USA: Illinois Supreme Court rules click-through nexus law pre-empted by Internet Tax Freedom Act

On October 18, 2013, in a 6-1 decision, the Illinois Supreme Court ruled that the state’s click-through nexus law is pre-empted by the federal Internet Tax Freedom Act’s ban against ‘discriminatory taxes on electronic commerce.’ The court did not reach the issue regarding whether the click-through nexus provision violated the US Commerce Clause. [Performance Marketing Association, Inc. v. Hamer, Ill. Sup. Ct., #114496 (10/18/13)]


Effective July 1, 2011, Illinois enacted a click-through nexus law, in which retailers that directly or indirectly refer potential customers to the retailer by a link on a person’s Internet website are considered maintaining a place of business in Illinois.  

Click-through nexus law discriminates against electronic commerce

The Illinois Supreme Court recognized that the contractual relationship taxed under the click-through nexus law is known as ‘performance marketing.’ Performance marketing occurs when a person publishing or displaying an advertisement is paid by a retailer when a specific action (e.g., a sale) is completed. Such arrangements are not limited to the Internet, they are also used in print and broadcast media. 

The Court held that the discrimination resulting from the click-through nexus law results from the different treatment of the following out-of-state retailers:

  • Out-of-state retailers contracting with Illinois Internet affiliates are required to collect use tax. These Internet affiliates provide advertising that is available and disseminated worldwide.
  • Out-of-state retailers contracting with similar Illinois ‘offline’ affiliates are not required to collect use tax. An example of activity performed by an Illinois ‘offline’ affiliate would be publishing print media (e.g., catalogs, magazines, newspapers, etc.) or broadcasting television or radio messages that are directed at a national or international audience.

Accordingly, by singling out retailers with Internet performance marketing arrangements for use tax collection, and not requiring use tax collection for similar ‘offline’ marketing, the court held that the click-through nexus law imposes a discriminatory tax on electronic commerce in violation of the federal Internet Tax Freedom Act and is therefore void and unenforceable.  As a result, any out-of-state retailers that have previously paid sales or use tax to the state, and have nexus solely due to the click-through nexus law, should seek refund claims.

The takeaway

The court’s opinion is significant as it is the first state appellate court decision to strike down a click-through nexus law on the basis of pre-emption under the Internet Tax Freedom Act. As noted in the dissent, state-wide challenges of click-through nexus laws have centered on Commerce Clause matters and no appellate level court has struck down such a law on the basis of a Commerce Clause violation. Following the Performance Marketing decision, future challenges may include an Internet Tax Freedom Act pre-emption argument, depending on the particulars of the respective state’s law 

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About Jennifer Jensen

email: Mobile: +1 240 678 0226 Office: +1 202 414 1741

Jennifer is a state and local tax director in PwC Washington National Tax Services specializing in sales and use and indirect taxes. Her industry focus is in technology, entertainment, media, and communications. Jennifer helps lead the firm's cloud computing initiative and is the state and local subject matter expert in this area. Jennifer provides both internal firm and external client sales and use tax training in such issues as eCommerce, the taxation of digital products, and, of course, cloud computing. She also summarizes relevant legislation or other tax law changes to disseminate both externally and internally and writes thought leadership pieces for external publication by the firm.