United States

Illinois amends click-through nexus law

TAX ALERT  | 

On Aug. 26, 2014, Illinois Governor Pat Quinn signed SB 352, enacting an amended version of the state's click-through nexus law that was previously struck down by the Illinois Supreme Court in Performance Marketing v. Hamer.

Pursuant to Illinois' click-through nexus law, starting on July 1, 2011, an out-of-state seller was deemed to have Illinois nexus for use tax purposes if the seller entered into "[…] a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly, or indirectly refers potential customers to the retailer by a link on the person's Internet website." As detailed in our prior alert on this topic, the Illinois Supreme Court found that this law was preempted by the Internet Tax Freedom Act (ITFA) because it applied to Internet marketing arrangements and not substantially similar offline arrangements and, therefore, was a discriminatory tax on electronic commerce. However, the long-term impact of the Illinois Supreme Court's ruling is far from certain as, barring action by Congress, the ITFA is due to expire in November 2014, which would render the Performance Marketing decision prospectively moot.

Not content to wait on the results of federal action, the Illinois legislature sought to breathe new life into the state's click-through nexus law post-Performance Marketing via the passage of SB 352. The amendments in SB 352 extend the definition of a retailer maintaining a place of business in Illinois for use tax purposes to include "a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by providing to the potential customers a promotional code or other mechanism that allows the retailer to track purchases referred by such persons." SB 352 also provides examples of mechanisms that allow a retailer to track purchases, including the use of a link on the person's Internet website, promotional codes distributed through the person's hand-delivered or mailed material, and promotional codes distributed by the person through radio or other broadcast media. By clearly indicating that the requisite tracking mechanisms include both electronic and tangible means, the Illinois legislature hopes to bypass the ITFA issue focused on by the Illinois Supreme Court in Performance Marketing.

Additionally, SB 352 amends the state's click-through nexus law by adding a provision allowing a retailer to rebut the presumption that its contacts with affiliates establish nexus with the state by submitting proof that the referrals or other activities pursued within the state were not sufficient to meet the nexus standards of the U.S. Constitution during the preceding four quarterly periods. Although the issue of whether the lack of such a provision rendered the state's click-through nexus law unconstitutional was not addressed in the Performance Marketing decision, the New York Court of Appeals felt that the inclusion of a rebuttable presumption provision was significant in determining that New York's click-through nexus law passed constitutional muster. For an out-of-state retailer, the addition of this provision creates a safe harbor when the only activity of an in-state affiliate is not significantly associated with the retailer's ability to establish or maintain the retailer's market in the state.

However, SB 352 is unlikely to end dispute regarding the constitutionality of Illinois' click-through nexus law. While the broadening of the applicability of the law may avoid preemption by the ITFA and the addition of the rebuttable presumption provision may defuse one approach to challenge under the Commerce and Due Process Clauses of the U.S. Constitution, the application of click-through nexus principles to any activity, electronic or otherwise, that refers customers to a retailer through promotional codes or other traceable mechanisms may violate the Commerce Clause by creating a presumption of nexus for retailers engaging in constitutionally protected advertising activities.

Although the amendments to Illinois' click-through nexus law under SB 352 will not be effective until Jan. 1, 2015, out-of-state retailers with sales into Illinois should act now to review their in-state advertising and referral activities, particularly their affiliate referral programs, to determine whether these activities create Illinois nexus.

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