Performance Marketing Association, Inc. v. Hamer ( 2013 )

2013 IL 114496
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 114496)
PERFORMANCE MARKETING ASSOCIATION, INC., Appellee,
v. BRIAN HAMER, Director of Revenue, Appellant.
Opinion filed October 18, 2013.
JUSTICE BURKE delivered the judgment of the court, with
opinion.
Chief Justice Kilbride and Justices Freeman, Thomas, Garman,
and Theis concurred in the judgment and opinion.
Justice Karmeier dissented, with opinion.
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 the 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:
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“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 110/2(1.1) (West 2010)).
¶8 The type of contractual relationship taxed by the new definitions
in the Act is known as “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
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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
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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 commerce that—
***
(iii) imposes an obligation to collect or pay tax on a
different person or entity than in the case of transactions
involving similar property, goods, services, or information
accomplished through other means.” 47 U.S.C. § 151 note.
The term “tax” in turn is defined in sections 1105(8)(A)(i) and (ii) of
the ITFA to include both revenue-raising measures and “the
imposition on a seller of an obligation to collect and to remit to a
governmental entity any sales or use tax imposed on a buyer by a
governmental entity.” “Electronic commerce” is defined in section
1105(3) as “any transaction conducted over the Internet ***
comprising the sale *** of property, goods, [or] services.”
¶ 16 Plaintiff argues that, under the plain language of the ITFA, the
relevant provisions of the Act constitute a prohibited, discriminatory
tax on electronic commerce. According to plaintiff, the amended
definitions of retailer and serviceman “maintaining a place of
business in this State” result in the “imposition on a seller of an
obligation to collect and remit” use tax, and thus constitute a “tax”
within the meaning of the ITFA. Further, the Act’s tax-collection
obligation is targeted at out-of-state Internet retailers who enter into
agreements with Internet affiliates for online performance marketing
arrangements and, thus, applies to electronic commerce as defined in
the ITFA.
¶ 17 At the same time, however, the Act does not require use tax
collection by out-of-state retailers who enter into performance
marketing contracts with “offline” Illinois print publishers and over-
the-air broadcasters. Plaintiff points to the parties’ joint stipulation of
facts, which indicates that many out-of-state retailers with no physical
presence in the state engage in performance marketing through a
variety of media such as catalogs, magazines, newspapers, television
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and radio, that are accessible by, or distributed to, consumers in
Illinois, but are directed at a regional, national and even international
audience. Plaintiff asserts that the Act is targeted solely at
performance marketing accomplished through “a link on the person’s
website,” with no similar treatment of sales accomplished by other,
“offline” means. In plaintiff’s view, this is the type of discrimination,
directed at electronic commerce, that is expressly prohibited under the
ITFA.
¶ 18 Defendant, in response, does not dispute that the Act makes no
mention of traditional, “offline” performance marketing contracts.
Nevertheless, defendant maintains that the Act is not discriminatory
because there are other statutory provisions in Illinois that already
impose a use tax collection obligation for “offline” performance
marketing. In support, defendant points to paragraph 3 of the
definition section of the Use Tax Act. That provision states that a
retailer “maintaining a place of business in this State” includes a
“retailer, pursuant to a contract with a broadcaster or
publisher located in this State, soliciting orders for tangible
personal property by means of advertising which is
disseminated primarily to consumers located in this State and
only secondarily to bordering jurisdictions.” 35 ILCS 105/2(3)
(West 2010).
According to defendant, this provision covers “offline” performance
marketing contracts that are similar to those entered into with Internet
affiliates. Thus, in defendant’s view, the Act is not discriminatory
within the meaning of the ITFA. We disagree.
¶ 19 Under paragraph 3 of the definition section of the Use Tax Act,
retailers who enter into contracts with Illinois publishers and
broadcasters for advertising “disseminated primarily to consumers
located in this State,” i.e., locally, are obligated to collect use tax. But
Internet advertising is different. As the parties’ joint stipulation of
facts states: “The home page and other publicly-available pages of
any Internet website can be accessed from a computer, or other digital
device, located anywhere in the world that is connected to the Internet
via wire or radio signal. Thus, information appearing on a webpage
is available and disseminated worldwide.” (Emphasis added.) Illinois
law does not presently require out-of-state retailers who enter into
performance marketing contracts for “offline” print or broadcast
advertising which is disseminated nationally, or internationally, to
collect Illinois use tax. However, under the Act, out-of-state retailers
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who enter into such contracts with Illinois Internet affiliates for the
publication of online marketing—which is inherently national or
international in scope and disseminated to a national or international
audience—are required to collect Illinois use tax. In this way, by
singling out retailers with Internet performance marketing
arrangements for use tax collection, the Act imposes discriminatory
taxes within the meaning of the ITFA.
