Finally, some good news for affiliates: On Friday, The Illinois Supreme Court struck down a state law that required online retailers, such as Amazon, to collect sales tax if they have affiliates in the state. This law, which has been called the “Amazon Tax” or “Mainstreet Fairness Bill” redefined the state’s definition relationships between out-of-state retailers and in-state performance marketing affiliates. The law claimed that a physical presence (or “nexus”) was created when retailers worked with affiliates who lived in Illinois and therefore required retailers to collect Illinois state sales tax.
The Supreme Court’s decision ruled that this law was unconstitutional as advertising via affiliates does not give rise to tax obligations and is therefore a discriminatory tax on Internet commerce. Discriminatory taxes on Internet commerce are prohibited by the Internet Tax Freedom Act, which is a federal law.
While supporters of the law claimed that it helped level the playing field between online merchants and brick-and-mortar retailers as both would be required to collect a user tax, the opposite actually occurred. Instead, many online retailers opted to just dissolve relationships rather than collect this tax, drastically impacting affiliates based in Illinois.
Rebecca Madigan, Executive Director of the Performance Marketing Association, explained in a blog post that “This was a lose-lose situation for the state. The state collected no new use tax revenue from those retailers that terminated their relationships with local Illinois affiliates, and the affiliates themselves lost millions of dollars in advertising revenue. That means less income tax revenue for the state and fewer jobs for the people of Illinois. Proponents of the nexus tax would have you believe that they have small business interests at heart, but the truth is, the nexus tax law hurt small businesses and unfairly discriminated against one of the fastest growing market segments in the nation.”
In 2011, the Performance Marketing Association filed a lawsuit against the Illinois Department of Revenue, challenging the constitutionality of this law. With its decision on Friday, the court agreed with the PMA’s challenge. In its blog post, the PMA explains that that “Illinois-based affiliates numbered at least 9,000 and in 2010 generated $744 million in advertising revenue. When the law took effect in 2011, those affiliates experienced economic devastation when out-of-state retailers, wanting to avoid sales tax collection obligations, simply terminate their relationships with affiliates. In fact, the PMA estimates about 1/3 left the state, 1/3 downsized, and 1/3 went out of business.”
However, the PMA is now optimistic about the effect of Friday’s ruling. Madigan wrote that “We are ecstatic! We are now looking forward to those 9,000 affiliate marketers getting back in business in Illinois. About 1,000 out-of-state merchants can now reinstate their advertising agreements with Illinois-based affiliate marketers, without threat of getting trapped with nexus.”
Companies are also looking forward to working with affiliates again in Illinois.
“We’re digesting the court’s decision, and if it feels like a final-final, we’d like to take advantage again of the good affiliate markets in Illinois,” says Jon Johnson, executive vice chairman of Overstock. “Affiliate marketing is a great way to market.”
Amazon added in a prepared statement that it was “excited to soon re-open our Associates [affiliates] program in Illinois.”
Madigan hopes that this ruling sets precedent for other laws around the country. As she says, “12 other states [have] passed similar laws, devastating over 90,000 small businesses around the country. We hope this decision helps other states avoid this kind of costly litigation and the damage to a thriving small business sector.”
Are you an affiliate that has been impacted by a nexus tax? Let us know what your thoughts are about The Illinois Supreme Court’s decision in the comments.