SPRINGFIELD — Illinois Supreme Court justices appeared skeptical Wednesday when an attorney representing the state argued the constitutionality of a two-year-old state law designed to force certain Internet retailers to collect sales taxes.
Before the law was passed, companies such as Sears and Walmart collected state sales tax on Internet transactions with Illinois customers. They did this because they had stores in Illinois, which constitutes a legal presence, or "nexus," in the state.
Companies such as Amazon, however, did not have to collect sales tax because they did not have a physical presence in Illinois.
To draw more tax revenue and end an advantage for Internet retailers, Illinois legislators redefined the term "physical presence" to include marketing affiliates based within the state – typically coupon or deal websites whose operators earn commissions for driving shopping traffic to an online retailer.
It is a novel legal concept — "a position no other court has adopted" — said George Isaacson, an attorney for the Performance Marketing Association, the plaintiff in the case. Hecontends Illinois' law goes against a requirement set by the U.S. Supreme Court in 1992 that establishes "physical presence" means having offices, branches, warehouses and employees in the state.
He said Illinois' law also violates federal statute, which has imposed a moratorium on states creating Internet-only taxes.
Illinois' law does not impose the same requirement on out-of-state businesses working with firms that place similar ads on radio or television, Isaacson said. That is evidence Internet retailers are being singled out by the law, he said.
After the law passed, Amazon dropped all of its Illinois affiliates to avoid being forced to collect the tax.
Chief Justice Thomas Kilbride expressed concern for how the law hypothetically could adversely affect a former Galesburg factory worker running an Internet-based business.
Justice Mary Jane Theis added, "We all struggle with this. We don't understand what they do enough to determine if there is nexus."
The only relationship between most Internet affiliates and companies such as Amazon or Overstock.com is they receive a commission for each successful sales referral they make. Justice Anne M. Burke asked ifa referral relationship created a nexus.
"No court — state or federal court in the United States — has found that that kind of limited activity is sufficient to create a nexus," Isaacson said.Assistant Attorney General Brian Barov, however, said he believed a referral relationship is sufficient to create a nexus.
About 2,000 Internet businesses left Illinois when this law passed, the Performance Marketing Association contends.
"My best guess is the state lost revenue because of this law," Isaacson said. "This is a good example of why these types of laws shouldn't be handled on a piecemeal, state-by-state basis."
The state high court is expected to issue a ruling within several months. Isaacson declined to predict its decision.
"I never make book on how courts decide cases," he said.
Today is Tuesday, July 22, the 203rd day of 2014. There are 162 days left in the year.
1864 -- 150 years ago: Everybody is invited to go on a moonlight excursion next Monday evening on the steamer New Boston. The trip will be from Davenport to Muscatine and back. 1889 -- 125 years ago: The mayor and bridge committee let a contract to the Clinton Bridge company for a $1,125 iron bridge across Sears canal near Milan. 1914 -- 100 years ago: Injunction proceedings to compel the Central Association to keep a baseball team in Rock Island for the remainder of the season were contemplated by some of the Rock Island fans, but they decided to defer action. 1939 -- 75 years ago: The first of the new and more powerful diesel engines built for the Rock Island Lines for the proposed Chicago-Denver run, passed thru the Tri-Cities this morning. 1964 -- 50 years ago: The Rock Island Rescue Mission is negotiating for the purchase of the Prince Hall Masonic Home located at 37th Avenue and 5th Street, Rock Island. 1989 -- 25 years ago: Quad Cities Container Terminal is being lauded as a giant business boon that will save several days and hundreds of dollars on each goods shipment to the coasts. The Quad Cities Container Terminal is the final piece of the puzzle that opens up increase access to world markets, Robert Goldstein said.