Illinois Court Rules Affiliate Nexus Tax Law Is Unconstitutional

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.

Kelly Clay
https://plus.google.com/105140389465525161529?rel=author

Kelly Clay is HasOffers' Digital Communications Strategist. In addition to writing about emerging news and trends in the performance marketing industry, she is a columnist for Forbes, covering the intersection of technology and society. She can be can also be found on Facebook, Twitter, or her personal blog... and usually with a cup of coffee in hand, too.

  • Dave Thomas

    It would be nice if this ruling triggers other states (especially California) to strike down their similar laws.

    • Kelly Clay

      Agreed!

  • Joe Tobiasz

    Being a resident of the State of Illinois, I was extremely upset with the law makers here when they passed the Mainstreet Fairness Bill. I didn’t blame Amazon for pulling out of Illinois in respect to their Affiliate Program. My thoughts were that because of bad State management, the State government will try to do anything is its power to subject taxes unfairly upon anyone or any business, because of past failures in managing large amounts of money, which have lead to huge deficits that lead to desperate measures. Sometime these desperate measures are performed without any regard to what will happen to our economy in the near future. To many politicians think for now and disregard what the future will bring. Did they actually know that affiliate marketing online is a small business? I only have thoughts that because these politicians have never been in online Affiliate Programs, there was complete ignorance of the subject and no thought was given to the tens of thousands of Affiliate Marketers whose income was closed instantly without much notice. I could go on and on, but I will end it here. I’m just glad that the Illinois High Court ruled the unjust Bill unconstitutional. Give me back my AMAZON!

    Joe Tobiasz, Soon to be an Amazon Affiliate again!

    Mainstreet Fairness Bill
    Mainstreet Fairness Bill
    Mainstreet Fairness Bill

  • Scott

    Sounds too good to be true! Amazon’s affiliate program offers much to the affiliate marketer, I had a lot of money invested in tools, hosting, advertising only to be dropped like a hot potatoe.

    If I were a company like Overstock or Amazon I wouldn’t be too excited about reinstating affiliates simply because of the nature of the beast they are dealing with…… politicians.

    The state is broke….. it’s broker than broke and it won’t be long before they take another stab at getting a piece of internet sales.

    The whole country is in a whole so deep there is no way out, I don’t know how the Fed’s will be able to continue to leave internet sales alone …..at least to the the degree that they have.

    Nevertheless, I’m anxious to be reinstated Mr. AMazon :)

  • Rich

    I don’t avoid brick-and-mortar because of price, so the playing field was never uneven in the regard for me. I avoid going into a store because I am bothered at the checkout to purchase insurance, or at a grocery store to try the “Pick of the Week”. I could have a full beard and they still try to get me to purchase razors. Yes websites do it, but I don’t feel bad ignoring the upsell. I do have an issue with having to ask “Are you serious?” to a poor clerk making minimum wage.

    The larger brick-and-mortar stores need to realize their service is what drove people like me away, not a cheaper price due to a tax loophole. Big stores are just too loud, annoying, and pushy for me to give them my business.

  • carolyn collins

    Oh happy Day. Illinois court is on the ball. Let’s hope the others follow suit.