The Illinois Supreme Court Invalidates Illinois' "Click-Through" Nexus Law

Wednesday, October 23rd, 2013


The Illinois Supreme Court recently held that the Illinois "click-through nexus" law violated federal law. The court found that the state law was preempted by the federal Internet Tax Freedom Act (ITFA).

Illinois enacted the click-through nexus law to require out-of-state retailers to collect and remit use tax. The term "nexus" means that a retailer has a connection to a particular state. Generally, that requires a retailer to have a physical presence in that state. In Illinois, a physical presence is established when a retailer maintains a place of business in the State. The click-through nexus law expanded the definition of "maintaining a place of business in the State" to include performance marketing. Performance marketing is when an out-of-state retailer has a contract with an in-state affiliate who directly, or indirectly, refers potential customers to the out-of-state retailer's Internet website by linking to it. If the performance marketing agreements generated over $10,000 per year, the out-of-state retailer was required to collect and remit use tax.

The court, in this case, found that the law was a violation of the ITFA. The ITFA prohibits discriminatory taxes on electronic commerce. The ITFA defines a discriminatory tax to be any tax (1) imposed by a State or political subdivision (2) on electronic commerce (3) that imposes a different obligation on persons or entities to collect or pay tax (4) than is required of transactions accomplished through other means for similar property, goods, services, or information.

The court held that the click-through nexus law imposed a collection obligation on online marketing that was not imposed on offline methods such as catalogs, magazines newspapers, and broadcasts on television and radio. While a similar requirement existed when offline methods were marketed to in-state consumers, the requirement was not imposed on offline marketing that was national or international in scope. Online marketing, the court found, is inherently national or international in scope because websites can be accessed globally. Therefore, the Illinois law imposed a requirement on online marketing that was not imposed on its offline counterparts.

The court held that this unequal treatment amounted to a discriminatory tax on electronic commerce. Therefore, the Illinois "click-through nexus" law violated the ITFA.

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