¶ 20 Defendant also points to section 150.801(c)(2) of title 86 of the
Illinois Administrative Code (86 Ill. Adm. Code 150.801(c)(2)
(2000)). Under this provision, out-of-state retailers
“who have any kind of place of business in Illinois or any
kind of order-soliciting or order-taking representative either
stationed in Illinois or coming into Illinois from time to time,
must collect and remit the Use Tax, as such, from Illinois
purchasers for use even though the seller is not required to
pay Retailers’ Occupation Tax when he does nothing in
Illinois except to solicit orders.” 86 Ill. Adm. Code
150.801(c)(2) (2000).
¶ 21 Defendant does not maintain that an Illinois newspaper or radio
station which has a performance marketing contract with an out-of-
state retailer would be considered “an order-soliciting or order-taking
representative” for purposes of this provision. That is, defendant does
not maintain that section 150.801(c)(2) of title 86 applies to
advertising. Defendant contends, however, that the Internet links at
issue in this case “are not advertising.” Instead, according to
defendant, “they are active efforts to solicit sales on behalf of out-of-
state retailers.” Defendant maintains that, because the click-through
link is “active” solicitation, it is similar to the activity which is
subject to use tax collection under section 150.801(c)(2) of title 86.
Thus, according to defendant, the Act is not discriminatory. Again,
we disagree.
¶ 22 The parties’ joint stipulation of facts states that an Internet
affiliate does not receive or transmit customer orders, process
customer payments, deliver purchased products, or provide presale or
postsale customer services. Further, an Internet affiliate displaying a
link on its website does not know the identity of Internet users who
click on the link, and after a user connects to the retailer’s website,
the affiliate has no further involvement with the user. It is clear,
therefore, that there is no interaction between an affiliate and a
customer, and no “active” solicitation occurs on the part of the
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Internet affiliate. The click-through link makes it easier for the
customer to reach the out-of-state retailer, but the link is not different
in kind from advertising using promotional codes that appear, for
example, in Illinois newspapers or Illinois radio broadcasts.
¶ 23 In short, under the Act, performance marketing over the Internet
provides the basis for imposing a use tax collection obligation on an
out-of-state retailer when a threshold of $10,000 in sales through the
clickable link is reached. However, national, or international,
performance marketing by an out-of-state retailer which appears in
print or on over-the-air broadcasting in Illinois, and which reaches the
same dollar threshold, will not trigger an Illinois use tax collection
obligation. The relevant provisions of the Act therefore impose a
discriminatory tax on electronic commerce within the meaning of the
ITFA. Accordingly, we affirm the circuit court’s judgment that the
definition provisions contained in the Act, quoted above and codified
at 35 ILCS 105/2(1.1) (West 2010), and 35 ILCS 110/2(1.1) (West
2010), are expressly preempted by the ITFA and are therefore void
and unenforceable. Because we hold that the provisions of the Act are
void based on preemption, we do not reach plaintiff’s alternative
argument that the new definitions provisions of the Act violate the
commerce clause of the United States Constitution. See National
Commercial Banking Corp. of Australia, Ltd. v. Harris, 125 Ill. 2d
448, 454-55 (1988).
¶ 24 Conclusion
¶ 25 For the foregoing reasons, the judgment of the circuit court
granting summary judgment in favor of plaintiff and denying
defendant’s motion for summary judgment is affirmed.
¶ 26 Affirmed.
¶ 27 JUSTICE KARMEIER, dissenting:
¶ 28 Public Act 96-1544 does not impose any new taxes or increase
any existing taxes. Substantive tax liability under Illinois law is
unaffected. Sales transactions subject to use and service use taxes are
the same now as they were before the Act took effect. What the law
does, instead, is simply amend the definition of retailers and
servicemen who are obligated to collect and remit Illinois use and
service use taxes to the Department of Revenue. It makes this change
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for reasons that are entirely reasonable and proper: (1) to enhance the
collection of revenues already due under Illinois law by reducing the
circumstances in which payment of the tax is left to individual
purchasers or consumers who may neglect or refuse to remit what
they owe to the Department of Revenue, and (2) to ameliorate the
competitive disadvantage suffered by existing Illinois retailers and
servicemen who must already include use and service use taxes in the
amount they charge their customers and then take responsibility for
remitting the tax to the state.
¶ 29 Under controlling case law, we must presume Public Act 96-1544
to be valid. The burden is on Peformance Marketing Association, Inc.
(PMA), the plaintiff in this case, to overcome that presumption. In my
view, it has failed to meet that burden. Contrary to the majority, I
would therefore reverse the judgment of the circuit court and remand
with directions to enter summary judgment in favor of the Director of
the Department of Revenue.
