Trade Group Calls Internet Ad Tax Illegal

CHICAGO (CN) – A Internet marketers’ trade group claims a new Illinois law illegally taxes out-of-state businesses that do business through online advertising in Illinois.

     The Performance Marketing Association claims Illinois H.B. 3659, signed into law by Gov. Pat Quinn in January, violates the Constitution’s Commerce Clause and the U.S. Internet Tax Freedom Act (47 U.S.C. §151) by “us(ing) the relationship between in-state publishers of online advertisements and out-of-state advertisers as a basis for expanding the state’s regulatory authority beyond its borders.”
     The trade group claims that even before the law takes effect, on July 1, its passage “has caused substantial harm to the business of thousands of Illinois publishers, including PMA members, through the loss of advertising contracts with Internet retailers.”
     “Performance marketing” is tradespeak for arrangements in which Internet publishers and advertisers share income from ads that direct browsers from one website to another.
     In its federal complaint, the California-based trade group claims that the defendant Illinois Department of Revenue, through HB 3659, discriminates against online advertising by “targeting online, performance marketing arrangements as the basis for imposing Illinois tax reporting and collection obligations upon retailers who do nothing more than advertise on the Internet through publishers located in Illinois, while not imposing tax reporting and collection obligations upon retailers who advertise nationally through other media.”
The trade group objects that the law redefined the meaning of a “retailer maintaining a place of business in this state.”
     According to the complaint, the new definition “include(s) any retailer that: (a) has one or more contracts with publishers ‘located in Illinois,’ pursuant to which the publisher displays an advertisement on its website that links Internet users to the retailer’s website, in return for which the publisher receives compensation based on sales made to customers who reached the retailer’s website via the link; and (b) realizes at least $10,000 in gross receipts from such sales over a one-year period.”
     Members of the trade group in Illinois who publish online ads for out-of-state retailers “receive compensation based on sales made by the retailers to customers who reached the retailers’ websites via the advertisements appearing on the publishers’ websites.”
     And “based solely upon a remote seller’s contractual relationships with Illinois publishers for the display of online advertisements that permit Internet users to gain access to the retailer’s website via an online link, an out-of-state retailer is obligated to collect and remit Illinois use tax on all of its taxable sales to Illinois consumers.”
     The trade group objects that under HB 3659, any online store with “one or more contracts” with publishers in Illinois becomes a “retailer maintaining a place of business” in Illinois, “regardless of whether the publisher’s computer servers storing and displaying the advertisement are located in Illinois, whether the sales made by the retailer as a result of the advertisement are to Illinois consumers, or whether the publisher engages in any activity in Illinois on behalf of an out-of-state retailer.”
     To duck the tax, retailers flew the Internet coop, yet “continue to make sales to Illinois residents who access the retailers’ websites directly or via the websites of publishers located outside of Illinois,” Performance Marketing says.
     It claims: “Due to the loss of contracts with advertisers, Illinois publishers of Internet advertisements will collectively lose millions of dollars of advertising revenue each year. Indeed, some Illinois publishers will likely go out of business as a result of the loss of their relationships with advertisers who discontinue their agreements with publishers in the state. …
     “For example, after enactment of HB 3659 on March 10, online retailer informed Illinois publishers that it would discontinue its contracts and relationships with Illinois publishers as of April 15, 2011. On information and belief, other Internet retailers will likewise terminate their advertising contracts with Illinois publishers either before or when the Act takes effect on July 1, 2011.”
     The trade group insists: “Internet retailers who have no business location or other physical presence in Illinois have no obligation to register with the Department or to collect Illinois sales or use tax because of the limitation on state taxing power under the Commerce Clause of the United States Constitution.”
     It wants HB 3659’s definition of “retailer maintaining a place of business in this state” rejected as unconstitutional, and damages.
     It is represented by George Isaacson with Brann & Isaacson.

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