As more and more commerce goes online, states have struggled with how to tax transactions that are not entirely within their borders. Under the U.S. Supreme Court’s decision in Quill Corp. v. N.D., 504 U.S. 298 (U.S. 1992) and other cases, a physical presence is required before a state may exercise tax jurisdiction over out-of-state taxpayers.
Beginning July 1, 2011, Illinois required an out-of-state retailer to collect use tax on all of its sales to Illinois residents if it (i) had a contract with an Illinois person who referred potential customers for the sale of tangible personal property for a commission via a link on the person’s website and (ii) the retailer made more than $10,000 through such Illinois referrals during the preceding four calendar quarters. Several other states, including New York, California, Rhode Island, Georgia, Arkansas, Connecticut, Vermont and North Carolina have enacted similar laws.
An Illinois court in Performance Marketing Association, Inc. v. Hamer (No. 2011 CH 26333, Ill. Cir. Ct. Cook Cty. 5/7/12)) ruled that this Illinois tax was unconstitutional because:
- The Illinois “click-through” nexus statute violates the Commerce Clause of the United States Constitution because the activity described in the statute does not establish nexus within the state; and
- Illinois acted prematurely in adopting the law because of the federal moratorium against discriminatory taxes on electronic commerce under the Internet Tax Freedom Act (ITFA), which is currently effective until November 1, 2014.
In California, Amazon has around 10,000 affiliates who are paid a commission for web-based links. Like Illinois, California wants to collect sales taxes because of the existence of these California-based affiliates. But, Amazon struck a deal with California lawmakers that will give it until September 2012 before collecting sales tax on California purchases. Amazon is seeking a federal solution that will prevent numerous state laws from each imposing their own solution.