Taxing Online Sales ' The 2012 Update

Following the passage of the Illinois Act, several prominent online retailers cancelled their marketing affiliate programs in Illinois to avoid the obligation to directly collect sales tax from Illinois consumers. See, Gregory Karp, “Cook County Judge Says 'Amazon-Tax Law' Unconstitutional,” Chicago Tribune, April 25, 2012, available at http://trib.in/K3r5Zu. The cancellation of such programs was an expected consequence of the Illinois Act, as similar results had occurred in Rhode Island, North Carolina and Colorado after their passage of similar laws. See, Halpern et. al., supra. An estimated 9,000 click-through affiliate marketers in Illinois were affected, and some Internet companies with business models that rely on commissions generated through such agreements relocated to other states in order to avoid having their relationship with online retailers terminated. See, John Pletz, “Judge Strikes Down Illinois' 'Amazon Tax',” Crain's Chicago Business, April 25, 2012, available at http://bit.ly/K3sW0B. In July 2011, the Performance Marketing Association (PMA), a trade association representing the interests of the online marketing industry, filed suit against the state of Illinois alleging that the Act violated the Commerce Clause of the U.S. Constitution and provisions of the Internet Tax Freedom Act. PMA v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., filed July 27, 2011).

The crux of the PMA's argument in PMA v. Hamer relies on the seminal Commerce Clause case Quill Corp v. North Dakota, 504 U.S. 298 (1992), in which the Supreme Court held that an out-of state retailer has a “substantial nexus” to a state only if it has a “physical presence” within the state. Courts have struggled to define what constitutes a “physical presence” for an out-of-state retailer without a physical brick and mortar location in the state, holding that while mere advertising in a state does not meet the standard, “continuous local solicitation” in such state may be enough to constitute the nexus. See, Scripto Inc. v. Carson, 362 U.S. 207 (1960); Tyler Pip Indus. v. Washington State Dep't of Revenue, 483 U.S. 232 (1987); Orvis Co. v. Tax Appeals Tribunal, 86. N.Y.2d 165, 178 (N.Y. 1995).

With respect to online retailers, the principle legal argument has been over whether click-through affiliates fall closer to the “mere advertising” or “active solicitation” end of the spectrum. In Amazon.com LLC v. New York State Department of Taxation and Finance, 913 N.Y.S.2d 129 (App. Div. 2010), the New York Appellate Division examined a New York click-through law similar to the Illinois Act and declined to find it per se unconstitutional on its face. (Note that the Supreme Court of New York Appellate Division remanded the case back to the lower court for further proceedings to determine whether the New York law, as applied to Amazon.com, violates the Commerce Clause.) In declining to find the click-through law unconstitutional, the New York court relied on the argument that the New York law provided a mechanism for click-through affiliates to demonstrate that they were engaging in mere advertising and not active solicitation, rather than legally characterizing such relationships one way or the other. Id.

In PMA v. Hamer, the PMA argued that the Illinois Act was distinct from the New York law in that it did not provide a mechanism for click-through affiliates to rebut the presumption that they have engaged in solicitation rather than mere advertising. Plaintiff's Motion for Summary Judgment, PMA. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., filed Jan. 6, 2012) (hereinafter “PMA Motion”). Without such mechanism in the Illinois Act, the PMA argued, the website links provided by click-though affiliates should be characterized as closer to pure advertising, “no different in substance than other forms of advertising broadcast to a wide, non-local audience.” Id. at 14. The Illinois Department of Revenue, on the other hard, argued that the click-through links amount to active solicitation, characterizing the links as “interactive” and the “tool in which a customer utilizes to connect to the retailer,” rather than passive displays of information. Defendants' Reply to Plaintiff's Motion for Summary Judgment, PMA. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., March 21, 2012) (hereinafter, “DOR Motion”).

