* Back in 2011, the governor and all four legislative leaders signed on to a bill pushed by the Illinois Retail Merchants Association. The idea was to protect physical retailers from being undercut by online retailers who don’t charge sales taxes. It flew out of both chambers and was quickly signed into law.
Here’s a basic summary of the law from an Illinois Supreme Court ruling today which struck the statute down…
(O)ut-of-state internet retailers and servicemen are required to collect state use tax if they have a contract with a person in Illinois who displays a link on his or her website that connects an Internet user to that remote retailer or serviceman’s website. There is no requirement under the Act that sales be made to Illinois residents to subject the out-of-state retailer or serviceman to Illinois use tax obligations, and there is no requirement that the computer server hosting the Illinois affiliate’s website be located in Illinois. Both new definitions are limited, however, to referral contracts that generate over $10,000 per year.
As a result, Amazon immediately announced that it was ending its Illinois affiliate program and many of those larger affiliates fled to other states.
* All for naught, however. The Court’s conclusion…
The parties’ joint stipulation of facts states that an Internet affiliate does not receive or transmit customer orders, process customer payments, deliver purchased products, or provide presale or postsale customer services. Further, an Internet affiliate displaying a link on its website does not know the identity of Internet users who click on the link, and after a user connects to the retailer’s website, the affiliate has no further involvement with the user.
It is clear, therefore, that there is no interaction between an affiliate and a customer, and no “active” solicitation occurs on the part of the Internet affiliate. The click-through link makes it easier for the customer to reach the out-of-state retailer, but the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts.
In short, under the Act, performance marketing over the Internet provides the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link is reached.
However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reach same dollar threshold, will not trigger an Illinois use tax collection obligation. The relevant provisions of the Act therefore impose a discriminatory tax on electronic commerce within the meaning of the [federal Internet Tax Freedom Act].
The federal law referenced in the opinion expressly prohibits “discriminatory taxes on electronic commerce.”
*** UPDATE *** From IRMA…
“It’s disappointing that the Illinois Supreme Court did not address the constitutionality of the issue, but rather erred in its conclusion that the act violated the Internet Tax Freedom act.
“We haven’t given up. There are other avenues for appeal we hope the state will take.
“This underscores the need for action in Washington to quickly pass the Marketplace Fairness Act.
“Working with a hodgepodge of laws around the country is intolerable, and brick and mortar retailers continue to be at a substantial disadvantage to their online competitors.”
- E Man - Friday, Oct 18, 13 @ 1:31 pm:
Illinois finally got one right!
- hisgirlfriday - Friday, Oct 18, 13 @ 1:38 pm:
Interesting this comes down right as Wisconsins Amazon tax is set to begin next month.
- wordslinger - Friday, Oct 18, 13 @ 1:49 pm:
–Fitch Ratings has estimated that states in which Amazon does not collect sales tax are losing out on $11 billion in revenue.–
The online retailers really have a sweet scam going on. They stick it to the brick-and-mortar guys and states, too.
I guess Congress would have to level the playing field, but obviously they can’t be trusted with matches or pointy scissors, much less substantive legislation.
With the competitive advantage of not collecting sales tax, I guess you can see how Amazon put Borders out of business.
http://www.reuters.com/article/2013/10/17/usa-tax-wisconsin-idUSL1N0I613J20131017
- Judgment Day - Friday, Oct 18, 13 @ 1:50 pm:
Finally! A favorable decision for small business here in Illinois. Who would of thought.
It never seemed to occur to anybody that the little, tiny startups often don’t have sufficient cash flow for a physical location. For them, that’s wasted money. Their physical location is their home, or apartment, or a garage, or even a storage locker.
So Illinois did their best to chase all these small, tiny folks out of state. But the real impact was to send a message to all the little, tiny folks that Illinois isn’t a friendly place to start a business. The odds are long enough against us anyway, why startup in a place that goes out of it’s way to make the odds even longer.
Maybe we started to reverse that today. Let’s hope.
- Rail Sitter - Friday, Oct 18, 13 @ 1:50 pm:
Maybe Illinois should level the playing field by eliminating all sales tax.
