(CN) - The Illinois Supreme Court struck down the state's so-called "Amazon tax law," aimed at leveling the playing field between online retailers and brick-and-mortar stores.
Responding to complaints that online retailers like Amazon have an unfair tax advantage, Illinois lawmakers passed Public Act 96-1544 in 2011.
The law included affiliates in its definition of retailers required to collect sales tax. California, Texas and New York have enacted similar "affiliate" or "Amazon" tax laws, which also face challenges from major retailers.
Affiliate marketing refers to a performance-based system in which retailers pay affiliates for each paying customer brought by the affiliate's own marketing efforts, mainly through links.
A trade group representing affiliate-marketing businesses sued Brian Hamer, director of the Illinois Department of Revenue, claiming the law violates the commerce clause of the U.S. Constitution and is preempted by the federal Internet Tax Freedom Act.
Cook County Circuit Judge Robert Lopez Cepero found the challenged provisions unconstitutional, and the state high court upheld that decision Friday on a 6-1 vote.
If an affiliate link generates more than $10,000 in sales for an out-of-state retailer, the law kicks in and the retailer must collect sales tax, the court noted.
"However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, will not trigger an Illinois use tax collection obligation," Justice Anne Burke wrote for the majority. "The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the [Internet Tax Freedom Act]."
In the dissenting opinion, Justice Lloyd Karmeier said the law had been extended to affiliates "for reasons that are entirely reasonable and proper." It helps the state collect much-needed revenue and helps eliminate "the competitive disadvantage suffered by existing Illinois retailers."
He also noted that New York's highest court recently rejected a commerce clause challenge to New York's version of Public Act 96-1544.
But the majority "has elected to ignore the commerce clause issues entirely and decide the case based solely on federal preemption grounds," Karmeier wrote, a decision he found "puzzling."
A state law that's preempted by federal law is not necessarily invalid; it's merely suspended and rendered unenforceable, he said.
"I must also point out that Justice Burke, author of the majority's opinion, has frequently taken this court to task for not reaching important legal issues presented by an appeal, even when resolution of those issues is not necessary for disposition of the particular controversy before it," Karmeier wrote.
He said the commerce clause issue is "highly likely" to resurface, given that the preempting federal law is a moratorium set to expire on Nov. 1, 2014.
"Once the moratorium imposed by the federal law is lifted, Public Act 96-1544 will be revived and reinstated without the need for any express reenactment by the legislature," he wrote. "A new commerce clause challenge is certain to follow. A year from now we could therefore find ourselves in precisely the same position we are in today, facing the same commerce clause challenge brought by and against the very same litigants."