The PMA also argued that the Act violated the federal Internet Tax Freedom Act (ITFA) (www.govtrack.us/congress/bills/110/hr3678), which prohibits a state from imposing an obligation to collect use tax in connection with an Internet transaction where no tax collection obligation is imposed on similar transactions accomplished through other means. PMA Motion, supra. The PMA argued that the Act impermissibly targeted online retailers who entered into agreements with click-though affiliates, but did not burden other out-of-state retailers who entered into similar agreements within Illinois (for example, advertising in “offline” media, such as print publishers or over-the-air broadcasters). Id. In response, the Illinois Department of Revenue again argued that click-through links are interactive and distinguishable from traditional advertisements and offline forms of media and, therefore, are not “similar transactions” under the ITFA. DOR Motion, supra.

On April 25, 2012, Illinois Circuit Court Judge Robert Lopez Cepero, in a ruling from the bench following oral arguments, granted summary judgment on behalf of the PMA, finding the Act unconstitutional under the Commerce Clause and in violation of the ITFA. PMA. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., April 25, 2012). Judge Cepro issued a written order of his decision on May 7, 2012, stating that the Illinois Act “fails the 'substantial nexus' requirement for state use tax collection and reporting obligations under the Commerce Clause ' [f]ailing the substantial nexus requirement renders the applicable provisions [of the Act] unconstitutional.” Id. Judge Cepero further found the Illinois Act preempted “by virtue of the federal moratorium against discriminatory state taxes on electronic commerce” under the ITFA. Id. While the Illinois Department of Revenue may appeal, the ruling provides a victory for online retailers and click-through affiliates and highlights the uncertainty surrounding the constitutionality of click-though affiliate laws implemented or under consideration by other states.

Beyond Illinois: New Trends In Taxing Online Sales

Outside of Illinois, states continue to look for ways to collect sales tax from online sales given the constitutional challenges and their desire to avoid the practical results seen in Illinois and other states, such as the cancellation of marketing agreements and Internet businesses leaving the state. While some states continue to implement click-through affiliate laws modeled after those in Illinois and New York, with the continued controversy surrounding the click-through affiliate approach, other states are examining different legislative approaches to taxing online retailers. Two different approaches to establishing the requisite nexus have resulted: 1) the New York and Illinois model targeting click-through affiliate relationships with online retailers; and 2) a new approach based on targeting online retailers' corporate affiliates (i.e., those organizations with a common ownership interest), rather than contractual click-through affiliates.

In March 2012, Utah passed House Bill 384, expanding the obligation for an out-of-state retailer to collect and remit sales taxes. Under the Utah law, an out-of-state retailer is subject to tax collection obligations if it has a greater than 10% ownership interest in a Utah business that delivers the out-of-state retailer's products or services to Utah consumers, and either: 1) the out-of-state retailer sells the same or a similar line of products and services as the in-state business under a similar business name; or 2) the in-state business is used to promote and facilitate sales of the out-of-state retailer's products and services within Utah. Utah Code Ann. '59-12-107(1)(2)(b) (2012); see also, “What is an 'Affiliate Nexus' Statute?,” Eyes on eCom Law, April 2, 2012 available at http://bit.ly/JyM9LV. This “common ownership” approach may establish the requisite nexus through an online retailer's relationships with an in-state business that supports the retailer (such as operators of warehouses or order fulfillment and distribution centers) if the online retailer has the requisite ownership interest such in-state business.

Texas adopted a similar law, effective on Jan. 1, 2012, which aims to establish the requisite nexus if an out-of-state retailer has a substantial ownership interest in a company doing business in Texas that sells similar products or promotes, advertises or facilitates the sale in Texas of the out-of-state retailer's products. Tex. Tax Code Ann Sec. 151.107(a)-(d).

Similar tax legislation utilizing the common ownership approach is pending in Virginia and New Jersey. See, Rebecca Madigan, “Virginia Did Not Pass an Affiliate Nexus Tax Law As We Know It,” Performance Marketing Association, April 18, 2012, available at http://bit.ly/JyMzlu (hereinafter “PMA Update”).

