The Performance Marketing Association (PMA) filed a lawsuit against the Illinois Department of Revenue on Wednesday challenging the constitutionality of the newly enacted law that requires out-of-state merchants who advertise on affiliate websites in Illinois to collect sales tax.
PMA said there are at least 9,000 Illinois-based affiliates including bloggers, non-profits, home-based businesses and small businesses with dozens of employees that generated $744 million in advertising revenue last year.
Since the law was enacted in March, retailers including Amazon.com and Overstock.com have already severed their relationships, and PMA said if HB 3659 takes effect on July 1 as scheduled, Illinois affiliates will be in jeopardy, as will the $22 million in state income tax it estimates are generated annually from the affiliates.
PMA said there are over 200,000 online affiliates operating nationwide. It explained the affiliate model as follows:
“Performance marketing is an advertising model whereby an independent affiliate receives a referral fee or payment from an online retailer when visitors to the affiliate’s website use links and banners to navigate to and subsequently purchase products on the retailer’s site. Affiliate marketers do not sell products or collect money from consumers. Affiliates do not deliver products or services, and there is no ownership or business relationship between affiliates and merchants beyond a limited advertising agreement.”
The PMA said it filed its complaint with the United States District Court for the Northern District of Illinois on behalf of its members in an effort to reverse the effects of the Illinois affiliate nexus legislation and to deter other states from enacting similar measures.
According to the PMA, HB 3659 exceeds the limits of the state’s power to regulate interstate commerce under the Commerce Clause, as established in the 1992 Supreme Court ruling in Quill Corp. v. North Dakota, which declares that a state cannot impose a sales or use tax collection obligation on a company if the company does not have a physical presence in that state.
Additionally, the PMA believes the law discriminates against electronic commerce in violation of the Internet Tax Freedom Act, which states that Internet sales cannot be discriminated against through tax obligations that apply only to online transactions.
The PMA’s news release is here.
The last of three bills aimed at getting the Seattle giant and other out-of-state online retailers to pay sales tax passed the Assembly on Wednesday afternoon.
“It’s something we’ve been working on for years,” said Assemblywoman Nancy Skinner, D-Berkeley, who authored the bill. “But this is the first time that so many businesses up and down the state are supporting it.”
A companion bill, authored by Assemblyman Charles Calderon, D-Whittier (Los Angeles County), passed the full floor on a 47-16 vote on Tuesday.
“This bill levels the playing field for businesses in California,” said Assemblyman Bill Berryhill, R-Ceres (Stanislaus County). “Not a day goes by when I don’t hear from businesses about their ability to compete.”
Which is what supporters of the so-called e-fairness legislation have been shouting from the rooftops for years, despite vetoes from former Gov. Arnold Schwarzenegger and dire threats from Amazon.com (2010 profit: $34 billion) and Utah’s Overstock.com to pull their affiliate business out of the state.
So, what comes next?
Senate action on the two Assembly bills, AB 153 (50-21- 9) and AB 155 (52-20 -8) and Assembly Action on SB 234 (22-17). Then the complimentary legislation if passed would go to Democrat Governor Jerry Brown. But, these bills passed with simple majority votes and some maintain that these “new” taxes fall under the jurisdiction of California Proposition 26, which requires a super legislative majority in order to pass.
I smell a lawsuit and a state court case, unless Governor Jerry Brown vetoes these bills, like Governor Arnold Schwarzenegger did in the past two legislative sessions.
In the meantime, if the bills become law, the actions should come swift from Amazon and the other internet sales tax targets, as they will pull their business out of California to reduce their liability.
And, as to the nexus issue, they will file probably a federal lawsuit.
This issue is far from resolved and I see the only revenue California will receive will be for its legal staff and judiciary.
Kind of a waste for California taxpayers.