Rebecca Madigan

2013-10-182013-10-18

PMA Illinois Lawsuit Victory Upheld by Illinois Supreme Court

We are overjoyed to announce that the Illinois Supreme Court has upheld its win against the Illinois Department of Revenue, declaring the Affiliate Nexus Tax law invalid.

Most importantly, the law is “void and unenforceable” and advertisers can reinstate their Illinois affiliate marketers immediately. The PMA’s legal counsel, George Isaacson of Brann and Isaacson, provided the following guidance:

The ruling by the Illinois Supreme Court that Public Act 96-1544 is “void and unenforceable” results in a judicial finding that the statute was never legally valid and, therefore, it is not currently in effect. This means that advertisers are free to reinstate their Illinois affiliates whose contracts were terminated out of fear of the “click through” nexus law. Of course, advertisers must still be wary of any additional activity that may be conducted by web affiliates on their behalf, such as active solicitation of prospective customers and other in-state promotional efforts. The court ruling does not displace, or supersede, traditional, physical-presence nexus standards. If Illinois affiliates engage in activities that go beyond the posting of Internet links, there remains the risk that those affiliates could create nexus for out-of-state retailers under existing nexus principles that are unrelated to the statutory provision that was struck down by the state Supreme Court.

In its decision, the Illinois Supreme Court agreed that the challenged statute is invalid. The court agreed with the PMA that advertising via performance marketing affiliates does not give rise to tax obligations and is therefore a discriminatory tax on Internet commerce. Discriminatory taxes on Internet commerce are prohibited by federal legislation, known as the Internet Tax Freedom Act (ITFA). This case is the first to uphold the ITFA.

By our estimates, Illinois-based affiliates numbered at least 9,000 and in 2010 generated $744 million in advertising revenue. When the law took effect in 2011, those affiliates experienced economic devastation when out-of-state retailers, wanting to avoid sales tax collection obligations, simply terminate their relationships with affiliates. In fact, we estimate about 1/3 left the state, 1/3 downsized, and 1/3 went out of business.

What’s worse is that 12 other states passed similar laws, devastating the incomes of over 90,000 affiliate marketers. That’s about 1/3 of all US affiliates! The PMA has been committed to fight these laws and reverse the damage done to small businesses in our industry.

Here are links to the court’s decision: summary and full decision.

The fight continues, as we work to block attempts by other states, and as we lobby in support federal legislation that will invalidate all these state laws. We need your help and support now more than ever. Contributions to the PMA Freedom fund will help cover our enormous legal bills! Please consider a financial contribution.

This is a great victory for our small industry, and thanks to all of you who have helped!

2013-09-252013-09-25

Supreme Court over Affiliate Tax

The Performance Marketing Association is pleased to announce that today it filed an amicus curiae brief (friend of the court) with the US Supreme Court, supporting petitions filed by Amazon and New York, requesting the Court hear their challenges of the New York Affiliate Nexus Tax law.

Amazon and Overstock make the case that the New York law is unconstitutional, and that the state overstepped its jurisdiction by attempting to force retailers to collect state sales tax. The PMA brief provides a real-world context to the case, explaining the devastation to 15,000 affiliate marketers in the state, when 1,000 out-of-state retailers terminated their advertising agreements with New York-based affiliate marketers. Since New York passed its law in 2008, twelve other states have followed suit, resulting in 90,000 affiliate marketers having their incomes devastated.

The US Constitution restricts a state from imposing a tax collection burden on an out-of-state company, unless that company has a physical presence, or ‘nexus,’ in the state. The New York law, and the basic substance of all affiliate nexus tax laws, claims that affiliate marketing is equivalent to a sales force or an agent of a company, and thereby meets the nexus standard. The PMA’s amicus brief details typical activities of affiliate marketers, and clearly refutes any possibility that affiliate marketers practice something other than passive and anonymous advertising.

The US Supreme Court typically receives 10,000 petitions a year, but only hears about 100 cases. We hope to hear whether or not they will accept this case by late October.

We are very proud of this document, and the extensive effort that went into its development. We would particularly like to thank John Cooney, Esq., of Venable, the attorney who crafted this clear and straightforward text. He does a great job of explaining what we do in performance marketing, in a way that is easy to understand and points out the flaws in the New York law. You can read the brief here.

The PMA is battling this devastating law on multiple fronts; we are awaiting an judgment on our suit against the State of Illinois, being considered by the Illinois Supreme Court; and we are hoping the Main Street Fairness Act, federal legislation that would make an affiliate nexus tax irrelevant, gains momentum in the US House of Representatives, after it passed the US Senate earlier in the year.

Thank you to our members for your continued support in our efforts to advocate on behalf of the performance marketing industry.