[Update: After this issue went to press, New Jersey Governor Chris Christie announced that Amazon.com plans to build two warehouses in the state and will begin collecting 7% state sales tax from NJ customers in July 2013. The warehouses will create 1,500 jobs and bring in an estimated $30 to $40 million in sales tax revenue, Christie said in a May 30 news conference. Video of Christie's announcement is available on the Governor's website; http://bit.ly/KgKRoK]

On April 20, 2012, Georgia enacted a tax law combining both the click-though affiliate model and common ownership affiliate models. Georgia HB 386 (LC 34 3484S) (2012); see also, “Yet Another State (Georgia) Adopts a Click-Through Nexus Law,” Eyes on eCom Law, April 30, 2012 available at http://bit.ly/JyOh6p. Georgia's law tracks the New York model, providing that online retailers who enter into agreements with Georgia residents under commission or compensated sales agreements worth greater than $50,000 annually are presumed to be required to collect Georgia sales and use tax. Like New York, the presumption may be rebutted by submitting proof that the resident affiliate does not engage in activity that significantly maintains the retailers' market within Georgia. The Georgia law also includes a common ownership element similar to the Utah statute, whereby nexus is presumed if an out-of-state retailer and a Georgia business are under common ownership or control and the Georgia business sells a similar line of products within Georgia under a similar business name or using similar trademarks and service marks.

Sales tax laws aimed at establishing the requisite nexus through click-through affiliates are still found in many jurisdictions in addition to Illinois and New York, including Rhode Island, North Carolina, Arkansas, Connecticut, California (effective Jan. 1, 2013 if federal tax legislation is not adopted), and Pennsylvania (in the form of an administrative regulation, effective on Sept. 1, 2012). See respectively, 35 Ill. Comp. Stat. 105/2 (2011); N.Y. Tax Law '1101(b)(8)(i)(l) (2008); R.I. Gen. Laws '44-18-15 (2009); N.C. Gen. Stat. '105-164.8(b)(3); Ark. Code. Ann. '26-52-117 (2011); Conn. Gen. Stat. '12-216a (2001); Ca. Rev. & Tax. Code '6203(c)(1) (2011); Pa. Sales and Use Tax Bull. 2011-01 (Dec. 2, 2011).

Of these states, Illinois, Connecticut and Pennsylvania do not include the ability to rebut the presumption that click-through affiliates are engaging in mere advertising as opposed to active solicitation. Click-through legislation is also currently pending in Minnesota. PMA Update, supra.

In 2010, Colorado adopted a different approach than the click-through or common ownership models. The Colorado law requires out-of-state online retailers to send Colorado consumers a notice of their obligation to self-report use taxes and an annual summary of their purchases. In addition, out-of-state retailers are required to submit an annual report to the state of Colorado listing the name, address, and purchase history of any consumer who purchased goods for delivery in Colorado. Act, 1 Colo.Code. Regs. '201-1:39-21-112.3.4 (2010). However, in March 2012, the Federal District Court of Colorado, in Direct Marketing Association v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. March 30, 2012), struck down the Colorado law as unconstitutional under the Commerce Clause for mandating a reporting requirement which imposes a unique burden on out-of-state retailers as compared to in-state retailers. The Colorado Department of Revenue has given notice of its intent to appeal the decision.

Congressional Action

Given the increasingly varied approaches of a state-by-state approach to taxing online sales and the constitutional uncertainty of such measures, there have been new calls for Congressional action to regulate the taxation of online sales at a federal level. Advocates for federal regulation include parties on both sides of the issue, ranging from lawmakers to online retailers and Internet marking firms. See, e.g., Karp, supra. At the time of this writing, three bills are pending in Congress seeking to unify the collection of state sales and use taxes:

• The Main Street Fairness Act (S. 1452), introduced in July 2011 by Senator Dick Durbin (D-IL), endorses a multi-state agreement on sales and use tax collection and administration. S. 1452, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/s1452.
• The Marketplace Equity Act of 2011 (H.R. 3179), introduced in October 2011 by Representative Steve Womack (R-AR3), authorizes states to require all sellers making sales within the state to collect sales tax, regardless of the location of the seller, in exchange for a commitment by such states to simplify their administration of sales and use tax. H.R. 3179, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/hr3179.
• The Marketplace Fairness Act (S. 1832), introduced in November 2011 by Senator Michael Enzi (R-WY), is similar to the other measures in allowing states to enforce existing sales and use taxes without regard to the manner in which the sale is transacted. S. 1832, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/s1832.