¶ 30 Prior to enactment of Public Act 96-1544, retailers and
servicemen who utilized the internet to make retail sales of tangible
personal property or services used in Illinois were required to collect
and remit use or service use taxes only if they or one of their
subsidiaries had an actual office, distribution house, sales house,
warehouse or other place of business located within this state or had
an agent or other representative operating within this state under their
authority or the authority of a subsidiary. If the retailer or serviceman
did not have such a presence in Illinois, its retail sales of tangible
personal property or services used here were still subject to the tax.
The difference is that the obligation to remit the tax shifted to the
purchasers, who were required to self report and pay the tax directly
to the Department of Revenue. 35 ILCS 105/10 (West 2012); 35
ILCS 110/10 (West 2012).
¶ 31 When the onus is placed on consumers to report and remit tax on
their retail purchases, taxable retail sales are under reported. That is
so, in part, because such sales are difficult for the state to police, a
circumstance which consumers are quick to appreciate. The result is
that collection of use and service use taxes suffers, depriving the state
of needed revenue to which it is entitled. Moreover, as consumers
realize that they can avoid their use tax liability by turning to out-of-
state internet retailers with no physical presence here, retailers and
servicemen with places of business located within Illinois are placed
at a competitive disadvantage because they, unlike their out-of-state
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internet competitors, must include the tax in the amount they charge
and then assume responsibility for remitting that tax money to the
State. See Joel Griffiths, Comment, Use It or Lose It: State
Approaches to Increasing Use-Tax Revenue, 60 U. Kan. L. Rev. 649
(2012); Michael R. Gordon, Up the Amazon Wthout a Paddle:
Examining Sales Taxes, Entity Isolation, and the “Affiliate Tax”, 11
N.C. J. L. & Tech. 299 (2010).
¶ 32 This situation is not unique to Illinois. It has been problematic for
many states throughout the United States. Three basic strategies have
emerged for addressing it: (1) increasing efforts to notify remote
sellers and in-state purchasers that the transaction is subject to the use
tax; (2) participation by the state in the Streamline Sales Tax Project
(SSTP) and adoption of the Streamlined Sales and Use Tax
Agreement (SSUTA), a collaborative effort aimed at reducing
compliance and administrative burdens related to use taxes; and (3)
implementation of what have become known as “affiliate” or
“Amazon” tax provisions, the latter appellation derived from the giant
online retailer. Griffiths, supra at 659-64.
¶ 33 The first “affiliate” or “Amazon” tax law was enacted by New
York State in 2008. Under the New York law, an internet retailer is
presumed to be a vendor required to collect sales tax on its New York
sales if the retailer makes sales of taxable property or services and:
“ ‘enters into an agreement with a resident of [New York]
under which the resident, for a commission or other
consideration, directly or indirectly refers potential customers,
whether by a link on an internet website or otherwise, to the
seller, if the cumulative gross receipts from sales by the seller
to customers in [New York] who are referred to the seller by
all residents with this type of an agreement with the seller is
in excess of ten thousand dollars during the preceding four
quarterly periods ... .’ ” Gary C. Bingel & John C. Genz, High
Court Upholds ‘Amazon Tax’ Provision for Internet
Retailers, 23 J. Multistate Tax’n & Incentives 33 (July 2013).
Similar legislation was subsequently enacted in at least half a dozen
other states, including Illinois. Griffiths, supra at 659; Jessica Nicole
Cory, The Gap Created by E-Commerce: How States Can Preserve
Their Sales and Use Tax Revenue in the Digital Age, 8 Okla. J. L. &
Tech. 57 (2012).
¶ 34 Public Act 96-1544, the legislation being challenged in this case,
is the Illinois version of New York State’s Amazon Law. The Act
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amended section 2 of the Use Tax Act (35 ILCS 105/2 (West 2012))
and section 2 of the Service Use Tax Act (35 ILCS 110/2 (West
2012)) to expand the definition of “retailer maintaining a place of
business in this State” and “serviceman maintaining a place of
business in this State.” Basically, the amendment broadened those
definitions to include retailers and servicemen who contract with
internet affiliates having a physical presence in Illinois to place links
on the affiliates’ website to solicit customers for their businesses, pay
their Illinois internet affiliates a commission based on the sales
generated through the links, and make over a certain dollar amount in
sales through those links.
¶ 35 PMA, a trade organization representing internet retailers who
oppose Public Act 96-1544, brought this action for declaratory and
injunctive relief to have the law invalidated on the grounds that it
unduly burdens interstate commerce in contravention of the
commerce clause of the United States Constitution (U.S. Const., art.
I, § 8, cl. 3). PMA alleged that the statute also violates the commerce
clause because it represents an improper attempt by Illinois to
regulate commerce outside this state’s borders. In addition, PMA
challenged the law on the grounds that it imposes a “discriminatory
tax” within the meaning of the federal Internet Tax Freedom Act (47
U.S.C. § 151 note) and, under the federal Constitution’s supremacy
clause (U.S. Const., art. VI, cl. 2), is preempted by the federal statute.