- Anon. - Friday, Oct 18, 13 @ 1:53 pm:
==Their physical location is their home, or apartment, or a garage, or even a storage locker.==
And if that home, apartment, or garage is in Illinois, they were required to collect the use tax from their Illinois customers before the Amazon law was enacted, and are still required to do so after this court decision. This decision only helps businesses, big or small, that are not in Illinois.
- OneMan - Friday, Oct 18, 13 @ 1:59 pm:
They are opening a distribution center in Wisconsin, that gives them a physical nexus, can’t get around that.
- Judgment Day - Friday, Oct 18, 13 @ 2:10 pm:
“The online retailers really have a sweet scam going on. They stick it to the brick-and-mortar guys and states, too.”
Actually, the scam is going the other way. Here’s how it’s been playing out.
1) With our ‘Amazon Tax’ here in IL, the IL based affiliate marketing programs stopped. So our small, tiny businesses go elsewhere.
2) That meant that we (IL) stuck it to Amazon, but what we really did was to give the ‘big box’ retailers a boost in the marketplace. Except we didn’t - we actually gave them an opportunity to ’scam’ local shoppers.
3) Maybe you don’t remember, but the ‘big box’ retailers all complained that they were financially penalized by keeping a high level of merchandise in their locations because shoppers would come in for comparison shopping, and then buy online. Remember?
3) So IL passed the Amazon tax, with at least part of the goal being to correct this ‘imbalance’.
4) Didn’t work. In fact, what it did do was to buy time for the ‘big box’ retailers to keep minimal stock on hand, and when people came in to shop, they got pushed into buying the needed items online in the store, where the physically located store would not only charge a high price for the merchandise, but all the applicable sales taxes for our bloated governments, plus inflated shipping and handling charges.
Now, they would deliver the merchandise to the store where you could pick it up, but you got the ‘opportunity’ to pick up all their distribution costs, plus those fees and charges became an even greater profit center. In effect, they pushed their merchandise distribution costs and charges down to all of the local shoppers. Talk about a sweet deal - for everybody but the shoppers. How’d that work out for you?
- wordslinger - Friday, Oct 18, 13 @ 2:20 pm:
JD, I can’t say that I remember all that. And Amazon is hardly a little-guy victim, or their affiliates who were operating out of “storage lockers,” as you say.
I think most big retailers have figured out just-in-time inventory systems by now.
Bottom line, who has the competitive advantage on the same goods: those that have to charge and collect the sales tax, or that that do not?
- Judgment Day - Friday, Oct 18, 13 @ 2:35 pm:
Word, that’s one ‘bottom line’. How about a second one?
Did Illinois trading jobs for sales tax revenue work out for Illinois?
- PoolGuy - Friday, Oct 18, 13 @ 2:45 pm:
personally I don’t purchase from Amazon just for the sales tax part. free shipping helps too. and I live in downtown area where I have to drive 15-20 min thru neighborhoods, traffic lights and parking lots to get to retail locations, and then deal with check out lines, customoers, and not always knowledgeable employees (I’m not anti-social for the record).
if I know “exactly” what I want and amazon will ship it to my door in 2-3 days, either free or even for a small shipping fee, isn’t that a competitive advantage also, regardless of sales tax?
- wordslinger - Friday, Oct 18, 13 @ 2:51 pm:
–if I know “exactly” what I want and amazon will ship it to my door in 2-3 days, either free or even for a small shipping fee, isn’t that a competitive advantage also, regardless of sales tax? –
That’s the choice of the retailer.
JD, you tell me how many jobs. You seem to know.
But I think this Internet thing is going to make it. The days where online retailers assert a competitive advantage because they’re an infant industry is long gone.
Bricks and mortars employ people here and pay property taxes. That should be enough of an advantage for the online giants.
- Curmudgeon - Friday, Oct 18, 13 @ 3:03 pm:
Wordslinger: “I guess you can see how Amazon put Borders out of business.”
Personally, I think Borders put itself out of business by some of its practices, including markups that were out of line even with other IL physical presence retailers.
I buy from Amazon, and sometimes its website has given me the opportunity to buy from small Illinois-located sellers I otherwise would never have been aware of.
The critics are looking at the situation backwards. Illinois is NOT losing EARNED revenue from online sellers — rather, it is seizing UNEARNED revenue from Illinois-located sellers who should be focus on protesting paying taxes for which they gain little, if anything, in “services” from the State.