Illinois enacts Web sales tax; online retailers threaten to leave

Mar 12, 2011 By Sandra M. Jones

Illinois Gov. Pat Quinn stepped into the Internet tax fray this week, signing into law a bill designed to collect a sales tax for certain online purchases, a move that Amazon.com Inc. said it would blunt by severing ties with Illinois affiliates.

The controversial law makes it tougher for online merchants such as Amazon and Overstock.com Inc. to claim they have no physical presence in a state - something they must do in order to avoid charging their customers .

"Amazon has basically a 10 percent pricing advantage, and they're fighting like the dickens to keep it," said Fiona Dias, executive vice president of strategy at GSI Commerce, a Pennsylvania-based digital marketing firm.

The law, which took effect immediately after it was signed Thursday, is expected to have little effect on consumers but deals a blow to small Web businesses that count Internet retail giant Amazon and other online merchants as a major source of ad revenue.

Under the new law, called the Main Street Fairness Act, online retailers must collect and remit sales taxes on purchases made by Illinois residents if the has a physical presence in the state. The new law expands the meaning of "physical presence" beyond a warehouse, factory or office to include affiliate companies, typically deal and coupon website operators that earn commissions for directing shopping traffic to an online store.

The average combined sales tax on goods purchased in the U.S. jumped to a record high of 9.64 percent in 2010, from 8.63 percent in 2009, according to Vertex Inc., as cash-strapped city, county and state governments sought new revenue. The average state sales tax rose to 5.52 percent in 2010 from 5.48 percent in 2009. The state sales tax in Illinois is 6.25 percent.

Amazon and Overstock said they would avoid the sales-tax issue by dropping their affiliates in Illinois. Amazon declined to disclose how many of its affiliates are in Illinois, but Overstock said it did business with "well over 100." Amazon and Overstock have relationships with thousands of affiliates across the country.

Illinois is among a handful of states - including New York, Rhode Island and North Carolina - that have instituted similar laws to extract sales taxes from online merchants and boost depleted state coffers.

"Illinois' Main Street businesses are critical to ensuring our long-term economic stability, which is why they must be able to compete with every company doing business online in Illinois," Quinn said. "This law will put Illinois-based businesses on a level playing field, protect and create jobs, and help us continue to grow in the global marketplace."

The Illinois Department of Revenue estimates it misses out on $153 million to $170 million in uncollected sales taxes each year from online purchases. The uncollected taxes of goods sold online and through catalogs totaled $8.6 billion in 2010 nationwide, according to a Wall Street Journal report citing the National Conference of State Legislatures.

The U.S. Supreme Court ruled in 1992 that companies without a physical presence in a state aren't required to collect state sales taxes.

Amazon, based in Seattle, sent a letter to its affiliates in Illinois on Thursday telling them that the company will terminate their contracts April 15. Its affiliates will no longer receive advertising fees for sales referred to Amazon.com, Endless.com or SmallParts.com, the letter said.

Overstock also sent a letter to its Illinois affiliates Thursday, saying it will sever its ties with them as of May 1 unless the law is repealed or the affiliates move to another state where no such law exists.

"We think that states that do this are making a mistake," said Jonathan E. Johnson, president of Salt Lake City-based Overstock. "We think this kind of law doesn't really hurt Overstock that much. The affiliate business can be borderless. If a Web shopper is looking for a coupon, they don't care if they get it from an Illinois-based affiliate or an Indiana-based affiliate."

Scott Kluth, founder and CEO of Chicago-based CouponCabin.com, called the new law "deeply disappointing" and said his company is "actively exploring" moving to Indiana.

"It's a shame we have to consider leaving our longtime home in Illinois, but we will do what is best for our business," Kluth said.

Brad Wilson, founder of BradsDeals.com, is staying in Chicago for now but predicted the new law will stunt the growth of the deal-site industry that has sprouted in Illinois.

"Chicago doesn't lead on the Internet in many things, but this space is one of the things that we do, and the state should cherish that and foster that," Wilson said. "These are modern business models. They don't require factories or fixed investments. They require smart people. And you can find smart people anywhere. They're legislating (this industry) out of the state."

Rival retailers saddled with brick-and-mortar stores, for their part, cheered the new law.

