The Illinois Amazon Tax is Dead

internet taxes and amazon taxAttention affiliate marketers: it’s safe to head back to Illinois. The state’s Supreme Court overturned the controversial “Amazon tax”. The court decided the law that birthed the online sales tax was superseded by the federal Internet Tax Freedom Act, and was therefore unconstitutional.

So, let’s take a minute to review the Internet Tax Freedom Act and the Amazon tax. Then we’ll discuss the logic road the Illinois justices traveled to reach their decision – a decision that is sure to delight the affiliate marketing community.

Internet Tax Freedom Act

Lawmakers singed the Internet Tax Freedom Act into law on October 21, 1998. It’s meant to preserve the educational, commercial and informational potential of the Internet by banning Web taxes. Specifically, the ITFA prohibits “Internet-only” levies like bit, email and bandwidth taxes. It does not, however, exempt states from establishing an online sales tax.

Officials have updated the Internet Tax Freedom Act three times – mostly for small definition changes and provision extensions. The last amendment extended the law till Nov. 1, 2014, at which time politicians will decide whether or not to keep it as is or change it.

Proponents of the ITFA argue the law is necessary for innovation, as burdening Internet development with taxes will hurt the potential benefits of the Web. Opponents of the ITFA say that all it does is unnecessarily cut a potentially valuable revenue stream for states.

Some States Are Not Subject To The ITFA

Before the ITFA went into effect, 10 states already had Internet taxes on the books. As such, the ITFA includes a grandfather clause which allows Internet taxes in those states. The ITFA immune states and district are CT, IA, NM, ND, SD, OH, SC, TN, TX, WI and DC.

Illinois Repealed The Amazon Tax

In 2011, Illinois passed the Main Street Fairness Act, which imposed an online sales tax for Internet retailers, with annual Illinois-generated revenues of over $10,000, regardless of whether or not the retailer had a physical presence in the state. Dubbed the “Amazon tax,” Illinois’ Main Street Fairness Act did not go over well, and large online retailers like Amazon and Overstock severed ties with Illinois affiliates to avoid the cost.

In fact, the new tax was so unpopular that the Los Angeles-based Performance Marketing Association sued the Illinois Department of Revenue, arguing the Amazon tax was unconstitutional and discriminated against “Internet-based performance marketers.” According to PMA’s research, after the MSFA passed, 1/3 of the state’s 9,000 affiliate marketers, who generated over $700 million in advertising revenue in 2010, left Illinois in 2011, and the other 2/3 either downsized or went belly up.

In a six-to-one ruling, the Illinois Supreme Court sided with the PMA, and by extension Illinois’ affiliates. Ultimately, the state’s highest court reasoned that the Internet Tax Freedom Act superseded the Main Street Fairness Act. Even though the ITFA does allow for online sales’ taxes, the bench decided that affiliate links were equivalent to radio and newspaper promotional codes, and since out-of-state retailers didn’t have to pay a tax on those sales, placing a tax burden on Internet affiliates would be “discriminatory.” The one dissenting judge argued that the MSFA “does not impose any new taxes or increase any existing taxes.”

The Future of Online Taxes

On November 1, 2014 the Internet Tax Freedom Act will expire. Some states, like Arizona, are already making moves to prepare for a possible change in law. It will be interesting to see what happens with the ITFA in 2014. Politicians eager to close the deficit gap may see Internet taxes as a juicy revenue pork chop just waiting to be devoured.

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