¶ 36 On the parties’ cross-motions for summary judgment, the circuit
court concluded that Public Act 96-1544 was facially invalid under
the commerce clause. It further held that the statute was preempted by
the federal Internet Tax Freedom Act and could not be enforced in
any case. Although the circuit court reserved for future consideration
PMA’s request for an award of attorney fees and costs, the court
made an express written finding pursuant to Supreme Court Rule
304(a) (Ill. S. Ct. R. 304(a) (eff. Feb. 26, 2010)) that there was no just
reason for delaying enforcement or appeal. Because it declared the
statute invalid, the circuit court opined that the appeal could be
brought directly to our court under Supreme Court Rule 302(a) (Ill.
S. Ct. R. 302(a) (eff. Oct. 4, 2011)).
¶ 37 Throughout this appeal, the focus of the argument by the parties
and by the Multistate Tax Commission and the Illinois Retail
Merchants Association and Illinois Municipal League, who were
granted leave to file friend of the court briefs in support of the
Director of Revenue, has been whether the circuit court erred when
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it held that Public Act 96-1544 is invalid under the commerce clause.
Contrary to the majority’s characterization, the commerce clause
issue was not merely an “alternative” challenge. Supra ¶ 23.
¶ 38 That the parties’ arguments centered on the commerce clause is
hardly surprising. The limits posed by the commerce clause have been
at the center of a nationwide debate regarding the power of states to
impose and collect taxes on sales conducted through the internet. See,
e.g., Gordon, Up the Amazon without a Paddle, supra; Griffiths, Use
it or Lose it, supra; Rob Owen, The “Amazon Tax” Issue: Washing
Away the Requirement of Physical Presence for Sales Tax
Jurisdiction over Internet Businesses, 2013 U. Ill. J. L. Tech. & Pol’y
231.
¶ 39 While this appeal was pending, the Court of Appeals of New
York, that state’s highest court, considered and rejected a commerce
clause challenge to New York’s version of Public Act 96-1544.
Overstock.com, Inc. v. New York State Department of Taxation &
Finance, 987 N.E.2d 621, 622 (N.Y. 2013). The parties have not cited
and I have not discovered any authority from a court of review which
has reached a contrary result and held that internet affiliate tax
collection requirements of the kind at issue here and in the New York
case run afoul of the federal commerce clause. How our court was
going to resolve the issue was therefore a matter of considerable
interest, concern and significance.
¶ 40 Unfortunately, the majority has elected to ignore the commerce
clause issues entirely and decide the case based solely on federal
preemption grounds. The decision is a puzzling one for several
reasons. First, a determination that a state law is preempted by a
federal one is not tantamount to a repeal or invalidation of the state
statute. The legislative enactment of the state is merely suspended and
rendered unenforceable by the existence of the federal enactment. Lily
Lake Road Defenders v. County of McHenry, 156 Ill. 2d 1, 8 (1993);
Kinsey Distilling Sales Co. v. Foremost Liquor Stores, Inc., 15 Ill. 2d
182, 193 (1958).1 Because of this, we have made clear that a
1
The majority cites Sprietsma v. Mercury Marine, 197 Ill. 2d 112, 117
(2001), for the proposition that federal preemption renders a conflicting
state law “null and void.” Supra ¶ 14. Sprietsma does not say that and it is
incorrect as a matter of law. When a state statute conflicts with an act of
Congress, the state statute merely “yields” to the federal law (see Crosby
v. National Foreign Trade Council, 530 U.S. 363, 372 (2000)), which
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determination that a statute of this state is preempted by federal law
does not constitute “invalidity” for purposes of the rule authorizing
direct appeal to our court in cases where a statute of the United States
or of this state has been held invalid. Ill. S. Ct. R. 302(a) (eff. Oct. 4,
2011).
¶ 41 If preemption were the sole basis for the circuit court’s ruling in
this case, that ruling would therefore not even be properly before us
under Rule 302(a). Rather, we would be obliged to transfer the appeal
to the appellate court. See Ill. S. Ct. R. 365 (eff. Feb. 1, 1994). Under
these circumstances, I would think that if we are intent on proceeding
with direct review, we should at least give some consideration to the
one issue decided by the circuit court which would give us
jurisdiction to do so.
¶ 42 I must also point out that Justice Burke, author of the majority’s
opinion, has frequently taken this court to task for not reaching
important legal issues presented by an appeal, even when resolution
of those issues is not necessary for disposition of the particular
controversy before it. See, e.g., In re Estate of Boyar, 2013 IL
113655, ¶¶ 49-51 (Burke, J., dissenting); In re K.E.F., 235 Ill. 2d 530,
541-43 (2009) (Burke, J., dissenting, joined by Freeman, J.); People
v. Evans, 2013 IL 113471, ¶¶ 22-27 (Burke, J., dissenting); Cooney
v. Rossiter, 2012 IL 113227, ¶¶ 42-46 (Burke, J., specially
concurring, joined by Freeman and Theis, JJ.); People v. White, 2011
IL 109689, ¶¶ 156-82 (Burke, J., dissenting, joined by Freeman, J.).
