The Marketplace Fairness Act Would Grant States the Authority Regarding Online Sales Tax.

The Marketplace Fairness Act would require remote sellers, including online businesses, with gross receipts over $1 million, to collect sales tax in qualifying states — even in states where a business has no physical presence. This case, Performance Marketing, Inc. v Brian Hamer (IL 114496), was brought to the Illinois Supreme Court prior to Congressional approval of the Marketplace Fairness Act, which aims to level the playing field between online retailers and brick-and-mortar businesses.

At the end of October the Illinois Supreme Court issued its ruling in the case Performance Marketing, Inc. v Brian Hamer (IL 114496). The case concerned a complaint seeking declaratory and injunctive relief in which Performance Marketing claimed that specific portions of the Illinois Public Act 96-1544 were preempted by federal law and violated the commerce clause of the US Constitution.

Performance Marketing Association, Inc., filed a complaint seeking declaratory and injunctive relief against the defendant, Brian Hamer, in his capacity as Director of the Illinois Department of Revenue. Plaintiff alleged that portions of Public Act 96-1544, a so-called “click-through” nexus law, were preempted by federal law and violated the commerce clause of the United States Constitution.

Illinois sales tax has two parts; the occupation tax which taxes the sale of tangible personal property and the second, use tax. Use tax prevents people from making out-of-state purchases to avoid paying the retailers’ occupation tax. The rates for these taxes are identical. While the responsibility for paying use tax is on the consumer or purchaser, it is difficult to collect tax from individual buyers so collection is imposed on the out-of-state retailer “maintaining a place of business in this State” 35 ILCS 105/2, 3-45 (West 2010).

In 2011, Public Act 96-1544 (eff. Mar. 10, 2011) amended the definition of a retailer or serviceman maintaining a place of business in this state to include any retailer/serviceman having a contract with a person located in this State. This meant that they were required to collect tax if they had a contract with any person in Illinois that displayed a link that connected an Internet user to the remote out-of-state web site (also called affiliates). The Act did not make any distinction that sales had to be made to Illinois residents or that the computer server hosting the Illinois affiliate had to be physically located in Illinois. The Act did limit the definition to referral contracts that generated more than $10,000 per year.

The marketing term for the relationship is performance marketing. This is defined as marketing or advertising where a person or organization that displays an advertisement for a retailer is paid when a sale is completed allowing the retailer to track the success of the campaign. This type of advertising is used in print and broadcast media as well as the Internet.

The plaintiff in this case claimed that the definitions in the Act were unconstitutional because they authorized the collection of use tax for activities that that did not primarily occur within the State. The plaintiff also claimed that the Act preempted the Internet Freedom Act, which prohibits discriminatory taxes on electronic commerce. The specific portions required online retailers such as Amazon to collect sales tax if they have in-state web affiliates while it did not require broadcasters and print advertisers with similar performance based marketing contracts to collect use taxes. The plaintiff claimed that the Act, by only targeting on-line Internet electronic commerce, was in fact discriminatory and the court agreed.

More than a dozen states have passed laws requiring online commerce companies to collect state sales tax under a variety of different circumstances. Most states require their residents to pay state tax on all purchases but many customers under-report their tax liability for on-line purchases. While the matter has been decided in Illinois, it is likely that this case, or a similar case in a different state, will wind up being heard by the U.S. Supreme Court.