By: Mark Glennon*
Once upon a time, it was widely recognized that legislators themselves should take care that laws they passed were constitutional and didn’t conflict with other laws, instead letting courts alone to sort things out.
The Illinois General Assembly seems to have gone out of its way to shatter any such expectation. In the new budget passed June 1, they thumbed their noses at questions of constitutionality and legality in their drive for more of what they like best – new taxes – plenty of which are in the budget, totaling at least $800 million per year.
A mess of uncertainty and litigation is sure to follow.
Below are just some of the serious, documented legal challenges and endless court proceedings likely to result.
Digital Ad Tax.
Beginning January 1, 2027, a 10 percent tax on gross receipts from targeted digital advertising services applies to companies with more than $1 million in Illinois digital ad revenue.
But that tax appears to be barred by the federal Internet Tax Freedom Act (ITFA). ITFA prohibits state and local governments from imposing discriminatory taxes on electronic commerce. That is, taxes are banned that target online services without imposing comparable radio, TV and billboard advertising entirely while taxing only digital advertising. NetChoice, which has already filed suit against Chicago’s nearly identical Social Media Amusement Tax, earlier urged Gov. JB Pritzker to veto the provision as “facially discriminatory under ITFA”.
The matter is hardly new. The Illinois Supreme Court earlier struck down a prior Illinois Internet tax on just that basis. The court found the statute was “a discriminatory tax on electronic commerce within the meaning of federal law” and thus preempted.
Illinois’ apportionment formula for its digital ad tax, which is based on the ratio of in-state to national digital ad revenue, also creates a multiple taxation risk. If every state applied an equivalent formula, companies could face taxation exceeding their total national revenue. NetChoice is already suing to block Chicago’s similar tax.
Then there’s the federal Constitution’ Commerce Clause, which has been held to prohibit state taxes on interstate commerce that are not fairly apportioned or that discriminate against interstate commerce. Illinois’ digital ad tax appears to fail that test. The Chicagoland Chamber of Commerce is among those who have noted that issue, warning that Illinois would face “litigation for the state of Illinois for an untold amount of time,” with no clear guarantee of new revenue.
Social Media User Tax
The budget imposes a per-user monthly fee on social media platforms ranging from $0.10 to $0.50 per Illinois user, depending on platform scale, projected to raise $200 million.
Like the digital ad tax, this tax targets exclusively online services with no offline analog. Social media is “solely a creature of the Internet for which no physical analog exists,” making the ITFA discrimination argument particularly strong. Selective taxation of media outlets triggers heightened First Amendment scrutiny because it poses a “particular danger of abuse.”
The federal Commerce Clause also presents a problem for the social media tax because it fails what has been called an “internal consistency test.” Taxes fail that test if every U.S. jurisdiction imposed the same per-user fee, a single user could be considered a “resident” of multiple jurisdictions simultaneously, resulting in multiple taxation and an unconstitutional burden on interstate commerce.
How about First Amendment issues?
Both the digital ad tax and the social media user tax impose differential burdens on media entities based on audience size and platform type. Courts have long held that selective taxation of media outlets triggers heightened First Amendment scrutiny because it poses a “particular danger of abuse.” The exemptions for “bona fide news websites” introduce content-based distinctions that are presumptively unconstitutional, as explained here.
Compliance with the social media tax would also bump up against Illinois’ own data privacy law. The new tax requires platforms to track and verify the Illinois residential addresses of active users — data collection that may conflict with the Illinois Biometric Information Privacy Act (BIPA) and other state privacy statutes.
Next, there’s a problem with undue vagueness, which presents a due process issue. Chicago’s Social Media Amusement Tax, a near-identical predecessor, has already been challenged on due process vagueness grounds — specifically, the difficulty of defining an “active Illinois user” with sufficient legal precision. The state-level version has the same problem.
Finally, what about the Illinois Constitution’s Uniformity Clause?
It requires that different classes for tax purposes “shall be reasonable and the subjects and objects within each class shall be taxed uniformly.” Both the digital ad tax and the social media fee create tiered, progressive rate structures based on company size or revenue.
Transportation Lockbox Diversion
The new budget’s transportation lockbox diversion has its own problems. Though perhaps not a “tax” in itself, the new budget transfers $150 million in gas sales tax revenue from the transportation fund to the General Revenue Fund.
That certainly appears to conflict with Illinois’ constitutional ban on raiding the transportation fund. In 2016, Illinois enacted the Transportation Taxes and Fees Lockbox Amendment, which mandates that transportation-related tax revenues be spent only on transportation purposes.
Corporate NOL Deduction Cap
The budget permanently limits corporate net operating loss deductions to 15% of net income or $500,000 (whichever is greater) in tax year 2027, phasing up to 80% by 2031.
That seems likely to stand up legally because courts grant legislatures wide latitude in prospective tax changes. However it’s sure unfair so businesses will be looking hard for any grounds for challenging the change. Businesses that incurred losses in prior years structured their financial affairs in reliance on the scheduled phase-out of the original cap have had the rug pulled out.
Cryptocurrency / Digital Asset Tax
A new 0.2% tax on the value of digital assets involved in exchanges, transfers, storage, or custodial services takes effect January 1, 2027.
The primary legal problem here is ITFA preemption: To the extent the tax applies to digital asset transactions in a manner that has no comparison in traditional financial instrument taxation, it could be characterized as a discriminatory tax on electronic commerce. Additionally, if the tax applies to interstate digital asset transfers, it faces potential Commerce Clause apportionment challenges similar to those facing the digital ad tax.
Lawmakers essentially acknowledged these risks by excluding digital ad tax revenue from the budget’s fiscal projections . That’s basically a concession that the provision is likely to be enjoined before it generates any money
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What’s the purpose of the oath of legislators to “support and defend the Constitution” if not to have them conform their legislation to the Constitution?
Thomas Jefferson was among many who warned directly about legislators who leave questions of constitutionality to a court monopoly: “The Constitution, if left to courts alone to worry about, “is a mere thing of wax in the hands of the Judiciary, which they may twist and shape into any form they please.”
And from Abraham Lincoln:
If the policy of the Government upon vital questions affecting the whole people is to be irrevocably fixed by decisions of the Supreme Court, the instant they are made in ordinary litigation between parties in personal actions the people will have ceased to be their own rulers, having to that extent practically resigned their Government into the hands of that eminent tribunal.
Those sentiments are long gone. If lawmakers today provided an honest quote about their disregard for constitutionality, a fair one would be “So, sue us.”
*Mark Glennon is founder of Wirepoints.
With $162 billion more from taxpayers, couldn’t you deliver a few bond upgrades, too
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