• by Wendy Davis  @wendyndavis, October 21, 2013

In a victory for the Performance Marketing Association, the Illinois Supreme Court has struck down a 2011 tax law requiring out-of-state retailers to collect sales tax if they work with online performance marketers located within the state.

The judges ruled that the so-called “Amazon tax” discriminated against online performance marketers -- meaning Web publishers that display ads linking to retailers' sites -- by treating them differently than offline performance marketers. That distinction violates the federal Tax Freedom Act, which prohibits “discriminatory taxes on electronic commerce,” according to the Illinois court.

“Performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached. 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,” the judges wrote in an opinion issued on Friday. “The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce.”

The ruling affirmed an opinion by Cook County Circuit Judge Robert Lopez Cepero, who invalidated the law last year after it was challenged by the Performance Marketing Association.

That group argued that the law should be thrown out for several reasons, including that it marked an attempt by Illinois to regulate interstate commerce. The Illinois Supreme Court didn't rule on that issue, because it voided the law as discriminatory.

PMA executive director Rebecca Madigan tells Online Media Daily that around 1,000 retailers terminated their affiliate arrangements in Illinois in order to avoid collecting use tax. That move affected 9,000 affiliate marketers in Illinois, says Madigan. She says that one-third of them, including larger companies like Fat Wallet and Coupon Cabin, moved out of state. She adds that one-third of the state's affiliate marketers downsized and an additional 3,000 went out of business, as a result of the law.

Consumers in states with sales taxes are supposed to pay tax on items purchased online. But many states rely on consumers to self-report this figure, which tends to result in underpayments.

In the last several years, 13 states have passed laws aimed at collecting more of the sales tax they were owed. Among them is New York, which passed a law similar to the one struck down in Illinois. Unlike the case in Illinois, the highest court in New York upheld the state's Amazon tax. Amazon and Overstock recently asked the U.S. Supreme Court to rule on New York's law. The Supreme Court hasn't yet said whether it will hear the appeal.