'Amazon tax' in Illinois ruled unconstitutional

The Illinois Supreme Court today shot down the state's 2011 "Amazon" law requiring out-of-state Internet sellers with web marketing affiliates in Illinois , to collect the Illinois sales taxes on deliveries to the state's residents.

The law is modeled on one New York passed in 2008-a law which was upheld by the New York Court of Appeals, the Empire State's highest court, in a 4-1 decision in March.

Both Amazon.com and Overstock.com have filed petitions asking the U.S. Supreme Court to review the New York decision.

While SCOTUS hasn't said whether it will hear the New York case, the fact that two states' high courts have reached opposite conclusions increases the chance it will do so, observed David C. Blum, a Chicago lawyer who closely tracks the internet sales tax issue.

Now the Illinois Department of Revenue, the loser in today's decision, could also ask the U.S. Supreme Court to step in, he noted.

The U.S. Supreme Court last weighed in on the issue of whether remote sellers must collect a state's sales tax in 1992, when it ruled, in a case involving a catalog seller (Quill v. North Dakota), that under the Constitution's commerce clause, only merchants with a physical presence in a state (nexus, in tax-speak) can be required by that state to collect its sales taxes. The high court pointed out, however, that Congress could grant collection powers to the states.

For two decades, bills granting such powers went nowhere in Congress. Then, this past May, by a 69 to 27 vote, the U.S. Senate passed the Marketplace Fairness Act of 2013 (S. 743) which requires Internet sellers with $1 million a year or more in sales outside their home states to collect each state's sales tax, provided that state meets some simplification requirements and provides free software to collect the tax.

The bill was backed by the National Retail Federation and such traditional bricks and mortar retailers as Wal-Mart , as well as by Amazon.com, which largely as a result of growing national network of warehouses, now collects sales taxes from residents in 13 states, including California, New York and Texas. It is opposed by the NetChoice coalition, which counts Overstock, eBay, Yahoo!, Facebook, VeriSign and The Electronic Retailing Association among its members.

Regardless of how the corporate interests line up, the Marketplace Fairness Act faces an iffy future in the fractious House, where it is supported by some Republicans, but opposed by many others. Technically, consumers are supposed to send in the applicable sales tax to their home state if they buy from a web site that doesn't collect it. Almost none do. Grover Norquist's, whose "Taxpayer Protection Pledge" to oppose tax increases has been signed by almost all House Republicans, has declared that the Marketplace Fairness Act "can only be viewed as a tax increase" and violates that pledge.

Muddying the legal waters: In its 6 to 1 decision (downloads as a PDF) today, Illinois' Supreme Court didn't even reach the question of whether the state's Amazon law violates the U.S. Constitution and the Quill decision. Instead, the Illinois justices found the Amazon tax was preempted by a fairly recent law-the Internet Tax Freedom Act of 2000 (ITFA), which prohibits states from imposing "discriminatory taxes on electronic commerce." The Amazon tax, the majority ruled, violates ITFA because web retailers who sell through links on Illinois web sites are required to collect sales taxes, whereas web retailers who simply advertise in Illinois through print or broadcast are not. (The Illinois case was brought by the Performance Marketing Association, which represent s Illinois affiliates-web sites which make money by hosting links to e-commerce sellers.)