In Boyar, her most recent pronouncement on the subject, Justice
Burke defended her position, in part, on the grounds that deferring
resolution of an issue can prove counterproductive in circumstances
when the same issue is likely to come before us again. In re Estate of
Boyar, 2013 IL 113655, ¶ 51 (Burke, J., dissenting).
supercedes it (see, e.g., Arizona v. United States, 567 U.S. ___, ___, 132 S.
Ct. 2492, 2501 (2012)). To the extent of the conflict, the state law is
“without effect” (Altria Group, Inc. v. Good, 555 U.S. 70, 76 (2008)) and
enforcement is precluded (see Arizona v. United States, 567 U.S. at ___,
132 S. Ct. at 2501), but the state law itself remains on the books. I note,
moreover, that Sprietsma did not even involve a conflict between a state
statute and a federal one and, in any case, it was promptly reversed by the
United States Supreme Court (Sprietsma v. Mercury Marine, a Division of
Brunswick Corp., 537 U.S. 51, 64 (2002)), circumstances the majority fails
to mention.
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¶ 43 Such circumstances were not actually present in Boyar itself,
where the legal issue Justice Burke wanted us to take up was arcane,
it had no application to the dispute before us, and there was no
empirical basis for believing it was likely to arise again any time
soon. Such circumstances are present here. Recurrence of the
commerce clause issue is highly likely. The Internet Tax Freedom Act
(47 U.S.C. § 151 note), the federal law held by the majority to
preempt Illinois’ Public Act 96-1544, is not a ban but a moratorium.
See Title XI of Pub. L. No. 105-277, §1101(a). It had no effect on
liability for taxes accrued and enforced prior to its enactment (id.
§1101(c)), and it will expire, by its terms on November 1 of next
year. 47 U.S.C. § 151 note (as amended by H.R. Res. 3678, eff. Nov.
1, 2007).
¶ 44 Once the moratorium imposed by the federal law is lifted, Public
Act 96-1544 will be revived and reinstated without the need for any
express reenactment by the legislature. Lily Lake Road Defenders v.
County of McHenry, 156 Ill. 2d at 8; Kinsey Distilling Sales Co. v.
Foremost Liquor Stores, Inc., 15 Ill. 2d at 193. A new commerce
clause challenge is certain to follow. A year from now we could
therefore find ourselves in precisely the same position we are in
today, facing the same commerce clause challenge brought by and
against the very same litigants. The delay will have accomplished
nothing.
¶ 45 The issue has been fully briefed and argued and is ripe for a
decision now. We should make one. I am prepared to do so. Just as
New York’s high court did when reviewing its state’s internet affiliate
tax law, I would hold that the tax-related obligations imposed by
Public Act 96-1544 apply to an activity with a substantial nexus to
Illinois and that PMA’s claim that the law is facially invalid under the
commerce clause should therefore have been rejected by the circuit
court.2
¶ 46 Failure to address and resolve the commerce clause challenge is
not only the reason I cannot join in the majority’s opinion. I must also
take issue with its conclusion that, under federal preemption
principles, Public Act 96-1544 is rendered wholly inoperative by the
2
State taxation obligations which impact the commerce clause must
meet various criteria in addition to the substantial nexus requirement, but
here, as in the New York case, the substantial nexus requirement was the
basis for plaintiff’s challenge to the law.
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federal Internet Tax Freedom Act. Although the majority opinion
enumerates the various ways in which federal law may operate to
preempt a state law, it omits any mention of the standards established
by the United States Supreme Court for assessing whether and to
what extent there is federal preemption in a particular case. We are
bound by those standards. Had the principles articulated by the United
States Supreme Court been properly considered and applied here, they
would have compelled the conclusion that Public Act 96-1544 has not
been preempted.
¶ 47 The United States Constitution created a federal government of
limited powers. It is unmistakably clear on this point. “The powers
not delegated to the United States by the Constitution, nor prohibited
by it to the States, are reserved to the States respectively, or to the
people.” U.S. Const., amend. X. Under our constitutional system, the
states thus retain substantial sovereign authority. Gregory v. Ashcroft,
501 U.S. 452, 457 (1991).
¶ 48 Because our federal system recognizes that sovereign power
resides in both the state and federal governments, the potential for
conflict between state and federal laws is apparent. The Constitution
addresses this problem through the supremacy clause (U.S. Const.,
art. VI, cl. 2), which provides that federal law “shall be the supreme
Law of the Land; and the Judges in every State shall be bound
thereby, any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.” Arizona v. United States, 567 U.S.___,
___, 132 S. Ct. 2492, 2500 (2012).
¶ 49 The supremacy clause has been interpreted by the United States
Supreme Court to mean that Congress has the power to preempt state
law (id. at ___, 132 S. Ct. at 2500) provided, of course, that it is
acting within the powers granted to it by the Constitution when it
does so (Gregory v. Ashcroft, 501 U.S. at 457). However, because of
the extraordinary nature of this power and its implications for the
critical political balance between the state and federal governments,
the United States Supreme Court has cautioned that it is a power we
must assume Congress does not exercise lightly. Id. at 460.
