Cook County Circuit Judge Strikes Down Illinois' "Amazon" Tax Statute
Illinois' so-called "Amazon" tax, which was intended to require certain Internet retailers to collect and remit state sales tax when making sales to Illinois residents, is unconstitutional, a Cook County Circuit judge ruled Wednesday, April 25.
Judge Robert Lopez Cepero granted summary judgment to the Performance Marketing Association (the "PMA"), a trade association, on the grounds that the Illinois statute violates the Commerce Clause of the U.S. Constitution and conflicts with the Federal Internet Freedom Tax Act, which bars certain Internet-related taxes. Judge Cepero is expected to issue a written order consistent with his bench ruling in the next few days. The Illinois Department of Revenue, the defendant in the case, told the Chicago Tribune it was considering an appeal.
Illinois' Amazon tax law, which became effective July 1, 2011, amended the definition of a "retailer maintaining a place of business" in Illinois to include any retailer that
- has a contract with an Illinois publisher, pursuant to which the publisher publishes advertisements on its Web site that link Internet visitors to the retailer's Web site in exchange for compensation based on sales made to customers by the retailer through the Illinois publisher's referrals, and
- earns at least $10,000 in gross receipts from such sales during a one-year period.
Under Illinois law, any retailer maintaining a place of business in Illinois is required to collect and remit state sales tax on sales to Illinois residents, register with the state Department of Revenue and file sales tax returns. Thus, Illinois' Amazon tax effectively required even out-of-state retailers with no physical presence in Illinois to collect and remit state sales tax, register with the Department of Revenue and file sales tax returns if they made sufficient sales to Illinois residents through in-state affiliates. Before the law became effective, online retailers were only required to collect and remit sales tax on purchases by Illinois residents if the retailer had a "physical presence" (e.g., a headquarters, retail store or one or more salespersons) in Illinois.
Illinois is one of a number of states that have passed so-called Amazon tax laws in recent years. Proponents of the laws argue that they prevent residents from avoiding state sales and use tax obligations on their Internet purchases and help level the playing field between brick-and-mortar retailers, which cannot avoid collecting sales tax, and online-only retailers, which often can avoid such obligations. But opponents of the laws argue that they impose unconstitutionally burdensome sales tax collection, registration, and filing obligations on retailers with little or no connection to the taxing state.
Amazon.com, the nation's largest online-only retailer and the perceived target of the Illinois statute, responded to the law by severing its relationships with its Illinois affiliates. Several Illinois affiliates, meanwhile, such as CouponCabin.com and FatWallet.com, relocated to nearby Indiana and Wisconsin to avoid termination of their contracts with Amazon.com and other online retailers.
In its complaint, the PMA argued that the Illinois statute unduly burdened interstate commerce by requiring out-of-state retailers with no physical presence in Illinois to comply with the state's sales tax laws. The PMA also argued that the Illinois law improperly regulated interstate commerce occurring outside the state's borders. Finally, the PMA argued that the Illinois law conflicted with the Federal Internet Tax Freedom Act by imposing a discriminatory tax on Internet commerce. A copy of the PMA's complaint is available on their Web site (last visited April 26, 2012). In his ruling, Judge Cepero agreed with the PMA that the Illinois Amazon tax law violated the Commerce Clause and conflicted with the Federal Internet Tax Freedom Act.
Although the PMA welcomed the decision, Judge Cepero's ruling is unlikely to be the final word on the Illinois Amazon tax. As noted above, the Illinois Department of Revenue said it is reviewing its appeal options, and David Kite, the president of the Illinois Retail Merchants Association, which supports the law, told the Chicago Tribune that the decision was merely the first step in a long battle over the constitutionality of the law.
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