Illinois-based Internet affiliates were bracing for a drop in revenue after giants Amazon and Overstock sent letters Thursday saying they would stop doing business with them due to a new Internet tax law.
Under the Main Street Fairness Act, which Gov. Pat Quinn signed into law Thursday, out-of-state online merchants must collect and remit Illinois sales tax of 6.25 percent if they do business with Illinois affiliate marketers, such as CouponCabin, Brad’s Deal and FatWallet.
Affiliates could lose one-third of revenue
Affiliate marketers and technology groups had lobbied against the measure, saying it would significantly curtail their business, potentially leading to layoffs and companies moving out of state. “It would cut a third of our revenue overnight,” CouponCabin chief executive Scott Kluth told SmallBusinessChicago in an interview late last year. “It would be a flip of the switch, and one-third of our revenue would be gone,” he said.
In a statement released Thursday, Kluth said, “Illinois will lose jobs, many thriving businesses like CouponCabin and other affiliate marketing firms will be forced to move to other states, and most important, this law will not generate the tax revenue Illinois thinks it will collect.” Kluth was unavailable for additional comment.
According to reports in the Chicago Tribune and Wall Street Journal, Amazon notified Illinois affiliates Thursday that it planned to terminate their contracts April 15, while Overstock said it would stop doing business with them May 1 unless the law is repealed or they move to states that don’t have similar laws.
Other online merchants are likely to abandon Illinois-based affiliates. In an earlier interview, Kluth estimated 500 to 600 Internet retailers might stop doing business with CouponCabin and as many as 9,000 Illinois affiliate marketers if the act became law. Illiniois affiliates contributed state tax revenue of $18 million in 2009 on $611 million in advertising revenue, according to information from the Performance Marketing Association reported in the Wall Street Journal. Due to the new law, the group estimates the state could lose $5 million to $6 million in tax revenue, the Journal reported.
Giants consider law unconstitutional
Amazon has said it considers the Illlinois act to be unconstitutional. At the heart of the controversy is what defines nexus, or a physical presence in a state. Illinois’ new law is based on the notion that doing business with an affiliate marketer in Illinois constitutes having a physical presence in the state. But many disagree, saying the state overstepped its bounds.
“The interstate application of sales tax has always been a federal issue,” said Brad Wilson, editor in chief of Brad’s Deals. He noted the 1992 U.S. Supreme Court Case of Illinois-based office supply cataloger Quill Corp. vs. North Dakota.
In that case, the high court decided that out-of-state merchants could be required to collect and remit sales tax for other states if they had a physical presence in those states, as defined as brick-and-mortar locations, offices, warehouses or employees, but not customers alone. But the ruling said states could not supersede the Interstate Commerce Clause by requiring out-of-state marketers with no physical presence to collect and remit sales tax, said Jerry Cerasale, senior vice president, government affairs, for the Direct Marketing Association in a previous interview with SmallBusinessChicago.
The Supreme Court ruling did hold open the door for Congress to grant the states the authority to impose their own laws, but Congress has not yet done so, Cerasale said.
Headed for court?
The Illinois law could wind up in court, as has been the case in New York and other states, experts said. Meantime, some states have repealed similar laws due to their negative impact on affiliates and state tax revenue.
Illinois affiliate marketers and Tech America are hoping for a repeal of the Illinois legislation, said Ed Longanecker, executive director of Tech America. “This is by far not over,” he said. “We’re not giving up.”