¶ 50 Consistent with this admonition, the Supreme Court has held that
preemption analysis must begin with the presumption that Congress
did not intend to supplant state law. Maryland v. Louisiana, 451 U.S.
725, 746 (1981); Scholtens v. Schneider, 173 Ill. 2d 375, 379 (1996).
Where a state statute is claimed to be preempted by an act of
Congress, as in the case before us here, the language used in the
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federal legislation is the best evidence of whether or not Congress
intended it to have preemptive effect. Dan’s City Used Cars, Inc. v.
Pelkey, 569 U.S. ___, ___, 133 S. Ct. 1769, 1778 (2013).
¶ 51 When reviewing the language of the federal law, it is important
to bear in mind that inclusion of an express preemption clause or
provision does not end the inquiry. Such a provision tells us that
Congress intended to supersede or modify state law to some extent,
but courts must still deal with the task of determining the substance
and scope of Congress’ displacement of state law. If the text of a
preemption provision is open to more than one plausible reading,
courts ordinarily accept the reading that disfavors preemption. Riegel
v. Medtronic, Inc., 552 U.S. 312, 334-35 (2008) (Ginsburg, J.,
dissenting).
¶ 52 Just as there is a presumption against preemption, there is a
presumption in favor of the validity of the state law. Pharmaceutical
Research & Manufacturers of America v. Walsh, 538 U.S. 644, 661
(2003). The burden of overcoming that presumption and establishing
that Congress intended to oust the state from the exercise of powers
otherwise available to it is on the party claiming that the state law has
been preempted. Id.at 661-62; Motor Vehicle Manufacturers Ass’n of
the United States, Inc. v. Abrams, 899 F.2d 1315, 1319 (2d
Cir. 1990)). The presumption against federal preemption applies with
special force where a matter of primary state responsibility, such as
local taxation, is at stake. Accordingly, no federal preemption exists
concerning a state or local tax unless Congress made its intent to
preempt unmistakably clear in the language of the federal statute.
Tri-State Coach Lines, Inc. v. Metropolitan Pier & Exposition
Authority, 315 Ill. App. 3d 179, 194 (2000).
¶ 53 Public Act 96-1544, the legislation being challenged in this case,
falls within this standard. It concerns state tax. As explained earlier
in this dissent, it amends the Illinois use tax and service use tax
statutes to expand the definition of retailers and servicemen obligated
to collect and remit use and service use taxes.
¶ 54 When it enacted the federal Internet Tax Freedom Act, Congress
did not make it unmistakably clear that it intended to preempt use tax
collection measures such as as Public Act 96-1544. Contrary to its
title, the federal law “does not create ‘tax freedom’ for transactions
on the Internet” (City of Chicago, Illinois v. StubHub!, Inc., 624 F.3d
363, 366 (7th Cir. 2010)), and the Act itself does not purport to assert
any general federal authority over matters of state and local taxation.
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To the contrary, when Congress drafted the Internet Tax Freedom
Act, it went to pains to make clear that except as provided in section
1101 of the Act,
“nothing in this [Act] shall be construed to modify, impair, or
supersede, or authorize the modification, impairment, or
superseding of, any State or local law pertaining to taxation
that is otherwise permissible by or under the Constitution of
the United States or other Federal law and in effect on the
date of enactment of this Act.” Interstate Tax Freedom Act,
§1101(b), 47 U.S.C. § 151 note.
¶ 55 The moratorium imposed by the Interstate Tax Freedom Act is
addressed to two specific things: (1) “taxes on Internet access,”
something which has no bearing whatever on the subject matter of
Public Act 96-1544, and (2) “multiple or discriminatory taxes on
electronic commerce.” Interstate Tax Freedom Act, § 1101(a)(1), (2),
47 U.S.C. § 151 note. As defined by the Act, “multiple” tax means
two states taxing the same thing without a tax credit. Id. § 1105(6),
47 U.S.C. § 151 note; City of Chicago, Illinois v. StubHub!, Inc., 624
F.3d at 366. The expanded definitions implemented by Public Act
96-1544 do not result in that happening, so that is not at issue here
either. That leaves only the question of whether the changes
introduced by Public Act 96-1544 run afoul of the Internet Tax
Freedom Act’s temporary ban on “discriminatory taxes.”
