Illinois Judge Rules 'Amazon Tax' Unconstitutional

by Wendy Davis, Apr 27, 2012, 5:11 PM

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Handing a victory to the Performance Marketing Association, a judge in Illinois ruled this week that the state can't require online companies like Amazon to collect sales tax from state residents.

Cook County Circuit Judge Robert Lopez Cepero invalidated a 2011 Illinois law that required out-of-state online retailers that worked with in-state affiliates to collect sales tax. In-state affiliates included online publishers that displayed ads linking to the retailers' sites.

Cepero said that the law unconstitutionally restricts interstate commerce, according to PMA executive director Rebecca Madigan, who was present at the court hearing on Wednesday. Cepero said he intends to issue a written ruling, but hasn't yet done so, according to Madigan.

Last year, the PMA filed a lawsuit challenging the measure, referred to as the "Amazon tax." The group argued that the Illinois law would unlawfully restrict interstate commerce; the U.S. constitution provides that only the federal government can regulate interstate commerce.

The PMA drew on a 1992 U.S. Supreme Court ruling that state governments can't require retailers to collect sales tax unless they have a physical presence in the state, like a brick-and-mortar store.

"The appearance of advertisements for an out-of-state retailer, that include a link to its Web site, on the Web sites of publishers located in Illinois is not sufficient," the PMA argued in its court papers.

Consumers in states with sales taxes generally are supposed to pay tax on items purchased via the Web. But many states rely on consumers to self-report this figure -- a practice that observers say results in underpayments.

In the last few years, a number of states passed laws aimed at collecting more of the sales tax they were owed. New York, for instance, passed a law that is similar to the one struck down in Illinois. Amazon and Overstock are currently challenging that law in court.

Colorado recently enacted a law obligating e-commerce companies to disclose information about state residents' purchases to the tax authorities, but that statute was struck down by a federal judge earlier this month.

Vermont, Oklahoma, and South Dakota also passed laws requiring online retailers to inform consumers about their duty to pay sales tax -- although none of those states require e-commerce companies to disclose consumers' purchases to the tax authorities.

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