Conclusion

Taken together, the recent Illinois decision in PMA v. Hamer (along with the pending litigation in Colorado and New York), the increasingly varied legislative approaches taken by individual states, and the renewed calls for federal action illustrate that the state of the law regarding the taxation of online sales is still very much in flux. It remains to be seen whether the “common ownership” approach to online sales tax will gain widespread support or, if challenged, sustain constitutional scrutiny. Further, it is uncertain whether the passage of a unified, federal sales tax approach will become a priority for Congress in the near future.

In an important victory for online retailers, in April of this year a federal circuit court judge struck down Illinois' recently enacted “Main Street Fairness Act,” 35 Ill. Comp. Stat. 105/2 (2011), as violating the Commerce Clause of the U.S. Constitution. See , Performance Marketing Association Inc. v. Hamer , No. 2011 CH 26333 (Ill. Cir. Ct., April 25, 2012). The Illinois Act was enacted in 2011 in an effort by Illinois legislators to force online retailers with no physical presence in the state to collect sales taxes directly for online purchases made by Illinois residents by focusing on advertising affiliate relationships within Illinois. As an update to our article in the June 2011 issue of Internet Law & Strategy, this article highlights important case developments and new legal trends that have emerged with respect to the collection of state sales taxes by online retailers. See, Marcelo Halpern et. al., “Taxing Online Sales: States and Online Merchants Battle over Affiliate Nexus as Illinois Joins the Fray,” Internet Law & Strategy, Vol. 9, No. 6 (June 2011), http://bit.ly/K3rjQo. The article also provides a general overview of online sales taxes and the constitutionality of click-through affiliate relationships.

Illinois Update: PMA v. Hamer

Under the Commerce Clause, a retailer located outside of a state can only be compelled to collect sales taxes on sales made to residents in such state if the retailer has a “substantial nexus” with the state. The Illinois Main Street Fairness Act, which passed in March 2011, sought to establish a taxable “nexus” between Illinois and out of state online retailers based on the retailers' contractual marketing relationships within the state. Known in this context as “affiliates,” in-state marketers (ranging from individual bloggers to large Internet companies) include links on their websites to the websites of non-resident online retailers in exchange for commission payments based on the number of “click-throughs” or actual sales originating from such links. Under the Illinois Act and similar laws in other jurisdictions, an online retailer having an affiliate relationship with an individual or company in a state is deemed to have a “physical presence” in that state and is therefore required to collect sales taxes on purchases made by residents of such state.

Following the passage of the Illinois Act, several prominent online retailers cancelled their marketing affiliate programs in Illinois to avoid the obligation to directly collect sales tax from Illinois consumers. See, Gregory Karp, “Cook County Judge Says 'Amazon-Tax Law' Unconstitutional,” Chicago Tribune, April 25, 2012, available at http://trib.in/K3r5Zu. The cancellation of such programs was an expected consequence of the Illinois Act, as similar results had occurred in Rhode Island, North Carolina and Colorado after their passage of similar laws. See, Halpern et. al., supra. An estimated 9,000 click-through affiliate marketers in Illinois were affected, and some Internet companies with business models that rely on commissions generated through such agreements relocated to other states in order to avoid having their relationship with online retailers terminated. See, John Pletz, “Judge Strikes Down Illinois' 'Amazon Tax',” Crain's Chicago Business, April 25, 2012, available at http://bit.ly/K3sW0B. In July 2011, the Performance Marketing Association (PMA), a trade association representing the interests of the online marketing industry, filed suit against the state of Illinois alleging that the Act violated the Commerce Clause of the U.S. Constitution and provisions of the Internet Tax Freedom Act. PMA v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., filed July 27, 2011).

