Illinois "Amazon Tax" Ruled Unconstitutional

April 26, 2012

Yesterday, Illinois circuit court judge Robert Lopez Cepero ruled that Illinois's affiliate click-through nexus law, passed last year, violates the U.S. Constitution's Commerce Clause and conflicts with the federal Internet Tax Freedom Act. The decision was a relatively fast one:

The quick decision Wednesday was unexpected, even to officials of the Performance Marketing Association, said Rebecca Madigan, the association's executive director.

"The judge pointed out and agreed with us that the state overreached its boundaries in trying to regulate interstate commerce," Madigan said. "We ... believe it paves the way for Internet marketing affiliates to get back in business in Illinois."[...]

Revenue officials claimed that the law would raise $150 million a year in revenue, but the immediate effect was several Internet-based businesses fleeing to Indiana and Wisconsin so as to not be cut off from commissions. The Illinois law, like a few others, require out-of-state retailers that have contracts with in-state "affiliates"-independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business-to collect the state's sales tax.

In 2010, we issued a report identifying the trend and demonstrating that states were abandoning "first-generation" version of these taxes, since they failed to produce any revenue and led to extended and unresolved litigation. The "second-generation" versions of these taxes, emphasizing mandatory disclosure of use tax obligations to consumers, are also enmeshed in litigation, with one version struck down in North Carolina on First Amendment grounds. We spoke too soon: Illinois's version is (was?) one of those a traditional first-generation "Amazon" tax that targets affiliates.

Contrary to the claims of supporters, Amazon taxes do not provide easy revenue. In fact, the nation's first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.

Enacting an Amazon tax law also sends a signal of hostility to businesses engaged in interstate commerce, runs the serious risk of retaliation from other states and from affected businesses, and undermines efforts to improve the uniformity of state sales taxes. The judge is correct in finding the law to be unconstitutional.

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