Judge Strikes Down Affiliate Nexus Law in Illinois

In a blow to Illinois’ Main Street retailers, Cook County Circuit Judge Robert Lopez Cepero ruled Wednesday that a law requiring remote retailers with a broad network of online affiliates acting as sales agents in the state to collect and remit sales tax was unconstitutional.

Cepora found the law violated the Commerce Clause of the Constitution and was not enforceable under the federal Internet Tax Freedom Act, according to the Chicago Tribune [1]. It is expected that the Illinois Department of Revenue will appeal the decision.

American Booksellers Association CEO Oren Teicher said he has every confidence that the ruling will be reversed on appeal. “We respectfully disagree with Judge Cepero’s ruling. To date, two New York State courts have considered the exact same law and both courts upheld the affiliate nexus law as constitutional,” he explained. “As both New York courts found, the online affiliate business model is clearly a sales model, and, under the 1992 Quill vs. North Dakota Supreme Court decision, sales agents constitute nexus in the state. Without legislation to clarify the state’s sales tax laws, Illinois’s Main Street retailers will yet again be placed at an unfair disadvantage to out-of-state competitors, and the loss of sales tax revenue will be felt throughout the state’s economy.”

David Vite, president and CEO of the Illinois Retail Merchants Assocation (IRMA), told BTW: “This ruling, if it stands, will have an adverse impact on retailers, small business owners, and consumers who are already struggling in this tough economy. This legislation was overwhelmingly approved by the state legislature and signed into law by Gov. Quinn, finally injecting fairness to the marketplace. We fully expect that this decision will be appealed and that this law will ultimately be upheld. However, the legal ruling continues a long nationwide legal battle and reinforces the need for Congress to pass a national solution to avoid further confusion.”

The Illinois Department of Revenue, the defendant in the case brought by the Performance Marketing Association, is reviewing its appeal options with the attorney general’s office. “We need to protect ‘brick and mortar’ stores from an unlevel playing field, and we need to recoup some of the estimated $153 million that was not paid by online merchants prior to the law being implemented,” the Department of Revenue said in a statement. “The law was a bipartisan initiative that passed both houses of the General Assembly with overwhelming support.”

The Judge’s decision also noted that the Illinois affiliate nexus law conflicted with the Internet Tax Freedom  Act [2]. The law, which was signed into law by President Clinton in 1998, and then amended and extended through 2014 by President George Bush, places a moratorium on taxing access to the Internet and taxes that would discriminate against online businesses.