¶ 56 Because Public Act 96-1544 does not create any new taxes or tax
liability, it is not a “tax” in the commonly understood sense.
However, in another peculiarity of phrasing, the Internet Tax
Freedom Act includes in its definition of “tax” not only actual taxes,
but also “the imposition on a seller of an obligation to collect and to
remit to a governmental entity any sales or use tax imposed on a
buyer by a governmental entity.” Interstate Tax Freedom Act,
§ 1105(8)(A)(ii), 47 U.S.C. § 151 note. The statutory amendments
promulgated under Public Act 96-1544 do expand the group of sellers
obligated to collect and remit Illinois sales and use tax, so they
certainly fall within the federal statute’s unique conception of a tax.
The real dispute is whether and to what extent they are
“discriminatory.”
¶ 57 To be “discriminatory” within the meaning of the federal law, a
tax must fall within one of the following specifically defined
categories:
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“(A) any tax imposed by a State or political subdivision
thereof on electronic commerce that—
(i) 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;
(ii) is not generally imposed and legally collectible at
the same rate by such State or such political subdivision
on transactions involving similar property, goods,
services, or information accomplished through other
means, unless the rate is lower as part of a phase-out of
the tax over not more than a 5-year period;
(iii) imposes an obligation to collect or pay the tax on
a different person or entity than in the case of transactions
involving similar property, goods, services, or information
accomplished through other means;
(iv) establishes a classification of Internet access
service providers or online service providers for purposes
of establishing a higher tax rate to be imposed on such
providers than the tax rate generally applied to providers
of similar information services delivered through other
means; or
(B) any tax imposed by a State or political subdivision
thereof, if—
(i) the sole ability to access a site on a remote seller’s
out-of-State computer server is considered a factor in
determining a remote seller’s tax collection obligation; or
(ii) a provider of Internet access service or online
services is deemed to be the agent of a remote seller for
determining tax collection obligations solely as a result
of—
(I) the display of a remote seller’s information or
content on the out-of-State computer server of a
provider of Internet access service or online services;
or
(II) the processing of orders through the
out-of-State computer server of a provider of Internet
access service or online services.” Interstate Tax
Freedom Act, § 1105(2), 47 U.S.C. § 151 note.
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¶ 58 In the case before us today, the amendments to the use and service
use tax statutes contained in Public Act 96-1544 are not alleged to be
“discriminatory” in any of the foregoing ways except one: imposing
“an obligation to collect or pay the tax on a different person or entity
than in the case of transactions involving similar property, goods,
services, or information accomplished through other means.”
Interstate Tax Freedom Act, § 1105(2)(A)(iii), 47 U.S.C. § 151 note.
But the amendments at issue here do no such thing. The obligation
they impose with respect to collecting and remitting use and service
use taxes falls on retailers and servicemen just as it does in all other
transactions, electronic or otherwise, where the sales activity of the
vendor or service provider has a substantial nexus with Illinois. The
law simply refines the definition of retailer and servicemen to reflect
the evolving nature of electronic commerce involving our state. Its
goal is to insure equal treatment, not impose extra responsibility.
¶ 59 In disputing this point, PMA attempts to find a discriminatory
effect in the law by positing a situation where an out-of-state retailer
advertises the sale of tangible personal property under a contract with
an Illinois publisher or broadcaster and the advertising is directed
primarily at a national or even international audience, rather than to
Illinois consumer. As PMA reads our use tax law, such a retailer
would not be obligated to collect and remit the use tax on any
transactions subject to the law, and in PMA’s view, that retailer’s
status is indistinguishable from the status of the out-of-state e-
commerce retailers it represents who will be subject to tax collection
obligations under Public Act 96-1544. Because the “offline” retailer
would not be required to collect and remit the tax, PMA argues that
under the Internet Tax Freedom Act, the e-commerce retailers it
represents cannot lawfully be required to collect it either.
¶ 60 This contention is untenable. For one thing, the parallel drawn by
PMA between the sales activities of the internet vendors it represents
and the “offline” merchants in its example is flawed. It is true that
most commercial solicitations made via internet websites can be
viewed anywhere in the world by anyone with computer access. That
is in the nature of how the internet works. But contrary to the position
urged by PMA and accepted by the majority (see supra ¶ 19), the
mere fact that it is technically possible to view an internet ad from
anywhere does not make the ad “inherently national or international
in scope and disseminated to a national or international audience.”
One of the great advantages of internet marketing is that it permits
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narrow targeting of particular customers in particular places with
particular interests in a way which print and broadcast media do not.
