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State Supreme Court strikes down Internet sales tax

Published: Saturday, Oct. 19, 2013 5:30 a.m. CDT

Local retailers again might find themselves collecting sales taxes that their online competitors may be able to skip.

Friday, the Illinois Supreme Court struck down a 2011 state law that had slapped a tax on the sales of merchandise peddled by online retailers through partners in Illinois.

The law had been backed by large bipartisan majorities in both houses of the Illinois General Assembly, including many local state lawmakers.

The law also was promoted by the Illinois Retail Merchants Association and some of the country’s largest retailers, among others. 

They said the law would close a “loophole” which created what they called an unfair advantage for Internet-based sellers over local shops.

The state high court recognized that purpose.

But in its 6-1 decision, the court said the Illinois law is in conflict with a federal law forbidding the establishment of a “discriminatory tax on electronic commerce.”

The ruling upheld a lower court decision, in part, in which a Cook County judge determined that the state law was both in violation of the federal Internet Tax Freedom Act and unconstitutional, as it established a tax on businesses that do not have “a substantial nexus” in the state.

The state high court did not rule on the constitutionality of the law.

The law had been challenged by the Performance Marketing Association, a trade group representing the interests of online sellers that generate sales by advertising on other websites and drawing customers to their sales sites via links.

The PMA had argued the law discriminated by placing a tax on the online performance marketers that it did not place on similarly situated out-of-state “offline” sellers, who use print or broadcast advertising to achieve similar goals.

The state Supreme Court backed that argument.

Locally, response to the decision was fairly muted. Roger Breisch, executive director of the Batavia Chamber of Commerce, said the issue never was a hot-button one for his members to begin with.

“None of my members have ever said to me they were glad we had the law, or wished we didn’t,” Breisch said.

However, he said some retailers have mentioned that they “feel they’re at a disadvantage.”

Statewide, the Illinois Retail Merchants Association said they believed the state Supreme Court “erred” in its decision, and that they “haven’t given up,” hinting that they hoped the Illinois Department of Revenue will seek to appeal the decision to the U.S. Supreme Court.

They also urged passage of the so-called Marketplace Fairness Act, federal legislation that would compel online retailers to collect sales taxes on behalf of the states in which their customers reside.

State Sen. Karen McConnaughay, R-St. Charles, said she would support new legislation that might seek to address the court’s concerns, should any arise.

“The businesses that choose to support our local communities should not be at an unfair disadvantage because of the tax loophole,” McConnaughay said.

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