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Illinois Court Strikes Down Internet Sales Tax Bill

by Nan Swift / /

It’s not often that one hears good news for taxpayers coming from Illinois. Today is an exception, when the state’s Supreme Court ruled 6 to 1 that the 2011 Main Street Fairness Act was unconstitutional.  The opinion is available here.

For anyone unfamiliar with the story unfolding in Illinois, our friends at the Illinois Public Policy Institute summed up the legislation this way:

In 2011, Illinois Gov. Pat Quinn signed the Main Street Fairness Act that required out-of-state online retailers such as Amazon.com to collect and remit sales taxes on purchases destined for Illinois if the online retailer had arrangements with Illinois-based marketing affiliates. These are typically coupon or deal websites, whose operators earn commissions for driving shopping traffic to an online retailer.

To avoid triggering the sales tax, out-of-state online retailers simply dropped their Illinois marketing affiliates, driving thousands of Internet startup entrepreneurs, many in Chicagoland, either out of business or out of state, some never to return again.

… Quinn’s online sales tax stopped this emerging sector in its tracks. The small, up-and-coming Internet entrepreneurs got hammered by their own Illinois government. Overnight, the state became less competitive in e-commerce, the future of business, communications and entertainment.

Be sure to read the whole thing here.

The immediate drop in online commerce and entrepreneurship is just one of the many negative consequences NTU and our allies fear should the federal Marketplace “Fairness” Act or other internet sales tax schemes move forward. If states are truly the laboratories of democracy, it’s safe to say that this is one experiment other states shouldn’t try.

Today’s opinion illustrates just how far from “fair” the internet sales tax gambit really is. Proponents of the legislation at the state and federal levels repeatedly argue that the government needs to “level the playing field” between brick-and-mortar and online retailers. But as the Court explains, such laws have the effect of creating even more, unconstitutional disparities, in this case, between online and traditional offline advertisers.

The Tax Foundation explains further:

… the law is broad enough that it could be read to sweep all paid-per-click advertising activity. So if you pay for advertising by the view, you have no obligation, but if you pay for advertising by the sale (performance marketing), you do.

Most of the legal challenges to these laws have focused on whether the state power exceeds constitutional limits under the Commerce Clause, but the Illinois Supreme Court focused on this disparity between Internet advertisers and traditional advertisers. Ultimately, the court concluded that because the law requires Internet-based performance marketers to collect tax, but does not require that of traditional performance marketers, it is a discriminatory tax on Internet-based commerce in violation of the federal Internet Tax Freedom Act…

NTU has long pointed out that bills like S.743 or H.R. 684 would be better titled the Marketplace Un-Fairness Act. Burdening online retailers, many of them small businesses, with even more regulations and compliance hurdles than brick-and-mortar stores isn’t leveling the playing field – it’s using the government to drive your competitors out of business.

Luckily, as the Illinois Supreme Court upheld today, these kinds of discriminatory shenanigans are unconstitutional. Let’s hope that legislators in Washington are paying attention.

Click here to learn more about this issue.

Click here to tell your Representative and Senators to oppose unconstitutional internet sales tax schemes.