Should consumers be able to avoid paying state sales tax simply because they make purchases on the Internet?
Some legislators think not, believing that state coffers should not be deprived of sales tax revenue from online purchases. Consequently, they have enacted some laws designed to capture such revenue.
However, according to the Chicago Tribune, a recent law passed in the Land of Lincoln attempting to tax online purchases was just ruled unconstitutional by the Illinois Supreme Court.
Illinois Act Taxed Online Purchases
Illinois passed the Main Street Fairness Act (“the Act”) in early 2011. The Act was referred to as the “Amazon tax law,” reports the Tribune.
Prior to passage of the Act, online retailers only had to collect sales tax on purchases by Illinois residents and only if the online retailer had a “physical presence” in Illinois. Significantly, the Act gave broad meaning to “physical presence” to include affiliate companies.
Affiliates generally speaking are third-party advertisers for online stores. By including them within the ambit of the “physical presence” notion, the potential sweep of sales tax on online purchases was greatly expanded.
In response, some Internet retailers ceased doing business with affiliates in Illinois. Some Internet sellers moved out of Illinois entirely.
State Supreme Court Invalidates Act
Ultimately, this issue led to litigation, and eventually a Cook County Circuit judge ruled that the Act ran afoul of the Commerce Clause of the U.S. Constitution and that it conflicted with the Internet Tax Freedom Act, a federal law which does bar certain online taxes.
The case then worked its way up the appellate chain, and in late October, the Illinois Supreme Court affirmed the decision of the Cook County Circuit judge, reports the Tribune. This was in contrast to the New York high court’s decision to uphold on a similar state tax challenged by Amazon and Overstock.com.
The impact of the decision is not fully known yet. Perhaps Internet retailers will start doing more business with affiliates in Illinois again, and maybe they will move back into the state themselves.
Or the litigation battle may continue, as review eventually could be sought by the U.S. Supreme Court.
Other states likely are watching to see how this plays out to determine what to do on their own home turf. And it is possible that Congress might weigh in with further Internet legislation in this area.
Eric Sinrod is a partner in the San Francisco office of Duane Morris LLP, where he focuses on litigation matters of various types, including information technology and intellectual property disputes. You can read his professional biography here. To receive a weekly email link to Mr. Sinrod’s columns, please email him at email@example.com with Subscribe in the Subject line. This column is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this column are those of the author and do not necessarily reflect the views of the author’s law firm or its individual partners.