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Illinois Set to Pass “Click-through” Nexus Law

Illinois Governor Pat Quinn (D) is expected to sign a bill into law that imposes sales tax nexus on remote retailers on the basis of the retailers’ affiliate agreements with in-state businesses. This legislation comes in response to an October 2013 Illinois Supreme Court ruling that struck down a similar law. This is the latest in a string of seemingly unending developments regarding how states will tax those doing business from out of state.

Under the U.S. Supreme Court’s 1992 ruling in Quill v. North Dakota, states may only require an out of state retailer to collect and remit sales tax if the retailer has a physical presence in the state. Many states have circumvented this rule by imposing sales tax nexus on retailers without a physical presence in the state on the basis of a retailer’s affiliate agreements with in-state businesses (known as “click-through nexus” or “Amazon tax”). Typically, under the affiliate agreement the in-state business refers customers to the out of state retailer by placing a link on its website.

In March 2011, the Illinois legislature passed Public Act 96-1544. The law imposed sales tax nexus on remote retailers with a contract with an Illinois business under which the business referred potential customers to the retailer by placing a link on the business’ website. In Performance Marketing Association v. Hamer, the Illinois Supreme Court struck down this law as violating the Internet Tax Freedom Act. Specifically, the court reasoned that the law’s imposition of sales tax nexus on the basis of internet referrals, but not print or broadcast referrals, constituted a discriminatory internet only tax.

In response, the state legislature recently passed SB 352, which requires all retailers with in-state affiliate agreements, regardless of the referral method, to collect and remit sales tax. In avoiding an internet only tax, the law actually expands Illinois’ previous click-through nexus law.

alliantgroup routinely counsels clients on state tax issues and we recently held a webinar addressing major issues in the state and local tax (“SALT”) area, including sales and use tax. In addition to the growing prevalence of click-through nexus laws, taxpayers need to be cognizant of other sales tax issues. For example, many states have joined the Streamlined Sales and Use Tax Agreement, which has created unified definitions with the goal of simplifying the complex patchwork of state sales tax laws and regulations. Additionally, the Marketplace Fairness Act, which was passed by the U.S. Senate in 2013 and is currently under consideration in the House, would allow states to require remote sellers to collect sales tax.

Although the physical presence test applies for purposes of sales tax nexus, its applicability to income tax nexus is questionable. Many states impose income tax nexus based on the economic presence test, which disregards a business’ lack of physical presence and looks solely to the business’ economic activity in the state. The status of the economic presence doctrine is in flux, with many state courts rejecting the doctrine and Congress considering the Business Activity Tax Simplification Act, which would prohibit the imposition of income tax nexus on taxpayers without a physical presence.

As if rapid developments in sales and income tax laws didn’t create enough confusion, many states are modifying their apportionment laws. In particular, many states are moving from the three factor apportionment formula to a single sales factor formula, and other states, such as Massachusetts, are beginning to source service revenue based on where the services are enjoyed instead of where they are performed.

With ever increasing complexity in the SALT area, we encourage businesses to consult with their trusted advisors to ensure that they remain in compliance and plan effectively. And they should regularly review the laws in each jurisdiction in which they do business.


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.

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