As the biggest online retail company, Amazon's ability to avoid collecting and remitting state sales taxes has been the envy of brick-and-mortar retailers. Retail margins are so slim, typically less than 5 percent, that not charging sales tax amounts to a price advantage.

In the past few weeks, Sears Holdings Corp., Best Buy Co., Barnes & Noble and Wal-Mart Stores Inc., among others, launched an effort to poach disgruntled Amazon affiliates in states the online retailer has threatened to leave.

Wal-Mart said in a statement Thursday that the new law "will help create a level playing field between online-only retailers and brick-and-mortar retailers."

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User comments : 20

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dogbert
2.5 / 5 (11) Mar 12, 2011
Very foolish, Illinois.

Businesses who depend on Amazon or Overstocked will likely move elsewhere or cease operations.

Closing businesses increases unemployment and decreases revenue.

Precisely foolish.

Skeptic_Heretic
2.4 / 5 (9) Mar 12, 2011
Very foolish, Illinois.

Businesses who depend on Amazon or Overstocked will likely move elsewhere or cease operations.

Closing businesses increases unemployment and decreases revenue.

Precisely foolish.


So you'd prefer to have the state have two different rules for purchase and sales in the state? For example, local book stores, that actually do employ residents of the state have to collect tax reducing their ability to compete pricewise, but Amazon, who doesn't employ anyone directly within the state, doesn't have to submit tax revenue to the state.

Paying attention yet?

dogbert
1.8 / 5 (8) Mar 12, 2011
You say you live in England. You don't have a dog in this race.
Skeptic_Heretic
3.4 / 5 (5) Mar 12, 2011
You say you live in England. You don't have a dog in this race.

No, I live in New England. New Hampshire to be exact. My location doesn't impact my ability to criticize your opinion.
ryggesogn2
1.4 / 5 (9) Mar 12, 2011
NH has no sales taxes which attracts many from MA.
MA sales taxes are lower than RI attracting many from RI to MA.
Of course it is technically illegal for MA residents to avoid paying the MA sales taxes even if they purchase in NH.
MA residents are provided the opportunity on their state tax forms to pay their sales taxes on NH purchases. Few do. MA 'liberals' also have the opportunity to pay a higher income tax rate, but few do.
Skeptic_Heretic
3.7 / 5 (3) Mar 12, 2011
NH has no sales taxes which attracts many from MA.
Many individuals, not businesses. The tax above does not impact individuals. It only impacts distributed business models.
MA sales taxes are lower than RI attracting many from RI to MA.
Again, individuals, not businesses.
Of course it is technically illegal for MA residents to avoid paying the MA sales taxes even if they purchase in NH.
Yes, the law states that you should report your purchase and pay appropriate tax as an individual or a business.
MA residents are provided the opportunity on their state tax forms to pay their sales taxes on NH purchases.
They're also permitted to adjust their taxable income based upon the payment of sales tax.
Few do.
Like you.
MA 'liberals' also have the opportunity to pay a higher income tax rate, but few do.
And this has anything to do with a distribution tax in Illinois?
nada
5 / 5 (2) Mar 12, 2011

So you'd prefer to have the state have two different rules for purchase and sales in the state? For example, local book stores, that actually do employ residents of the state have to collect tax reducing their ability to compete pricewise, but Amazon, who doesn't employ anyone directly within the state, doesn't have to submit tax revenue to the state.

Paying attention yet?


It should be noted that you consider TAXES as the normal course of action. How about DROPPING the sales tax in IL if their is SUCH a concern about employee welfare?
Ethelred
1 / 5 (1) Mar 13, 2011
Of course it is technically illegal for MA residents to avoid paying the MA sales taxes even if they purchase in NH.
It is Constitutionally illegal for MA to try to control interstate trade. Ma residents can buy where they wish. However this situation is a problem and it will remain one unless the Feds do something to handle it.

Internet sales are being subsidized by not paying taxes and only the Feds can deal with it. Don't know how myself.

Ethelred
epsi00
not rated yet Mar 13, 2011
well politicians don't always have their head on their shoulders. sometimes, it's way up there, in a tunnel.

now back to the point. If local business were affected seriously by the fact that online retailers not collecting taxes, then logic says that they would have gone bankrupt a long time ago. The fact that they haven't prove that online retail and local retail can coexist peacefully.

