On Friday morning, the Illinois Supreme Court handed down its opinion in one of its most high-profile pending cases. The Court held in Performance Marketing Association, Inc. v. Hamer that the federal Internet Tax Freedom Act (ITFA) preempted the Illinois "Click-Through" Act, also known as the "Amazon tax" – becoming (according to lone dissenter Justice Lloyd A. Karmeier) the first court of review in the country to do so. Our detailed summary of the underlying facts and Circuit Court holding in Performance Marketing is here. Our report on the oral argument is here.
Here’s how the Amazon tax works: many smaller websites display links allowing visitors to click and be taken directly to the website of a national retailer to buy books, music, or almost anything else. Typically, the small website owner is paid a commission according to how many visitors reach the national retailer’s website through his or her site. The business is called “performance marketing” – it happens in catalogs, magazines, newspapers, television and radio too, but these days, internet is the most high-profile form. Illinois’ Act imposes no new taxes; rather, it defines any out-of-state merchant with a contractual relationship with an Illinois-based performance marketer as an Illinois merchant, obligated to collect use taxes on online sales, as long as the performance marketer’s link generates $10,000 a year in sales.
After the Illinois statute was enacted, the Performance Marketing Association filed suit in Cook County Circuit Court. The PMA alleged that the Act violated the dormant Commerce Clause by burdening interstate commerce and attempting to regulate commerce without a substantial nexus to the state. The PMA further claimed that the statute was preempted by the ITFA, which bars state statutes for a limiting time from singling out electronic commerce for special burdens. The Circuit Court granted PMA’s motion for summary judgment, holding that the statute was both a Commerce Clause violation and preempted. The appeal was directly to the Supreme Court.
Normally, one would have expected the plaintiff to have an uphill battle before the Court; over the past decade, the Illinois Supreme Court has been at least moderately hostile to constitutional claims (for any readers who aren’t lawyers – statutory preemption is technically a constitutional claim, since the reason a Federal statute trumps a state statute under the right conditions is the Federal Supremacy Clause). But it didn’t turn out that way; the Supreme Court affirmed the judgment, with Justice Anne M. Burke writing for the six-Justice majority.
The ITFA defines as a prohibited discriminatory tax any tax which impacts electronic merchants differently than similarly situated merchants in non-electronic goods, the Court noted. The plaintiff claimed that the Act was preempted because it was aimed solely at online performance marketers; there were no similar burdens placed on print or broadcast performance marketers. The defendant countered that Illinois law already placed comparable burdens on offline performance marketing, citing 35 ILCS 105/2(3), the definition section of the Use Tax Act.
The Court disagreed. Section 2(3) applies to performance marketers using advertising “which is disseminated primarily to consumers located in this State and only secondarily to bordering jurisdictions.” No burdens were placed on performance marketers whose ads were disseminated in Illinois as part of national or international distribution. But online performance marketers – whose ads are by definition visible worldwide – were required to collect use tax if they entered into contracts with Illinois-based advertisers. Thus, the Act had a differential impact on electronic commerce.
The defendant pointed to section 150.80(c)(2) of title 86 of the Administrative Code (86 Ill. Adm. Code 150.801(c)(2)), which requires out-of-state retailers with a relationship with an in-state representative soliciting or taking orders to collect use tax. Online performance marketing, defendant argued, is not pure advertising, but rather “active” solicitation of orders. Thus, the Act merely placed electronic performance marketers on the same basis as offline marketers. But once again, the Court disagreed. The online advertiser didn’t receive or transmit customer orders, process payments, deliver purchased products or provide customer services, the Court pointed out. Nor did it know the identity of internet users who click on the link, and after the user passes through the link to the retailer’s website, the referring advertiser has no further connection to the user. The Court concluded that this was not solicitation within the meaning of the regulation.
Ultimately, the matter was simple, the majority found. An electronic performance marketer with $10,000 in sales through the link was burdened, but a similarly situated print advertiser with the same volume of sales was not. Therefore, the Illinois Act was preempted by the ITFA. For that reason, the majority declined to address the Commerce Clause challenge.
Justice Lloyd A. Karmeier dissented. The Illinois Act was hardly unique, Justice Karmeier pointed out; Illinois’ statute was merely the local version of a bill enacted in at least half a dozen other states and modeled on a New York statute (which has recently been upheld against an ITFA challenge). Justice Karmeier had two procedural objections to the majority’s opinion. First, he pointed out that the case was before the Court under Supreme Court Rule 302 because the lower court had invalidated a statute; had preemption been the sole basis for the lower court’s ruling, the appeal would have been to the Appellate Court. Because the majority resolved the case on preemption grounds, declining to address the Commerce Clause challenge, Justice Karmeier argued that the opinion ultimately accomplished little. The Federal Act will expire, barring renewal, next November 1st. Since a preemption ruling merely suspends the operation of a law, rather than voiding it for all time, if the Federal Act is allowed to expire, the Illinois Act will immediately spring back to life, and the Commerce Clause challenge will begin all over again. Justice Karmeier argued that the Court should have addressed the constitutional challenge and held that because the Act only burdened businesses with a substantial nexus to Illinois, it was valid pursuant to the Commerce Clause. Justice Karmeier also concluded that the Act avoided preemption, arguing that it merely made it clear that the same obligation to collect use taxes imposed on offline entities with a substantial nexus to Illinois applied to similarly situated internet businesses.