The federal Internet Tax Freedom Act, which prohibits discriminatory taxes on electronic commerce, preempts Illinois’ statutory attempt to require retailers from other states to collect and remit sales or use taxes to Illinois if they utilize click-through performance marketing arrangements to generate over $10, 000 per year in internet sales to Illinois customers—commerce clause not reached.
Appeal from the Circuit Court of Cook County, the Hon. Robert Lopez Cepero, Judge, presiding.
Lisa Madigan, Attorney General, of Springfield (Michael A. Scodro, Solicitor General, and Brian F. Barov, Assistant Attorney General, of Chicago, of counsel), for appellant.
Ronald L. Wisniewski, of Chicago, and George S. Isaacson and Matthew P. Schaefer, of Brann & Isaacson, of Lewiston, Maine, for appellee.
Brian D. Day and Roger Huebner, of Springfield, for amicus curiae Illinois Municipal League.
Tanya P. Triche, of Chicago, for amicus curiae Illinois Retail Merchants Association.
Shirley Sicilian, Bruce Fort and Roxanne Bland, of Washington, D.C., for amicus curiae Multistate Tax Commission.
Chief Justice Kilbride and Justices Freeman, Thomas, Garman, and Theis concurred in the judgment and opinion.
¶ 1 The plaintiff, Performance Marketing Association, Inc., filed a complaint seeking declaratory and injunctive relief against the defendant, Brian Hamer, in his capacity as Director of the Illinois Department of Revenue. Plaintiff alleged that portions of Public Act 96-1544, a so-called "click-through" nexus law, were preempted by federal law and violated the commerce clause of the United States Constitution. The circuit court of Cook County agreed with both propositions and entered summary judgment in plaintiff's favor. Defendant appealed directly to this court. Ill. S.Ct. R. 302(a) (eff. Oct. 4, 2011). Because we agree with the circuit court's conclusion that the relevant portions of Public Act 96-1544 are preempted by federal law, we affirm the judgment of the circuit court.
¶ 2 Background
¶ 3 Sales tax in the State of Illinois is comprised of two complementary taxes, the Retailers' Occupation Tax Act (35 ILCS 120/1 et seq. (West 2010)), which is the principal means for taxing the retail sale of tangible personal property in Illinois, and use tax. Use tax is imposed "upon the privilege of using in this State tangible personal property purchased at retail from a retailer." 35 ILCS 105/3 (West 2010). The purpose of the use tax is "primarily to prevent avoidance of the [retailers' occupation] tax by people making out-of-State purchases, and to protect Illinois merchants against such diversion of business to retailers outside Illinois." Klein Town Builders, Inc. v. Department of Revenue, 36 Ill.2d 301, 303 (1966). The Retailers' Occupation Tax and the use tax are imposed at the same rate. 35 ILCS 105/3-10 (West 2010); 35 ILCS 120/2-10 (West 2010).
¶ 4 The ultimate responsibility for paying the use tax falls upon the consumer. However, because it is impractical to collect the tax from individual purchasers, the burden of its collection is imposed upon the out-of-state retailer. Brown's Furniture, Inc. v. Wagner, 171 Ill.2d 410, 418 (1996) (citing National Geographic Society v. California Board of Equalization, 430 U.S. 551, 555 (1977)). In Illinois, any retailer "maintaining a place of business in this State" is required by statute to collect use tax from its customers and remit it to the Illinois Department of Revenue. 35 ILCS 105/2, 3-45 (West 2010).
¶ 5 In 2011, the Illinois General Assembly enacted Public Act 96-1544 (eff. Mar. 10, 2011) (hereinafter, Act). In relevant part, the Act amended the definition of a retailer or serviceman "maintaining a place of business in this state" in Illinois' Use Tax and Service Use Tax Acts. Under these new definitions, a retailer "maintaining a place of business in this state" now includes:
"a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person's Internet website." Pub. Act 96-1544, § 5 (eff. Mar. 10, 2011) (codified at 35 ILCS 105/2(1.1) (West 2010)).
¶ 6 A serviceman "maintaining a place of business in this state" now includes any serviceman:
"having a contract with a person located in this State under which the person, for a commission or other consideration based on the sale of service by the serviceman, directly or indirectly refers potential customers to the serviceman by a link on the person's Internet website." Pub. Act 96-1544, § 10 (eff. Mar. 10, 2011) (codified at 35 ILCS 110/2(1.1) (West 2010)).