From the record before us, there is no reason to assume that this will
not be the predominant way in which Illinois-based internet services
will be utilized by the out-of-state retailers and servicemen now
covered by Public Act 96-1544. There is no dispute that when an out-
of-state retailer avails itself of Illinois print or broadcast media to
target Illinois consumers, it is required to collect and remit use tax. 35
ILCS 105/2(2), (3) (West 2012). If an out-of-state retailer uses Illinois
internet services to target Illinois consumers in the same way,
requiring it to likewise collect and remit use tax is therefore not
discriminatory. It is fair.3
¶ 61 Second, as the Multistate Tax Commission aptly observes in its
friend of the court brief, the particular form of solicitation activity
addressed by Public Act 96-1544 has no direct analog outside the
context of the internet. Other forms of commercial solicitation may
employ some form of “performance-based” marketing, but none
possesses the immediacy or directness of the “click-through”
marketing possible online. As pointed out earlier in this dissent, the
Internet Tax Freedom Act does not, in fact, create “tax freedom” for
commercial transactions on the internet. It requires only that internet
transactions not be treated less favorably than would be the case with
non-internet-based transactions. If an internet marketing scheme has
no true offline counterpart, it is difficult to see how requiring the
retailer to collect and remit the use tax due on the resulting
transactions can be deemed discriminatory within the meaning of the
federal statute.
¶ 62 Finally, PMA has not adduced a single example of a situation in
Illinois or any other jurisdiction with an “affiliate” or “Amazon” tax
where a use tax has actually been imposed on an internet retailer in a
way that is inconsistent with the language and purposes of the Internet
Tax Freedom Act. PMA’s concerns over conflicting state law are
therefore entirely speculative. That one may be able to hypothesize
potential conflicts with federal legislation is not a legally sufficient
basis under the supremacy clause for completely jettisoning a state
3
Arguably, it is more than fair. Out-of-state internet retailers are not
covered by the law unless they meet a certain sales threshold. Offline
retailers are obliged to collect and remit use tax no matter how small their
sales are.
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law as the majority has done here. To the contrary, it is well settled
that under the supremacy clause of the United States Constitution, a
federal law preempts a conflicting state law and the state law is
displaced only to the extent it actually conflicts with federal law.
Dalton v. Little Rock Family Planning Services, 516 U.S. 474, 476
(1996); People ex rel. Director of Corrections v. Booth, 215 Ill. 2d
416, 425-26 (2005); In re Marriage of Hulstrom, 342 Ill. App. 3d
262, 266 (2003). Absent a showing of such an actual conflict, PMA’s
claims of preemption must therefore be rejected.4
¶ 63 In National Private Truck Council, Inc. v. Oklahoma Tax
Comm’n, 515 U.S. 582, 586 (1995), the United States Supreme Court
observed that it has “long [been] recognized that principles of
federalism and comity generally counsel that courts should adopt a
hands-off approach with respect to state tax administration [for] ‘[i]t
is upon taxation that the several States chiefly rely to obtain the
means to carry on their respective governments, and it is of the
utmost importance to all of them that the modes adopted to enforce
the taxes levied should be interfered with as little as possible.’
[Citation.]” Rather than heed this admonition, the majority ignores it
and, indeed, the entire body of supremacy clause jurisprudence
developed by the United States Supreme Court over the past several
decades. This it may not do. The supremacy clause itself forbids it. As
the Supreme Court of Pennsylvania correctly observed, “[i]t is
fundamental that by virtue of the Supremacy Clause, the State courts
are bound by the decisions of the Supreme Court with respect to the
federal Constitution and federal law, and must adhere to extant
Supreme Court jurisprudence. U.S. Const. art. VI, cl. 2; Chesapeake
& O. Ry. Co. v. Martin, 283 U.S. 209, 221, 51 S. Ct. 453, 75 L. Ed.
983 (1931).” Council 13, American Federation of State, County &
Municipal Employees ex rel. Fillman v. Rendell, 986 A.2d 63, 77 (Pa.
2009).
¶ 64 Today’s decision by the majority marks the first time a court of
review in the United States has determined that the Internet Tax
Freedom Act preempts a state from enacting an internet affiliate tax
4
I note, parenthetically, that to the extent federal law might preempt the
application of portions of Illinois use tax law in certain circumstances, there
would be no impediment under Illinois law to enforcement of the remainder
of the law or its application to persons or circumstances other than those to
which it was held invalid. 35 ILCS 105/18 (West 2012).
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law to facilitate the collection of existing use taxes to which the state
is legally entitled. Under the standards articulated by the United
States Supreme Court and set forth in this dissent, standards by which
we are bound, that determination is inconsistent with supremacy
clause principles. For this reason, and because Public Act 96-1544 is
not invalid under the commerce clause, the judgment of the circuit
court in favor of PMA should be reversed and the cause should be
remanded with directions to enter summary judgment in favor of the
Director of Revenue. I therefore respectfully dissent.
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