* Back in 2011, the governor and all four legislative leaders signed on to a bill pushed by the Illinois Retail Merchants Association. The idea was to protect physical retailers from being undercut by online retailers who don’t charge sales taxes. It flew out of both chambers and was quickly signed into law.

Here’s a basic summary of the law from an Illinois Supreme Court ruling today which struck the statute down…

(O)ut-of-state internet retailers and servicemen are required to collect state use tax if they have a contract with a person in Illinois who displays a link on his or her website that connects an Internet user to that remote retailer or serviceman’s website. There is no requirement under the Act that sales be made to Illinois residents to subject the out-of-state retailer or serviceman to Illinois use tax obligations, and there is no requirement that the computer server hosting the Illinois affiliate’s website be located in Illinois. Both new definitions are limited, however, to referral contracts that generate over $10,000 per year.

As a result, Amazon immediately announced that it was ending its Illinois affiliate program and many of those larger affiliates fled to other states.

* All for naught, however. The Court’s conclusion…

The parties’ joint stipulation of facts states that an Internet affiliate does not receive or transmit customer orders, process customer payments, deliver purchased products, or provide presale or postsale customer services. Further, an Internet affiliate displaying a link on its website does not know the identity of Internet users who click on the link, and after a user connects to the retailer’s website, the affiliate has no further involvement with the user.

It is clear, therefore, that there is no interaction between an affiliate and a customer, and no “active” solicitation occurs on the part of the Internet affiliate. The click-through link makes it easier for the customer to reach the out-of-state retailer, but the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts.

In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached.

However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reach same dollar threshold, will not trigger an Illinois use tax collection obligation. The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the [federal Internet Tax Freedom Act].

The federal law referenced in the opinion expressly prohibits “discriminatory taxes on electronic commerce.”

*** UPDATE *** From IRMA…

“It’s disappointing that the Illinois Supreme Court did not address the constitutionality of the issue, but rather erred in its conclusion that the act violated the Internet Tax Freedom act.

“We haven’t given up. There are other avenues for appeal we hope the state will take.

“This underscores the need for action in Washington to quickly pass the Marketplace Fairness Act.

“Working with a hodgepodge of laws around the country is intolerable, and brick and mortar retailers continue to be at a substantial disadvantage to their online competitors.”