The crux of the PMA's argument in PMA v. Hamer relies on the seminal Commerce Clause case Quill Corp v. North Dakota , 504 U.S. 298 (1992), in which the Supreme Court held that an out-of state retailer has a “substantial nexus” to a state only if it has a “physical presence” within the state. Courts have struggled to define what constitutes a “physical presence” for an out-of-state retailer without a physical brick and mortar location in the state, holding that while mere advertising in a state does not meet the standard, “continuous local solicitation” in such state may be enough to constitute the nexus. See , Scripto Inc. v. Carson , 362 U.S. 207 (1960); Tyler Pip Indus. v. Washington State Dep't of Revenue , 483 U.S. 232 (1987); Orvis Co. v. Tax Appeals Tribunal, 86. N.Y.2d 165, 178 (N.Y. 1995).

With respect to online retailers, the principle legal argument has been over whether click-through affiliates fall closer to the “mere advertising” or “active solicitation” end of the spectrum. In Amazon.com LLC v. New York State Department of Taxation and Finance , 913 N.Y.S.2d 129 (App. Div. 2010), the New York Appellate Division examined a New York click-through law similar to the Illinois Act and declined to find it per se unconstitutional on its face. (Note that the Supreme Court of New York Appellate Division remanded the case back to the lower court for further proceedings to determine whether the New York law, as applied to Amazon.com, violates the Commerce Clause.) In declining to find the click-through law unconstitutional, the New York court relied on the argument that the New York law provided a mechanism for click-through affiliates to demonstrate that they were engaging in mere advertising and not active solicitation, rather than legally characterizing such relationships one way or the other. Id.

In PMA v. Hamer, the PMA argued that the Illinois Act was distinct from the New York law in that it did not provide a mechanism for click-through affiliates to rebut the presumption that they have engaged in solicitation rather than mere advertising. Plaintiff's Motion for Summary Judgment, PMA. v. Hamer , No. 2011 CH 26333 (Ill. Cir. Ct., filed Jan. 6, 2012) (hereinafter “PMA Motion”). Without such mechanism in the Illinois Act, the PMA argued, the website links provided by click-though affiliates should be characterized as closer to pure advertising, “no different in substance than other forms of advertising broadcast to a wide, non-local audience.” Id. at 14. The Illinois Department of Revenue, on the other hard, argued that the click-through links amount to active solicitation, characterizing the links as “interactive” and the “tool in which a customer utilizes to connect to the retailer,” rather than passive displays of information. Defendants' Reply to Plaintiff's Motion for Summary Judgment, PMA. v. Hamer , No. 2011 CH 26333 (Ill. Cir. Ct., March 21, 2012) (hereinafter, “DOR Motion”).

The PMA also argued that the Act violated the federal Internet Tax Freedom Act (ITFA) (www.govtrack.us/congress/bills/110/hr3678), which prohibits a state from imposing an obligation to collect use tax in connection with an Internet transaction where no tax collection obligation is imposed on similar transactions accomplished through other means. PMA Motion, supra. The PMA argued that the Act impermissibly targeted online retailers who entered into agreements with click-though affiliates, but did not burden other out-of-state retailers who entered into similar agreements within Illinois (for example, advertising in “offline” media, such as print publishers or over-the-air broadcasters). Id. In response, the Illinois Department of Revenue again argued that click-through links are interactive and distinguishable from traditional advertisements and offline forms of media and, therefore, are not “similar transactions” under the ITFA. DOR Motion, supra.

