely the innocent victims, thousands of which have had their referral contracts cancelled by out-of-state retailers. The issue would be better left to Congress to resolve, according to counsel.
In rebuttal, Justice Thomas asked counsel for the state how the statute qualified as non-discriminatory. Counsel argued that print-based performance marketing might create a taxable event too. If there are entities which the statute could constitutionally apply to, counsel concluded, then a facial challenge must fail. Since the referral relationships effectively created an in-state sales force for out-of-state retailers, that should be enough to trigger taxation.