Illinois Supreme Court Holds Click-Through Nexus Statute Preempted By Internet Tax Freedom Act

On October 18, 2013, the Illinois Supreme Court affirmed a circuit court holding that Illinois' click-through nexus law is preempted under the Supremacy Clause of the U.S. Constitution due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the Internet Tax Freedom Act ("ITFA").1 The decision upheld the circuit court's granting of summary judgment in the underlying case.2

Background

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

History of Underlying Case

On June 1, 2011, the Performance Marketing Association ("PMA"), a not-for-profit trade association representing the performance marketing industry, filed a lawsuit against the Illinois Department of Revenue in U.S. District Court.4 Soon thereafter, the PMA dismissed the federal lawsuit and filed a new petition in Illinois circuit court on July 27, 2011.5 The PMA claimed that the Act was unlawful on three grounds: (i) the Act violates the Commerce Clause of the U.S. Constitution by imposing a tax on retailers that have no business location, property, employee, or other physical presence in Illinois;6 (ii) the Act violates the Commerce Clause as unduly burdensome to interstate commerce; and (iii) the Act is preempted by the ITFA, which contains a prohibition against a state imposing a "discriminatory tax" on "electronic commerce."

The PMA and the Department each filed cross-motions for summary judgment. The circuit court granted PMA's motion for summary judgment, holding that the Act violated the substantial nexus requirement of the Commerce Clause and was expressly preempted by the ITFA.7 The circuit court did not provide a detailed legal analysis for the decision and did not reach the merits of the PMA's claim that the Act was a burden on interstate commerce. Also, the circuit court noted that the decision was directly appealable to the Illinois Supreme Court because the holding invalidated a state statute.8

The Department subsequently appealed the decision to the Illinois Supreme Court.

Illinois Supreme Court Affirms Summary Judgment

In affirming the circuit court's decision, the Illinois Supreme Court first addressed the issue of whether the Act is preempted by the ITFA pursuant to the Supremacy Clause.9 The PMA argued that the Act was expressly preempted by the prohibition of any discriminatory tax on electronic commerce contained in the ITFA.10 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.11 The PMA argued that the Act expanded the definition of retailer and servicemen to require out-of-state Internet retailers entering into affiliate agreements with Illinois parties to unfairly collect sales...