On April 25, 2012, Illinois Circuit Court Judge Robert Lopez Cepero, in a ruling from the bench following oral arguments, granted summary judgment on behalf of the PMA, finding the Act unconstitutional under the Commerce Clause and in violation of the ITFA. PMA. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct., April 25, 2012). Judge Cepro issued a written order of his decision on May 7, 2012, stating that the Illinois Act “fails the 'substantial nexus' requirement for state use tax collection and reporting obligations under the Commerce Clause ' [f]ailing the substantial nexus requirement renders the applicable provisions [of the Act] unconstitutional.” Id. Judge Cepero further found the Illinois Act preempted “by virtue of the federal moratorium against discriminatory state taxes on electronic commerce” under the ITFA. Id. While the Illinois Department of Revenue may appeal, the ruling provides a victory for online retailers and click-through affiliates and highlights the uncertainty surrounding the constitutionality of click-though affiliate laws implemented or under consideration by other states.

Beyond Illinois: New Trends In Taxing Online Sales

Outside of Illinois, states continue to look for ways to collect sales tax from online sales given the constitutional challenges and their desire to avoid the practical results seen in Illinois and other states, such as the cancellation of marketing agreements and Internet businesses leaving the state. While some states continue to implement click-through affiliate laws modeled after those in Illinois and New York, with the continued controversy surrounding the click-through affiliate approach, other states are examining different legislative approaches to taxing online retailers. Two different approaches to establishing the requisite nexus have resulted: 1) the New York and Illinois model targeting click-through affiliate relationships with online retailers; and 2) a new approach based on targeting online retailers' corporate affiliates (i.e., those organizations with a common ownership interest), rather than contractual click-through affiliates.

In March 2012, Utah passed House Bill 384, expanding the obligation for an out-of-state retailer to collect and remit sales taxes. Under the Utah law, an out-of-state retailer is subject to tax collection obligations if it has a greater than 10% ownership interest in a Utah business that delivers the out-of-state retailer's products or services to Utah consumers, and either: 1) the out-of-state retailer sells the same or a similar line of products and services as the in-state business under a similar business name; or 2) the in-state business is used to promote and facilitate sales of the out-of-state retailer's products and services within Utah. Utah Code Ann. '59-12-107(1)(2)(b) (2012); see also, “What is an 'Affiliate Nexus' Statute?,” Eyes on eCom Law, April 2, 2012 available at http://bit.ly/JyM9LV. This “common ownership” approach may establish the requisite nexus through an online retailer's relationships with an in-state business that supports the retailer (such as operators of warehouses or order fulfillment and distribution centers) if the online retailer has the requisite ownership interest such in-state business.

Texas adopted a similar law, effective on Jan. 1, 2012, which aims to establish the requisite nexus if an out-of-state retailer has a substantial ownership interest in a company doing business in Texas that sells similar products or promotes, advertises or facilitates the sale in Texas of the out-of-state retailer's products. Tex. Tax Code Ann Sec. 151.107(a)-(d).

Similar tax legislation utilizing the common ownership approach is pending in Virginia and New Jersey. See, Rebecca Madigan, “Virginia Did Not Pass an Affiliate Nexus Tax Law As We Know It,” Performance Marketing Association, April 18, 2012, available at http://bit.ly/JyMzlu (hereinafter “PMA Update”).

[Update: After this issue went to press, New Jersey Governor Chris Christie announced that Amazon.com plans to build two warehouses in the state and will begin collecting 7% state sales tax from NJ customers in July 2013. The warehouses will create 1,500 jobs and bring in an estimated $30 to $40 million in sales tax revenue, Christie said in a May 30 news conference. Video of Christie's announcement is available on the Governor's website; http://bit.ly/KgKRoK]

On April 20, 2012, Georgia enacted a tax law combining both the click-though affiliate model and common ownership affiliate models. Georgia HB 386 (LC 34 3484S) (2012); see also, “Yet Another State (Georgia) Adopts a Click-Through Nexus Law,” Eyes on eCom Law, April 30, 2012 available at http://bit.ly/JyOh6p. Georgia's law tracks the New York model, providing that online retailers who enter into agreements with Georgia residents under commission or compensated sales agreements worth greater than $50,000 annually are presumed to be required to collect Georgia sales and use tax. Like New York, the presumption may be rebutted by submitting proof that the resident affiliate does not engage in activity that significantly maintains the retailers' market within Georgia. The Georgia law also includes a common ownership element similar to the Utah statute, whereby nexus is presumed if an out-of-state retailer and a Georgia business are under common ownership or control and the Georgia business sells a similar line of products within Georgia under a similar business name or using similar trademarks and service marks.

