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.