Affiliate Nexus Taxes: Still Unconstitutional

Good news today out of the Land of Lincoln. Cook County Judge Robert Lopez Cepero ruled Illinois’ affiliate nexus tax, or Amazon tax in layman’s terms, unconstitutional and struck the law in its entirety. This is a great, if not wholly unexpected, win for Illinois taxpayers and sets precedent that other states would be wise to follow when considering such schemes.

For background, following the 1992 U.S. Supreme Court decision in Quill v. North Dakota, all businesses have followed a common set of rules. In order for a state to subject a business to its tax laws, that business must be physically located in the state. This “physical presence” test protects taxpayers from rogue state tax collectors and prevents businesses from shouldering the heavy burden of complying with the rules of thousands of different taxing jurisdictions nationwide.

Affiliate nexus schemes attempt to undermine this standard by creating a false physical presence by linking out-of-state retailers, such as, to in-state websites who advertise for the retailer. Such schemes are constitutionally dubious as they clearly violate the intent of the 1992 ruling and create onerous barriers to interstate commerce.

That simple principle is at the heart of today’s Illinois ruling. The circuit court judge ruled the statute facially unconstitutional and held the state law violated the federal Internet Tax Freedom Act, which prohibits states from unfairly targeting online activity for tax purposes.

Of course, as stated above, none of this should come as new information. In fact, this is what NTU wrote to Governor Quinn during last year’s debate;

States that have attempted to prey upon online retailers beyond their borders through the  “affiliate nexus” route have not raised the desired revenues. In fact, North Carolina officials report that they are not keeping track of collections from their tax scheme. Additionally, Rhode Island’s tax administrators say that their treasury has actually lost revenues following enactment of the tax. What these policies have done is impose high costs on the states through litigation and lost business activity. Both North Carolina and New York have been sued over this issue and the litigation continues to this day. Several major online retailers have also terminated their affiliates programs in Colorado and Rhode Island due to those states’ sales and use tax-reporting requirements for online transactions. If Illinois enacts an affiliate nexus tax, the state’s more than 9,000 affiliates, who earned $611 million and paid $18 million in state income tax in 2009, will suffer the same fate; and have already notified their Illinois affiliates of their intention to terminate the program because of this measure.

I would love for NTU to claim some sort of prescient knowledge that Amazon and Overstock would cancel their affiliate contracts, that companies (notably would move out of state, that the law would fail to raise the promised revenue, and that the state would be subject to a successful court challenge. However, the reality is that this information is basic common sense, which the state chose to ignore. Hopefully, after today’s decision Illinois will take a hard look at its overspending problem rather than try to concoct an even more exotic tax scheme.