SPRINGFIELD — Illinois Supreme Court justices appeared skeptical Wednesday when an attorney representing the state argued the constitutionality of a two-year-old state law designed to force certain Internet retailers to collect sales taxes.
Before the law was passed, companies such as Sears and Walmart collected the state sales tax on their Internet transactions with Illinois customers. They did this because they had stores in Illinois, which constitutes a legal presence, or nexus, in the state.
But companies such as Amazon didn’t have to collect the tax because they did not have a physical presence in Illinois.
In order to draw more tax revenue and end an advantage some Internet retailers have over others, legislators in Illinois redefined the term “physical presence” to include marketing affiliates based in Illinois – typically coupon or deal websites whose operators earn commissions for driving shopping traffic to an online retailer.
It is a novel legal concept, said George Isaacson, an attorney for the Performance Marketing Association, the plaintiff in the case. He added, it “is a position that no other court has adopted.”
Isaacson contends the law goes against a requirement set by the U.S. Supreme Court in 1992 that establishes “physical presence” as having offices, branches, warehouses and employees in the state. He added that the state law also violates federal statute, which has imposed a moratorium on states creating Internet-only taxes.
The Illinois law does not impose the same requirement on out-of-state businesses that work with firms that place similar ads on radio or television, Isaacson said. That in itself is evidence that Internet retailers are being singled out by this law, he said.
After the law passed, Amazon dropped all of its Illinois affiliates to avoid being forced to collect the tax.
Chief Justice Thomas Kilbride expressed concern for how the law would be adversely affecting a hypothetical former Galesburg factory worker who is running an Internet-based business.
Justice Mary Jane Theis added, “We all struggle with this. We don’t understand what they do enough to determine if there is nexus.”
The only relationship between most Internet affiliates and companies like Amazon or Overstock.com is they receive a commission for each successful sales referral they make.
“Does a referral relationship create a nexus?” asked Justice Anne M. Burke.
Isaacson said, “No court – state or federal court in the United States – has found that that kind of limited activity is sufficient to create a nexus.”
But Assistant Attorney General Brian Barov said that he believed that a referral relationship is sufficient to create a nexus.
About 2,000 Internet businesses left Illinois when this law passed, the Performance Marketing Association contends.
“My best guess is the state lost revenue because of this law. This is a good example of why these types of laws shouldn’t be handled on a piecemeal, state-by-state basis,” Isaacson said.
The high court will likely issue a ruling in several months.
Isaacson said, “I never make book on how courts decide cases.”