Cook County Judge Throws Out Illinois Amazon Tax

I came home yesterday to the good news that a Cook County judge threw out the Illinois Amazon Tax stating that the tax was unconstitutional.

Last year, Illinois Governor Pat Quinn signed into law the Amazon Law, which was designed to tax out-of-state goods bought on the internet.  The Amazon tax is just a bad idea that would cause a decrease in revenue and cause businesses to leave Illinois.  According to ABC news this is exactly what happened.

 ”We’ve built a home here for seven years,” said Lauren Boukas of CouponCabin.com. “The last thing we want to do is leave Chicago. “We’re all Chicagoans and love living here, but we have to do what’s best for the business.”

But leave they did. Internet retailer Coupon Cabin moved to northwest Indiana after the online sales tax law passed.

The legislation even required giants Amazon and Overstock.com to collect Illinois sales tax if they partnered with Illinois-based companies. At the time, Amazon, for one, said it would simply cut ties with Illinois firms.

As a result of the Amazon Tax, a suit was filed by the Performance Marketing Association.  Cook County Judge Robert Lopez Cepero ruled on that case yesterday and stated that the Illinois Amazon Tax was unconstitutional because it violated the Commerce Clause of the Constitution.

Amazon Tax, the Dormant Commerce Clause, and the “Click-thru” Nexis

These attempts to collect-out of-state revenue have run into trouble through a difficult and complicated aspect of constitutional law known as the Dormant Commerce Clause.  The dormant commerce clause is probably one of the most difficult concepts of constitutional law, it is the bane of every law students existence.  Constitutional law courses will spend three or more classes and a hundred pages of boring case law on this aspect of law, and in the end, the average law student will still have no clue what it means.  In a nutshell, as applied to taxes, the dormant commerce clause is a principal that says states cannot initiate a tax that would hurt interstate commerce.  Currently the principal case on the issue is Quill Corp. v. North Dakota , 504 U.S. 298 (1992).  The holding from the United States Supreme Court  states that here has to be some substantive nexus with the state in order for the state to collect taxes.  In English, this means there the company has to have some sort of “presence” in the state. 

Here is the part of the Amazon law that is constitutionally dubious, and has costed taxpayers tons of money.  The law states that a nexus is created when Amazon enters into an agreement with an in-state company,  or “affiliate”, to refer customers via a “click-thru” in exchange for commission or revenue sharing.  In English, it is like this.  You see those banner ads on websites that have advertising on them?  When you click on them, they send you to an e-commerce site.  The website that is hosting the banner add collects advertising revenue from the e-commerce site, based on the number of clicks.  The law states that if Amazon, or any other e-commerce site, creates this type of agreement with a website, then the nexus between Amazon and that state has been created, and the burden is on Amazon to show that one has NOT been created.  This is the legislature’s attempt satisfy the holding of Quill with regards to out-of-state internet commerce, the problem is there has been no legal ruling on this issue until yesterday.

This is the first time a court has decided whether or not affiliating with an in-state company will create the logical nexus necessary to satisfy the holding of Quill; or whether there needs to be some physical presence of a company in state to satisfy Quill.  From my opinion, Judge Cepero was correct in his ruling because the purpose of the Dormant Clause, and the holding of Quill is to encourage interstate commerce.  Quill did not anticipate the advent of e-commerce, it was decided in an era when Prodigy was the “new big thing” and users had to put their phone receivers on the modem to connect.  Quill focused on catalog services.  However the principals of Quill still apply.  If I were to make an analogy, it would be like a New Hampshire catalog company being charged Illinois state sales tax because they use a printing press in Illinois.  It is difficult to believe that Quill would allow for this situation.

That said, this is the very first step in a long series of litigation that will likely make it up to the Supreme Court, costing the taxpayers millions in litigation costs.