Yesterday, Governor Quinn ended two months of fence sitting and signed into law Illinois’s version of the tax on online retailers, generally called the “Amazon tax”, first passed in New York in 2008. The bill passed the General Assembly back in January. The new law goes into effect on July 1 of this year.
In 1992 the US Supreme Court ruled that a state does not have the authority to assess sales tax on merchants who do not have a physical presence in that state. (The technical term is “nexus.”) A book bought online from Barnes & Noble will be charged sales tax because Barnes & Noble has stores in Illinois, whereas the same book purchased from Amazon will not currently be charged sales tax because Amazon does not have a brick and mortar presence in the state. Although Illinois residents, as in other states, are required to pay use tax on items they use in the state and for which they paid less than the state’s 6.25% sales tax rate, most residents don’t report these purchases and the Illinois Department of Revenue estimates it loses more than $153 million a year in unpaid online purchase use tax.
Previously, Amazon and similar companies have worked through affiliates. A blog, for example, will host links to Amazon’s products and the blog owner is paid when users follow those links to Amazon and make purchases. The new law deems that this relationship, having affiliate arrangements with Illinois-based individuals and companies, constitutes a nexus. Thus, effective July 1, 2011, online retailers with Illinois affiliates will have to charge sales tax on the purchases made by Illinois residents.
Similar laws have already passed in New York, Rhode Island and North Carolina. Amazon challenged the New York law almost immediately after it was passed and the case there is ongoing. In Rhode Island and North Carolina, Amazon and similar companies terminated their affiliate programs to avoid the new laws. Amazon has already informed its Illinois affiliates that it will be ending its agreements with them because of the new law.
Traditional retailers such as Barnes & Noble and Sears have reached out to the displaced, former affiliates. These companies have always had to charge sales tax on their online transactions because they maintain physical stores as well.
The long term picture for internet sales tax is uncertain. Senator Dick Dubrin (D-IL) has said Congress should pass a law allowing states across the board to collect sales tax from online retailers. Along with Governor Quinn and other supporters of the new Illinois law, Durbin has said requiring online retailers to charge sales tax will help even the playing field between them and traditional, brick and mortar stores.
For more information on the new law, sales tax, use tax, or other tax concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.