Sales tax laws aimed at establishing the requisite nexus through click-through affiliates are still found in many jurisdictions in addition to Illinois and New York, including Rhode Island, North Carolina, Arkansas, Connecticut, California (effective Jan. 1, 2013 if federal tax legislation is not adopted), and Pennsylvania (in the form of an administrative regulation, effective on Sept. 1, 2012). See respectively, 35 Ill. Comp. Stat. 105/2 (2011); N.Y. Tax Law '1101(b)(8)(i)(l) (2008); R.I. Gen. Laws '44-18-15 (2009); N.C. Gen. Stat. '105-164.8(b)(3); Ark. Code. Ann. '26-52-117 (2011); Conn. Gen. Stat. '12-216a (2001); Ca. Rev. & Tax. Code '6203(c)(1) (2011); Pa. Sales and Use Tax Bull. 2011-01 (Dec. 2, 2011).

Of these states, Illinois, Connecticut and Pennsylvania do not include the ability to rebut the presumption that click-through affiliates are engaging in mere advertising as opposed to active solicitation. Click-through legislation is also currently pending in Minnesota. PMA Update, supra.

In 2010, Colorado adopted a different approach than the click-through or common ownership models. The Colorado law requires out-of-state online retailers to send Colorado consumers a notice of their obligation to self-report use taxes and an annual summary of their purchases. In addition, out-of-state retailers are required to submit an annual report to the state of Colorado listing the name, address, and purchase history of any consumer who purchased goods for delivery in Colorado. Act, 1 Colo.Code. Regs. '201-1:39-21-112.3.4 (2010). However, in March 2012, the Federal District Court of Colorado, in Direct Marketing Association v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. March 30, 2012), struck down the Colorado law as unconstitutional under the Commerce Clause for mandating a reporting requirement which imposes a unique burden on out-of-state retailers as compared to in-state retailers. The Colorado Department of Revenue has given notice of its intent to appeal the decision.

Congressional Action

Given the increasingly varied approaches of a state-by-state approach to taxing online sales and the constitutional uncertainty of such measures, there have been new calls for Congressional action to regulate the taxation of online sales at a federal level. Advocates for federal regulation include parties on both sides of the issue, ranging from lawmakers to online retailers and Internet marking firms. See, e.g., Karp, supra. At the time of this writing, three bills are pending in Congress seeking to unify the collection of state sales and use taxes:

• The Main Street Fairness Act (S. 1452), introduced in July 2011 by Senator Dick Durbin (D-IL), endorses a multi-state agreement on sales and use tax collection and administration. S. 1452, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/s1452.
• The Marketplace Equity Act of 2011 (H.R. 3179), introduced in October 2011 by Representative Steve Womack (R-AR3), authorizes states to require all sellers making sales within the state to collect sales tax, regardless of the location of the seller, in exchange for a commitment by such states to simplify their administration of sales and use tax. H.R. 3179, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/hr3179.
• The Marketplace Fairness Act (S. 1832), introduced in November 2011 by Senator Michael Enzi (R-WY), is similar to the other measures in allowing states to enforce existing sales and use taxes without regard to the manner in which the sale is transacted. S. 1832, 112th Congress (2011), status available via GovTrack.us at www.govtrack.us/congress/bills/112/s1832.

Conclusion

Taken together, the recent Illinois decision in PMA v. Hamer (along with the pending litigation in Colorado and New York), the increasingly varied legislative approaches taken by individual states, and the renewed calls for federal action illustrate that the state of the law regarding the taxation of online sales is still very much in flux. It remains to be seen whether the “common ownership” approach to online sales tax will gain widespread support or, if challenged, sustain constitutional scrutiny. Further, it is uncertain whether the passage of a unified, federal sales tax approach will become a priority for Congress in the near future.