Illinois ruled last Friday against sales tax specifically designed to target out-of-state sellers using affiliate links for marketing. The case was brought to the Illinois Supreme Court by Performance Marketing Association, Inc., a group that focuses on internet marketing. The Illinois court ruled that the Illinois internet sales tax law, not to be confused with the national Marketplace Fairness Act in Congress now, was invalidated by a federal law called the Internet Tax Freedom Act. This is the second instance of a high court weighing in on a law that specifically targets affiliate marketing.
The highest courts in New York weighed in recently on the issue, concluding that affiliate marketing is enough to create nexus for sales tax. Amazon, a major player in this business model, asked the United States Supreme Court to examine the case. Now that a second state has issued an opinion, it’s even more likely that the U.S. Supreme Court will hear arguments about the affiliate marketing nexus issue in sales tax, especially if Illinois decides to file with the U.S. Supreme Court to try to win their case. The Internet Tax Freedom Act was signed into law by President Bill Clinton in 1998 and is meant to prevent federal, state, and local laws that would inhibit the commercial, educational, and informational value of the Internet.
According to federal law, no government can institute legislation that creates an internet-only tax, taxes internet access services, or doubles up on taxes on e-commerce. Illinois concluded that the state law creating nexus through affiliate advertising for sales tax is preempted by the Internet Tax Freedom Act and isn’t a valid law. What does this mean? Businesses that use affiliate marketing in Illinois can start up again and affiliates in Illinois can again post affiliate links. In a larger sense, however, there’s the potential that this will open up pathways for affiliate nexus in sales tax to reach the U.S. Supreme Court in more than one way. When the Supreme Court Justices are called upon to issue an opinion on multiple cases that surround the same issue, they’re more likely to hear and issue an opinion on the problem. This could be more step closer to a final decision to unify sales tax affiliate nexus across the country.
