State Tax Snapshot: Which Will Survive--the Internet Tax Freedom Act or Click-Through Nexus Laws?


“This town ain’t big enough for the both us.” The phrase is essential dialogue in most western movies. It also seems to describe the current relationship between click-through nexus laws and the federal Internet Tax Freedom Act (ITFA).

In Performance Mktg. Ass'n Inc. v. Hamer , No. 114496 (Ill. Oct. 18, 2013), the Illinois Supreme Court voided the state’s click-through nexus statute, finding that the federalITFA preempts Illinois from imposing a prohibited, discriminatory tax on electronic commerce.

 The Internet Tax Freedom Act of 2007 (H.R. 3678), which was enacted Oct. 31, 2007, extended the moratorium under 15 U.S.C. § 151 on state and local taxation of Internet access and on the “multiple or discriminatory” taxation of electronic commerce from Nov. 1, 2007, to Nov. 1, 2014.

Included within the definition of a “discriminatory tax” under the ITFA is a state tax that “is not generally imposed and legally collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means.”

The taxpayer successfully argued in Performance that the state’s tax-collection obligation targeted out-of-state Internet retailers who entered into agreements with Internet affiliates for online performance marketing arrangements. But the law did not require use tax collection by out-of-state retailers who entered into performance marketing contracts with “offline” Illinois print publishers and over-the-air broadcasters.

The Illinois Supreme Court was so persuaded by the argument that it did not address the taxpayer’s claim that the state’s click-through nexus law violated the Commerce Clause of the U.S. Constitution.

The ruling is likely to raise the stakes for those seeking to extend the ITFA before it expires next year. If the Act is allowed to expire, the taxpayer’s victory in Performance would be rendered moot for future years. But if the Act is extended, the ITFA could become another weapon in taxpayers’ arsenal to defeat click-through nexus laws.

The future of the ITFA could enter into the political calculus behind the enactment of the Marketplace Fairness Act (MFA). It seems likely that there will be an attempt to tack onto the legislation tax proposals that have been traditionally unpopular with the states, participants in a Bloomberg BNA State Tax Advisory Board Roundtable concluded. This could also include the Mobile Workforce Act, Business Activity Tax Simplification Act, and Digital Goods & Services Tax Fairness Act.

Continue the discussion on the BBNA State Tax Group on LinkedIn: Is the extension of the ITFA likely to factor into the enactment of the MFA?

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