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Illinois Supreme Court Rejects 'Amazon Tax'

by Leroy Baker,, New York

25 October 2013

With, as yet, no agreement in the United States Congress on the Marketplace Fairness Act (MFA), which would legalize state taxation of online retail sales, the Illinois Supreme Court has created greater confusion by being the first to reject a so-called "Amazon tax," in contrast to the stance taken previously by other courts, for example in New York.

While, under a 1992 "pre-internet sales boom" US Supreme Court ruling, known as the "Quill" decision, retailers are only required to collect sales tax in states where they also have bricks-and-mortar stores, the MFA would give a state the option to require online retailers with national annual sales greater than USD1m to collect the tax, even if the websites lack that physical "nexus" in the state.

The US Supreme had also decided in 1992 that only Congress has the authority to regulate interstate commerce under the Commerce Clause of the US Constitution. In that case, while many states have already responded to the Quill decision by introducing their own online sales tax laws, and have even concluded agreements with selected businesses, particularly with, to collect sales taxes on internet purchases, it is still believed that only Congressional action will make such laws and agreements effective.

That consideration also appears to underlie the decision taken by the Illinois Supreme Court to throw out the version of the MFA passed by Illinois in 2011, which, as in other states that had passed a similar law, attempted to expand the meaning of a seller's physical nexus to include that of its affiliate companies (that attract buyers by a link to the retailers' websites in exchange for a commission out of each sale) – the so-called "click-through" nexus.

Within its decision in Performance Marketing Association Inc. v. Brian Hamer , Director of Revenue 2013 IL 114853, the Illinois Supreme Court decided, by a majority of 6-1, that the law's provisions, which had resulted in some internet retailers, including Amazon, cutting their ties with affiliates in Illinois, were preempted by "the supreme" US federal law. "State law is null and void," it concluded, "if it conflicts with federal law."

Given the disparity of judgments between state courts, and if Congress continues to fail to take federal action on online sales tax, it is now generally felt that the litigation between state governments and online retailers will be presented, sooner or later, before the US Supreme Court.

However, it is also likely that the latter may not be able to accept a representative case if the problem is considered to remain a constitutional issue, subject to the Commerce Clause, and that Congress will have to remain as the final arbiter on the issue.

TAGS: court | compliance | tax | business | sales tax | tax compliance | commerce | law | agreements | internet | e-commerce | United States | retail

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