2013-07-222013-07-22

Affiliate Tax to be Heard by Supreme Court?

In a dramatic move, Amazon and Overstock have filed an application to petition the US Supreme Court to hear their case against the state of New York, challenging its affiliate nexus tax law. Amazon and Overstock lost their appeal in New York courts after a prolonged 4+ year legal battle.

This move likely indicates Amazon and Overstock have lost faith in the chances of the Marketplace Fairness Act (MFA), the federal legislation recently passed by the Senate, but stuck in the House. Much like last year, the MFA has fallen victim to partisan politics causing deadlock across the board, and which now seems unlikely to change in the foreseeable future.

From a timing standpoint, the state of the MFA is very disappointing. Passage of the MFA would make affiliate nexus tax laws moot, and would result in advertisers being able to reinstate 90,000 affiliate marketers in the 12 states where these laws have passed. Conceivably, the MFA could pass at any time, and for two years it seemed like the best and only option to reverse the devastation caused by the affiliate nexus tax laws.

On the other hand, a victory in the US Supreme Court would declare affiliate nexus tax laws illegal and likely unconstitutional, and would also result in advertisers being able to reinstate those 90,000 displaced affiliate marketers. But this is likely to be a long and risky prospect, with a fairly low chance of success.

It looks like Amazon and Overstock are taking this very seriously. They have retained uber-heavy-hitter Ted Olson, the attorney who recently won the legalization of gay marriage in front of the Supreme Court.

While this information is part of the public record, it has not yet hit the mainstream press.

Here are some questions we have been discussing with our legal team:

Q: What does this mean for affiliate marketers?

A: More waiting, unfortunately. For more than a year, we have pinned our hopes on the passage of the Marketplace Fairness Act. With this change in strategy, from legislation to litigation, it will likely delay any resolution to this issue that has plagued us for nearly 5 years. However, with the stalemate in Congress, it’s hard to know how long that will continue and what impact it would eventually have on the legislation.

Q: How will the PMA respond?

A: The lawsuit the PMA brought against the state of Illinois is now more important than ever. We are anxiously awaiting the Illinois Supreme Court ruling, and we assume our suit will have bearing on the petition being filed by Amazon and Overstock. Additionally, the impact on affiliate marketers will likely be an important part of their case, so the PMA will help in any way we can.

Q: What are the chances the Supreme Court of the United States (SCOTUS) would take this case?

A: Typically, the court receives 8,000 – 10,000 petitions for certiorari but only accepts 100-150 cases. In 2011, the court received 7,700 petitions; 79 cases were argued and 73 were disposed of. Statistically, it’s going to be a long shot if the case gets accepted.

Then again, taxing Internet sales is an extremely hot issue the justices are likely familiar with and they may take an interest in this case.

Q: How long will this take?

A: Based on the filings, Amazon and Overstock asked for an extension to file their petition for a writ of certiorari by August 23^rd. The court, on average, takes 6 weeks to respond. This includes a 30 day response time given to the other party, the respondent. If the petition is granted, the petitioner has 45 days to file a brief on the merits, and the respondent has 35 days to file a brief in response, for a total of about 80 days. Then oral arguments get scheduled. Cases could be heard in this term or the next term (the following October).

Short answer: we have no idea.

Q: How will Congress react?

A: It’s difficult to imagine another scenario other than Congress further stalling to see how the Supreme Court will rule. It doesn’t seem likely the House would suddenly be motivated to pick up the Marketplace Fairness Act at this point.

Q: How will state legislatures react? Will this chill further affiliate nexus tax bills?

A: As we have seen played out over and over again, state legislatures act rather independently and often narrow-mindedly. When Amazon initially sued New York, other states stood by to see what the courts would say; but it took so long to resolve, states eventually pursued their own bills. When the PMA won its lawsuit against Illinois, it did have a chilling effect in some states, like Minnesota and Indiana, but not for long. Both the Amazon case and the PMA case were fought in state courts, so there isn’t legal precedence or jurisdiction over other states that a Supreme Court case would have.

And we thought the introduction of the Marketplace Fairness Act would cause states to wait for Congress to decide, but that hasn’t seemed to stop states. There were 9 bills introduced in 2013, after the MFA was introduced this year.

Q: How will the brick-and-mortar community react?

A: The retailers have already acted desperately, convincing state legislators and governors to pass affiliate nexus tax laws, despite the horrific track record of devastation to small businesses and loss of income tax revenue. Their response is a cause for concern.

As an exclusive benefit to PMA members, I’m happy to further discuss your questions and concerns. How the states, Congress, retailers and the court will respond are all unknowns. We are all in this together, not only to help restore the businesses of 90,000 affiliate marketers, but to hold off further damage to our industry.

Thank you for your continued support!