Performance Marketing Association Wins Suit Challenging Validity of Illinois Affiliate Nexus Law
Supreme Court Upholds 2012 Circuit Court Decision
CAMARILLO, CALIFORNIA, OCTOBER 18, 2013 – The Performance Marketing Association (PMA) today received news that the Illinois Supreme Court reaffirmed the circuit court decision, declaring that the state’s “affiliate nexus tax” law is invalid. In 2011, the PMA filed a lawsuit against the Illinois Department of Revenue, challenging the constitutionality of a newly enacted Illinois law that would be financially devastating to thousands of the state’s small businesses, forcing them to downsize, relocate or close their doors. This law, also known as the “Amazon Tax” or “Mainstreet Fairness Bill” redefined the state’s definition of the relationship between out-of-state retailers and in-state performance marketing affiliates, also known as publishers. The law asserted that a nexus, or physical presence, is created when these retailers work with Illinois-based affiliates who engage in certain activities, and therefore requires retailers to collect Illinois state sales tax. The PMA contended that this law unfairly discriminated against Internet-based performance marketers, severely harmed Illinois affiliates resulting in a devastating loss of income, and exceeded the state’s power to regulate interstate commerce and is therefore unconstitutional.
In its decision, the Illinois Supreme Court agreed that the challenged statute is invalid. The court agreed with the PMA that advertising via performance marketing affiliates does not give rise to tax obligations and is therefore a discriminatory tax on Internet commerce. Discriminatory taxes on Internet commerce are prohibited by federal legislation, known as the Internet Tax Freedom Act (ITFA). This case is the first to uphold the ITFA.
According to the PMA, Illinois-based affiliates numbered at least 9,000 and in 2010 generated $744 million in advertising revenue. When the law took effect in 2011, those affiliates experienced economic devastation when out-of-state retailers, wanting to avoid sales tax collection obligations, simply terminate their relationships with affiliates. In fact, the PMA estimates about 1/3 left the state, 1/3 downsized, and 1/3 went out of business.
We are ecstatic!” said Rebecca Madigan, Executive Director of the PMA. “We are now looking forward to those 9,000 affiliate marketers getting back in business in Illinois. About 1,000 out-of-state merchants can now reinstate their advertising agreements with Illinois-based affiliate marketers, without threat of getting trapped with nexus.” Madigan continues, “Unfortunately, 12 other states passed similar laws, devastating over 90,000 small businesses around the country. We hope this decision helps other states avoid this kind of costly litigation and the damage to a thriving small business sector.”
Proponents of this law claimed that the law leveled the playing field between online merchants and brick-and-mortar retailers because both would now be required to remit a user tax. The goal is to add new tax revenue to state coffers, but the PMA noted that the opposite actually occurred as online retailers opted to dissolve relationships rather than collect state sales tax.
“This was a lose-lose situation for the state,” added Madigan. “The state collected no new use tax revenue from those retailers that terminated their relationships with local Illinois affiliates, and the affiliates themselves lost millions of dollars in advertising revenue. That means less income tax revenue for the state and fewer jobs for the people of Illinois. Proponents of the nexus tax would have you believe that they have small business interests at heart, but the truth is, the nexus tax law hurt small businesses and unfairly discriminated against one of the fastest growing market segments in the nation.”
According to Madigan, there are more than 200,000 online affiliates operating nationwide. Performance marketing is an advertising model whereby an independent affiliate receives a referral fee or payment from an online retailer when visitors to the affiliate’s website use links and banners to navigate to and subsequently purchase products on the retailer’s site. Affiliate marketers do not sell products or collect money from consumers. Affiliates do not deliver products or services, and there is no ownership or business relationship between affiliates and merchants beyond a limited advertising agreement.
The PMA filed its original complaint with the United States District Court, Northern District on behalf of its members in an effort to reverse the Illinois affiliate nexus tax and to set a precedent for other states considering similar measures. According to the PMA, the law exceeded the limits of the state’s power to regulate interstate commerce under the Commerce Clause, as established in the 1992 Supreme Court ruling in Quill Corp. v. North Dakota, which states that a state cannot impose a tax on a company if it does not have a physical presence in that state. Additionally, the PMA asserted the law discriminates against electronic commerce in violation of the Internet Tax Freedom Act, which states that Internet sales cannot be discriminated against with Internet-only taxes.
The Illinois Supreme Court decision can be found here:
The Performance Marketing Association (PMA) is a not-for-profit trade association founded in 2008 to connect, inform and advocate on behalf of performance marketing, a multi-billion-dollar marketing channel, which comprises more than 200,000 businesses and individuals. Continued growth of the performance marketing space is expected as advertisers, facing small budgets and big expectations, increasingly look to performance-based marketing initiatives to expand their business. Additional information is available at: http://www.thepma.wpengine.com.
Rachel Guillot, 785.822.8986
Media | Performance Marketing Association
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