Illinois’ Internet sales tax law struck down, adding to uncertainty

In a legal setback for states seeking to collect taxes from Internet sales, the Illinois Supreme Court in October struck down the legislature’s 2011 Main Street Fairness Act. According to USA Today, the decision marks the first time a state’s Internet sales tax law has been invalidated. Illinois’ measure is known as an “Amazon” law, named after the online retailer.

Twelve other states, including Kansas and Minnesota, have such laws, which establish in statute what is known as a “click-through nexus.” If potential customers are referred to an out-of-state seller via the website of an in-state small business or blogger (“click through”), a nexus is established. Internet retailers such as Amazon commonly employ these types of performance-marketing agreements.

The U.S. Supreme Court has limited a state’s ability to collect sales taxes from Internet retailers who do not have a physical presence in the state. However, a third party can create the “substantial nexus” that a state needs — hence the passage of these “click through” laws. Due in part to conflicting state court rulings (Illinois’ measure was overturned while New York’s was upheld), the U.S. Supreme Court may eventually weigh in on the constitutionality of these “Amazon” laws.

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