by Lawrence J. McQuillan, PhD
This morning, Cook County Circuit Judge Robert Lopez Cepero struck down the online affiliate tax (Public Act 096-1544). The law required out-of-state online retailers such as Amazon.com to collect and remit sales taxes on purchases made by Illinois residents if the online retailer maintained a physical presence in Illinois. The law was signed by Gov. Pat Quinn on March 10, 2011 and became effective July 1, 2011.
The problem with the law is that it expanded the definition of “physical presence” beyond a factory, warehouse, store or office to include affiliate companies in Illinois, typically coupon websites, deal websites or small mom-and-pop entrepreneurs who wanted to earn extra money. The affiliate companies and entrepreneurial website operators earned commissions for driving shopping traffic to an online retailer.
Judge Cepero ruled that having marketing affiliates in Illinois does not constitute a sufficient physical presence to allow the state to tax out-of-state online retailers. He also ruled that the “law is premature” since the federal Internet Tax Freedom Act places a moratorium on states taxing Internet commerce until Nov. 1, 2014. To read a more in-depth legal perspective, read the Liberty Justice Center's comments here.
This decision is great news for Illinois entrepreneurs who will once again be allowed to live and work in Illinois as online marketers. At the time that Illinois’ law was signed, the Performance Marketing Association estimated there were at least 9,000 Illinois-based online affiliates with 2010 advertising revenues of $744 million. They paid $22 million in state income tax. But many of these marketers either fled the state or closed their business after the law was passed.
This decision is a step in the right direction to bring needed jobs and businesses back to Illinois and help the economy recover from a long recession. The Illinois Policy Institute was a leading opponent of the law and has long advocated for its repeal in legislative testimony, blogs, a press conference, briefing and this real-life short video of two entrepreneurs in the Quad Cities area.