By Jacob Heubert -
Last October, the Illinois Supreme Court struck down the state’s “Amazon tax,” a state law that would have forced many online retailers to pay Illinois taxes regardless of whether they had any physical presence in the state. Now, despite this ruling, some legislators are trying to bring back this tax.
The “Amazon tax” required Amazon and any other online retailer with affiliates in Illinois to collect a “use tax” for all sales to Illinois customers.
Amazon and many other e-commerce websites have affiliate programs, which allow participants to put links to the retailer’s website on their own websites and receive a cut of any sales made to customers who follow the affiliate’s links.
Fortunately, the Illinois Supreme Court struck the law down under the U.S. Constitution’s Supremacy Clause, which prohibits states from passing laws that conflict with federal law. Illinois’ affiliate tax fell because it directly conflicted with the Internet Tax Freedom Act, a federal law that prohibits discrimination against electronic commerce. The Amazon tax was discriminatory because it didn’t apply the same tax to companies with affiliate (or “performance marketing”) programs that involved print or broadcast media rather than online sales.
But now there’s a bill before in the General Assembly, Senate Bill 352, which tries to “fix” that problem by imposing sales taxes on both online retailers and other out-of-state retailers with similar programs that use coupons or promotional codes distributed by mail, radio or television.
If the state does bring the tax back, the courts should strike it down again, this time for violating the Commerce Clause of the U.S. Constitution.
Under the Commerce Clause, a state cannot collect sales taxes from a business unless there is a “substantial nexus” between the business’ activity and the state. Under U.S. Supreme Court precedent, there is no substantial nexus between a state and a seller that does not have a physical presence in that state.
Many retailers affected by the Amazon tax, including Amazon, have no physical presence in Illinois and therefore cannot constitutionally be subject to the tax.
The new Amazon tax bill tries to get around the Commerce Clause problem by stating that there is a “presumption” that any online retailer with affiliates in the state has a physical presence in the state, which the retailer can rebut by “submitting proof” that its Illinois affiliates’ activities during the past year “were not sufficient to meet the nexus standards of the United States Constitution.”
But that move should not save the tax from being struck down again. The state cannot get around the Constitution by passing a law that is plainly unconstitutional with respect to most of the businesses affected by it and then let individual businesses get out from under it by proving – at their own expense, on a case-by-case basis – that it violates the Constitution with respect to them.
Legislators who have any respect for the Constitution wouldn’t even try it.
And legislators who had any concern for their state’s economic well-being wouldn’t try to revive this tax. The first time around, it destroyed jobs and forced affiliate marketers to either shut down or flee to other states. For example, Overstock.com and Amazon ended relationships with their Illinois-based marketing affiliates; Chicago-based CouponCabin moved to Indiana; and FatWallet.com, which had been headquartered near Rockford for three years, skipped the border to Wisconsin.
The General Assembly should stop doing more unnecessary economic damage this state can’t afford, avoid another needless court battle, and permanently abolish the Amazon tax.
- Jacob Huebert is Senior Attorney at Liberty Justice Center