October 23, 2013

Illinois Supreme Court rules against ‘Amazon tax’


Illinois: fighting the evil of sales tax with with a rock and a sunburst and an eagle and some pointy grass.

In a landmark — but probably ineffectual— decision, last week the Illinois Supreme Court struck down the Main Street Fairness Act, which requires out-of-state retailers to collect sales tax on annual sales of more than $10,000 through in-state affiliates. The court ruled that the law conflicted with a federal law, the Internet Tax Freedom Act, which prohibits states from imposing “discriminatory taxes on electronic commerce.”

Thirteen other states already have laws like this on the books, with West Virginia starting to collect sales tax just last month, but Illinois is the first of these states to reverse its position. The act argued that affiliates based in Illinois, who receive a percentage of any sales generated by customers who clicked through to Amazon or other online retailers, constituted a “nexus” — essentially, a physical presence, and a physical presence that mandated the collection of a sales tax. When the act went through in 2011, there was considerable fall-out. From a Crain’s Chicago Business article by Paul Merrion:

About 1,000 out-of-state retailers quickly severed their affiliations with about 9,000 Illinois-based Web marketers after the tax was enacted, according to Rebecca Madigan, executive director of Performance Marketing Association Inc., a Los Angeles-based trade group for affiliated marketers, which led the legal battle against the Illinois tax.

About a third fled the state, she said, including prominent Web marketers such as Coupon Cabin and Fat Wallet. Another third went out of business.

However, it’s unlikely that these businesses will return to the state, no matter what the status of the sales tax provisions: for one thing, the Internet Tax Freedom Act is due to expire next fall, which makes retailers’ fantasy of a newly tax-unencumbered Illinois slightly moot.

And more fundamentally, the question of how to reconcile taxation and online businesses is not one that’s going away. In a recent article for Reuters, Patrick Temple-West reviewed the state of these discussions in both Illinois and New York, which is in the midst of instituting a law similar to the Main Street Fairness Act. Because individual states are coming to distinctly different answers about how to proceed on this issue, and how state and federal law should coincide, it may be that this is ultimately headed for the U.S Supreme Court:

Different decisions in different states improve the odds that the Supreme Court will tackle this issues, said Stephen Kranz, a partner at law firm McDermott Will & Emery.

“There will continue to be additional litigation at the state level exacerbating the problem,” Kranz said. “That is clear and should be a factor considered by the court in deciding whether to take the New York or Illinois case.”

The Supreme Court accepts only a small portion of the thousands of petitions it gets each year, but it is often more inclined to step in when lower courts disagree.

Some Illinoians feel the same way. For instance,

Friday’s Illinois ruling “underscores the need” for Capitol Hill action, said David Vite of the Illinois Retail Merchants Association.

“Brick-and-mortar businesses, which pay property taxes, and income taxes, and are hiring people, are at a significant competitive disadvantage with their remote-selling counterparts,” Vite told The Associated Press. “It’s time for the federal government to clarify and finish putting retailers, who are making payroll and putting people to work, on equal footing.”

Indeed, the whole rationale behind giving online retailers tax breaks of any kind has now, at long last, come into high relief: why do it? They don’t need it. The Internet doesn’t need any handholding to make it a viable place for commerce. 1998, when the Internet Tax Freedom Act was originally passed, is long, long gone.

It’s purely the power of retailers like Amazon (the biggest, meanest gun in the room), Overstock.com, and others that’s keeping these protections in place, along with the system of state control over sales tax.

And perhaps, the Illinois ruling can be seen as a bellwether on this front: if one state reverses itself on this issue, then the necessity for a national solution may become increasingly obvious: for online business owners alone, changing standards cause havoc. As the Marketplace Fairness Act, which would allow states to require that online retailers collect tax, wends its way through the House, brick-and-mortar stores in Illinois and elsewhere are no doubt hoping that lawmakers will wake up, look at the disproportionate advantages online retailers are taking full advantage of, and make the decision to pursue a different and more equitable direction.



Sal Robinson is a former Melville House editor. She's also the co-founder of the Bridge Series, a reading series focused on translation.