Performance Mktg. Ass'n, Inc. v. Hamer
Annotate this CaseThe ability of consumers to make purchases on the internet from out-of-state merchants without paying Illinois sales or use taxes caused Illinois retailers to ask the legislature to “level the playing field.” The result was a taxing statute, Public Act 96-1544, effective in 2011, called the “click-through” nexus law. The law was challenged by a group of internet publishers that display website texts or images, such as a retailer’s logo, containing a link to a retailer’s website; they are compensated by the retailer when a consumer clicks on the link and makes a purchase from the retailer. Out-of-state retailers who use such arrangements to generate sales of over $10,000 per year become subject to taxation under the statute. Their challenge was based on the federal Internet Tax Freedom Act, 47 U.S.C. 151, which prohibits discriminatory taxes on electronic transactions, and the commerce clause of the U.S. Constitution. The Illinois Supreme Court held that the statute is invalid. The court noted that such marketing, when conducted through print media or on-the-air broadcasting, does not give rise to tax obligations under the Illinois statute. The enactment is a discriminatory tax on electronic commerce within the meaning of federal law, which preempts it. The court did not reach the commerce clause issue.
Court Description:
The ability of consumers to make purchases on the internet from out-of-state merchants without paying sales or use taxes to the State of Illinois caused Illinois retailers, large and small, to ask the state legislature to “level the playing field.” The result was a taxing statute that became effective in 2011 and which has been called the “click-through” nexus law.
The plaintiff in this case is a trade group whose activities are impacted by this statute. “Performance marketing” refers to programs in which the display of advertising is paid for when a specific action, such as a sale, is completed. The clicking and the making of a sale can be tracked by means of codes. In an internet transaction, the publisher of an advertisement, or so-called “internet affiliate,” displays on its website texts or images, such as a retailer’s logo, containing a link to a retailer’s website and then is compensated by the retailer when a consumer clicks on the link and makes a purchase from the retailer. Out-of-state retailers who use such arrangements to generate sales of over $10,000 per year become subject to taxation under this statute.
On the federal level, discriminatory taxes on electronic commerce have been prohibited by the Internet Tax Freedom Act. This, and the commerce clause of the United States Constitution, are the basis of a challenge brought to the Illinois statute by the trade group, Performance Marketing Association, Inc., in the circuit court of Cook County. Plaintiff obtained an invalidation of this Illinois statute from the circuit court in its action for declaratory and injunctive relief.
In this decision, the Illinois Supreme Court agreed that the challenged statute is invalid. The court noted that “performance marketing,” when engaged in through print media or on-the-air broadcasting, does not give rise to tax obligations under the Illinois statute. This enactment is therefore a discriminatory tax on electronic commerce within the meaning of federal law, which preempts it. The Illinois Supreme Court did not reach the commerce clause issue. The circuit court was upheld.
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