By Hannah Meisel
* Still no decision in Janus v. AFSCME today (though the justices will be back with more opinions tomorrow), but the U.S. Supreme Court’s ruling in South Dakota v. Wayfair opens the door for Illinois to collect sales taxes from more out-of-state online retailers.
Luckily, the General Assembly doesn’t have to wait for Veto Session to implement a law to capture the revenue; the language was already in the Budget Implementation bill that passed with overwhelming majorities and was already signed by Gov. Rauner earlier this month.
COGFA estimates the tax could bring in $150 million in FY19 — not an enormous windfall, but nothing to sniff at either.
The language in the BIMP expands the state’s 6.25 sales tax to out-of-state retailers who do $100,000 or more worth of business annually in Illinois (or 200 or more annual transactions here). If businesses reach that threshold, they are considered to be “maintaining a place of business in this State” and required to collect and remit the taxes.
A standalone bill aimed at capturing the revenue, SB 2577, passed the Senate 39-10 on April 17 — 2018’s Tax Day — but never got past First Reading in the House.
It’s important to note that about 80 percent of out-of-state retailers are already paying sales taxes here. But proponents say the BIMP bill language and the Wayfair decision will help Illinois capture the remaining 20 percent.
In 2011, lawmakers approved what became known as the “Amazon tax,” which taxed online retailers if they had marketing affiliates in Illinois that generated more than $10,000 in business annually in “click-through agreements.” But the law also forced retailers like Amazon to collect Illinois sales taxes even if the customer wasn’t an Illinois resident or if the affiliates site was not hosted on a server based in Illinois.
The Illinois Supreme Court struck down the law in 2013, finding it unfairly discriminated against electronic businesses under the federal Internet Tax Freedom Law because entities like newspapers or radio broadcasts were not likewise taxed.
* From today’s opinion, striking down a 1992 Supreme Court ruling in Quill Corp. v. North Dakota…
The Internet revolution has made Quill’s original error all the more egregious and harmful. The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency. The argument, moreover, that the physical presence rule is clear and easy to apply is unsound, as attempts to apply the physical presence rule to online retail sales have proved unworkable.
* Reaction from the Illinois Retail Merchants Association CEO Rob Karr…
“We are very pleased with the Supreme Court’s ruling to allow states to collect internet sales tax. This ruling replaces the pre-Internet ruling that was determined by lower courts to prohibit states from requiring internet retailers to collect sales tax. As IRMA has long argued, regardless of where a sale occurs, a sale is a sale and sales tax should be applied. This ruling will ensure that main street retailers – who employ your neighbors, pay property tax and support local programs – are able to compete on a level playing field with out-of-state retailers that use our roadways and other services, but up until now, did not contribute anything to Illinois’ economy. This decision also protects Illinois consumers who have been liable for the sales taxes remote sellers refused to collect.”
* In the days after signing the budget, Gov. Rauner repeatedly touted the fact that the FY19 budget had “no new taxes.” I asked the Governor’s office whether the Wayfair ruling’s activation of the BIMP language throws a kink in that narrative.
*** UPDATE 1 ***
* Statement from Rep. Dave McSweeney (R-Barrington Hills), one of a handful of lawmakers from both Chambers who didn’t vote for the budget.
“It’s bad enough that the Madigan-Rauner budget includes the revenues from the 32% tax increase in the income tax rate. We now find out that the budget includes a tax increase on Illinois citizens made possible by the Supreme Court online sales tax ruling. I’m glad that I voted against this unbalanced ‘budget’ that contains the status quo of high tax policies in Illinois.”
*** UPDATE 2 ***
* Heard back from the Governor’s office. They do not consider the BIMP bill language activated by the Wayfair ruling a “new tax,” as the sales tax has been on the books for years.
*** UPDATE 3 (by Barton) ***
From the Dept. of Revenue…
Director Beard is very pleased that the United States Supreme Court overturned the 1992 decision in Quill and recognized that the physical presence requirement of Quill does not reflect the 21st century marketplace. To be clear, this is not a new tax. Illinois residents are already obligated to pay a Use Tax on out-of-state purchases and this prudent decision will allow states the ability to enforce Use Tax laws that are already in existence, bringing in an estimated $200 million in new State revenue for Illinois annually. With this decision, we level the playing field for Illinois brick and mortar retailers.
Public Act 100-0587 Background:
Illinois Public Act 100-0587 adopts the same standards as South Dakota for out-of-state-retailers to collect Use Tax on sales to state purchasers. The Act provides that, beginning October 1, 2018, an out-of-state retailer making sales of tangible personal property to purchasers in Illinois will be required to collect Use Tax if its cumulative gross receipts to purchasers in Illinois are $100,000 or more; or the retailer enters into 200 or more separate transactions to purchasers in Illinois. This law is not retroactive.
The State of Illinois estimates this Public Act will bring in an additional $200 million annually ($140 million for FY19) from the 6.25% Use Tax that will be collected. Locals will receive their share of Use Tax collected.
The Illinois Department of Revenue is available to assist any out-of-state retailers in registering their business to ensure compliance with the new Public Act.
Current Law Background:
Currently, Illinois law requires an out-of-state retailer to have a physical presence in this State to establish nexus. The following activities establish nexus:
• Physical presence. This type of nexus is established when an out-of-state retailer has more than the slightest physical presence in Illinois. This could be an employee, an agent, an office, or other physical location.
• Click-thru nexus. This type of nexus is established when an out-of-state retailer contracts with a person in this State to refer potential customers to that retailer. The retailer tracks those referrals using a promotional code or other mechanism, pays a commission or other consideration based on sales to purchasers through such referrals, and meets a $10,000 threshold.
• Affiliate nexus. This type of nexus occurs when an out-of-state retailer sells the same or similar product as a person located in this State and does so using a similar name or trademark. In these arrangements, the out-of-state retailer provides a commission or other consideration based on sales of tangible personal property to purchasers in this State. A $10,000 threshold must be met.
* Fun *nougat* of information (hat tip Andy Maloney for that joke) from my former colleague at Law360. She says it’s from Chief Justice Roberts’ dissent today.
*** UPDATE 4 (by Barton) ***
Jack Lavin and the Chicagoland Chamber…
“Today’s Supreme Court ruling is welcomed news for brick-and-mortar retailers along with state and local government. As one of the anchors of the Chicagoland economy, retail drives economic development, which supports infrastructure, job creating efforts and creates much needed sales tax revenue. Although some online retailers already collect and pay sales taxes, this ruling now places all retailers on equal footing,” Jack Lavin, president & CEO, Chicagoland Chamber of Commerce.