Amazon Tax: 2011 Illinois Law Unconstitutional

Last year, we reported on legislation enacted in Illinois that would shut down many small Internet businesses.  Dubbed the Amazon Tax, the new law would require any non-Illinois seller to collect Illinois sales tax if that seller acquires customers through a link on the Internet website of the Illinois business. This collection requirement would apply even though the out-of-state business has no other presence in the state. We refer to this emerging concept as “virtual nexus.”  The advent of this virtual nexus position threatened to make a hopelessly complicated patchwork of state tax laws even more complex.


But finally, reason has prevailed.  In a suit brought by the Performance Marketing Association, an Illinois judge ruled last week that the state’s “Amazon Tax” law violates the commerce clause of the Constitution as well as the Internet Tax Freedom Act (which prohibits imposing discriminatory Internet-only taxes, as well as multiple taxes on electronic commerce).  While we fully expect this case will be appealed to the Illinois Supreme Court, this decision is significant; it is the first push-back against the increasingly popular wave in the states of enacting “Amazon Tax” laws.


We have noted in the past that these laws merely cause Internet businesses to move out of the taxing state and, overall, accomplish little real tax revenue.  Further, these laws saddle small businesses with huge compliance burdens, which can cause many small businesses to withdraw from interstate commerce.


We continue to believe that all businesses must pay their fair share of taxes, and that all states should be allowed to require businesses within their jurisdiction to collect and report taxes, as determined by state law.  However, we do not believe that the states should be allowed to require out of state businesses, with no physical presence in that state, to collect and remit these taxes.  This is just an unfair approach, on which the Supreme Court has already spoken.


For small businesses, the issue is compliance costs.  Requiring these businesses to file multiple state tax returns with states in which they do not have a real presence poses an unreasonable burden on small businesses.


We will continue to watch as litigation unfolds in Illinois and other states.  We expect that if the states begin to lose these Amazon Tax battles, there will be increasing pressure on Congress to address this interstate taxation issue.