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'Amazon tax' for sales thrown out in Illinois

Dana Hoff | Getty Images

The Illinois Supreme Court threw out a state law Friday that taxes certain Internet sales, saying the so-called "Amazon tax" violated federal rules against "discriminatory taxes" on digital transactions.

The 6-1 ruling represented the first time a court had invalidated an Internet sales tax law among 18 states that have them. It brought an immediate cry from traditional, store-based retailers for Congress to step into regulating taxes on web sales.

The court determined that Illinois' 2011 "Main Street Fairness Act" was superseded by the federal law, which prohibits imposing a tax on "electronic commerce" and obligates collection that's not required of transactions by other means, such as print or television.

(Read more: Mall retailers will be challenged: Analyst)

Illinois' law required out-of-state retailers to collect state taxes on annual sales of more than $10,000 that involve in-state "affiliates," or website operators and bloggers, that draw consumers to the retailers' sites in exchange for a cut of each sale.

That prompted several high-profile departures from the Prairie State by companies such as CouponCabin.com, which fled rather than lose so-called "click-through-nexus" payments from the Internet retailers.

But Justice Anne Burke, writing for the court's majority, questioned whether there was any substantial difference between out-of-state businesses reaching Illinois consumers through a click-through-nexus approach or through other approaches that aren't taxed.

(Read more: What DC wrangling means for your holiday budget)

"The click-through link makes it easier for the customer to reach the out-of-state retailer," Burke wrote. "But the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts."

Justice Lloyd Karmeier dissented, saying the federal law does not apply because the state statute doesn't "impose any new taxes or increase any existing taxes," but rather changes the definition of who's obligated to collect them.

Illinois' tax collector, the Department of Revenue, said it is considering asking the U.S. Supreme Court to intervene. Amazon.com did just that in August, when it sought a review of the New York Court of

Appeals' March ruling upholding the law there. The Empire State was among the first to argue that a business with "affiliates" within its borders gives the company a physical presence there — a must if a state hopes to collect taxes from it, according to a 1992 U.S. Supreme Court ruling.

Revenue officials also said they would continue to push the "Marketplace Fairness Act" in Congress to "level the playing field for all businesses." Its sponsor is Sen. Dick Durbin, an Illinois Democrat.

Friday's Illinois ruling "underscores the need" for Capitol Hill action, said David Vite of the Illinois Retail Merchants Association.

"Brick-and-mortar businesses, which pay property taxes, and income taxes, and are hiring people, are at a significant competitive disadvantage with their remote-selling counterparts," Vite told The Associated Press. "It's time for the federal government to clarify and finish putting retailers, who are making payroll and putting people to work, on equal footing."

(Read more: Where are the shoppers? Blame Congress)

Neither proponents nor opponents of the measure could say how much Illinois had collected, but just as the law's backers trumpet economics, so do those opposing it. George Isaacson is a lawyer from Lewiston, Maine, who represents the plaintiffs in the case, Performance Marketing Association. Its members are the affiliates who post the retailers' links.

"Our understanding is that the primary economic impact, the effect of the legislation, was in forcing the web affiliates to lay off people," Isaacson said. "That's less income, less income tax. The law was self-defeating in terms of economic impact."

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