¶ 7 Thus, pursuant to the Act, out-of-state internet retailers and servicemen are required to collect state use tax if they have a contract with a person in Illinois who displays a link on his or her website that connects an Internet user to that remote retailer or serviceman's website. There is no requirement under the Act that sales be made to Illinois residents to subject the out-of-state retailer or serviceman to Illinois use tax obligations, and there is no requirement that the computer server hosting the Illinois affiliate's website be located in Illinois. Both new definitions are limited, however, to referral contracts that generate over $10, 000 per year. Pub. Act 96-1544, §§ 5, 10 (eff. Mar. 10, 2011) (codified at 35 ILCS 105/2(1.1) (West 2010), 35 ILCS 11 "performance marketing." Performance marketing refers to marketing or advertising programs in which a person or organization which publishes or displays an advertisement (often referred to as an "affiliate" or "publisher") is paid by the retailer when a specific action, such as a sale, is completed. In performance marketing, the retailer tracks the success or "performance" of the marketing campaign, and sets the affiliate's compensation accordingly. Such contractual arrangements are not limited to the Internet. They are also used in print and broadcast media, where promotional codes are used to generate and track sales.
¶ 9 After the Act was enacted, plaintiff, a trade group which represents businesses engaged in performance marketing, filed a complaint against defendant in the circuit court of Cook County. In count I of its complaint, plaintiff alleged that the new definitions in the Act were unconstitutional under the commerce clause of the United States Constitution (U.S. Const., art. I, § 8), because they authorized the collection of use tax with respect to an activity that lacked a substantial nexus with the state of Illinois (see Quill Corp. v. North Dakota, 504 U.S. 298 (1992)). In count III of its complaint, plaintiff alleged that the provisions of the Act were expressly preempted by the Internet Tax Freedom Act (ITFA) (47 U.S.C. § 151 note (2000)), which prohibits "discriminatory taxes on electronic commerce." Plaintiff and defendant filed cross-motions for summary judgment.
¶ 10 Following a hearing, the circuit court held that the relevant provisions of the Act failed the substantial nexus requirement for state taxes under the commerce clause and were therefore unconstitutional. The court also concluded that the provisions were expressly preempted under the ITFA. The court therefore entered summary judgment in plaintiff's favor on counts I and III of its complaint, and denied defendant's motion for summary judgment. This appeal followed.
¶ 11 Analysis
¶ 12 Summary judgment is proper when "the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." 735 ILCS 5/2-1005(c) (West 2010). The interpretation of a statute is a matter of law and is thus appropriate for summary judgment. Village of Chatham, Illinois v. County of Sangamon, Illinois, 216 Ill.2d 402, 433 (2005). We apply a de novo standard of review to issues of statutory interpretation and summary judgment rulings. First American Bank Corp. v. Henry, 239 Ill.2d 511, 515 (2011).
¶ 13 Plaintiff alleges both that the relevant provisions of the Act are preempted by federal legislation and that they violate the commerce clause of the United States Constitution. We begin with preemption.
¶ 14 Article VI of the federal constitution provides that the laws of the United States "shall be the supreme Law of the Land; *** any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. Const., art. VI, cl. 2. Under the supremacy clause, a federal statute will preempt state law in any one of three circumstances: "(1) express preemption—where Congress has expressly preempted state action; (2) implied field preemption—where Congress has implemented a comprehensive regulatory scheme in an area, thus removing the entire field from the state realm; or (3) implied conflict preemption—where state action actually conflicts with federal law." Carter v. SSC Odin Operating Co., 237 Ill.2d 30, 39-40 (2010). State law is null and void if it conflicts with federal law. Sprietsma v. Mercury Marine, 197 Ill.2d 112, 117 (2001).
¶ 15 Plaintiff argues that the relevant provisions of the Act are expressly preempted under section 1101(a)(2) of the ITFA (47 U.S.C. § 151 note). That section prohibits a state from imposing "discriminatory taxes on electronic commerce." Section 1105(2)(A)(iii) of the ITFA defines a discriminatory tax, in part, as:
"(A) any tax imposed by a State or political subdivision thereof on electronic ...