Now, we don't want amazon to go relocate to china, do we?
Ethelred
3 / 5 (4) Mar 13, 2011
It should be noted that you consider TAXES as the normal course of action
'Only two things in life are certain. Death and taxes.'

How about DROPPING the sales tax in IL if their is SUCH a concern about employee welfare
Then they have to find another revenue source. Sales taxes are used primarily by cities and counties. Sales taxes used to be inherently local and thus were a good way to handle the costs of local government.

Do YOU have an answer as to handle the situation as the bills still have to be paid.

Only people in total denial of reality like Marjon up there can say with a straight face that taxes should be voluntary. He has the option to move to somewhere else. I have suggested Somalia since it EXACTLY fits his definition of a perfect government. He keeps refusing to either move or admit that he is wrong.

Its a hard question. If you have a VIABLE answer you should run for office. We could use someone that has a real world answer to the problem

Ethelred
ryggesogn2
1 / 5 (5) Mar 13, 2011
Then they have to find another revenue source.

Gee, they could cut spending. That's what everyone else does who can't and won't gang up on their neighbors and take their money.
SumGuy
not rated yet Mar 13, 2011
Ok, explain this: Illinois thinks that it can tax Amazon because Amazon has a commercial relationship with advertisers in Illinois and that relationship is directly related or facilitates the sales that Amazon transacts inside Illinois. So Amazon is ending it's business relationships with bloggers and other "affiliates" who operate inside Illinois, thereby leaving Amazon with no financial or business ties with anyone operating in Illinois. But wait! Doesn't Amazon hire various shipping companies to deliver packages to customers in Illinois? Doesn't that still leave Amazon with significant financial or business ties to Illinois, to the same (if not more) extent than these so-called bloggers?
mysticfree
3 / 5 (2) Mar 13, 2011
Maybe Amazon should change its business model to one like Illinois government's (among other states) -- force everyone to pay whether they use Amazon products or not, and run the Amazon business as inefficiently as possible so that its products cost more than they should.
MikeGroovy
3 / 5 (2) Mar 13, 2011
Illinois is pretty desperate for tax income. Businesses and tax payers are desperate to save money. This is a bad decision for their state long term. Oklahoma is booming thanks in part to low state taxes and small government. Technically our income is already taxed.. Sales tax is really a tax on the same funds.
dogbert
1 / 5 (5) Mar 13, 2011
The bottom line is that the action by Illinois harms businesses in Illinois who do business with out of state vendors like Amazon. The businesses whose association with Amazon, Overstocked, etc. have been severed lose the revenue from that association. Illinois loses the taxes which it would have gained from taxing that lost revenue. Some of those businesses may move out of Illinois or may fail, costing the citizens of Illinois the jobs that those businesses provided and further reducing tax revenues to the state.

Everyone loses. No one gains. The arguments that Illinois has a right to do this are irrelevant to the fact that no one, including the government of Illinois, gains and everyone loses.
SumGuy
not rated yet Mar 13, 2011
I don't see how Amazon simply cutting business with in-state bloggers and advertisers is enough to keep the State of Illinois off Amazon's back. Because until Amazon actually stops doing business OF ANY KIND with ANYONE in Illinois, then the State of IL will always have some way to link Amazon to the state. And when Amazon hires Fedex or UPS to deliver products to customers in Il, then that should be sufficient for the state to force Amazon to collect sales tax on it's behalf.
kaasinees
1.7 / 5 (6) Mar 13, 2011
Businesses who depend on Amazon or Overstocked will likely move elsewhere or cease operations.

Sowhat? They dont pay sales taxes anyway.
dogbert
1 / 5 (5) Mar 13, 2011
Sowhat? They dont pay sales taxes anyway.


They pay taxes. When they purchase anything they pay sales taxes. They pay payroll taxes, etc. The people who work for them pay all kinds of taxes. When they go out of business or move out of state, their jobs and taxes go with them.
ereneon
5 / 5 (2) Mar 19, 2011
Isn't it actually the customer who is hiring FedEx or UPS to ship products? It is the customer who pays for shipping. Once you buy the product and leaves the warehouse, it has nothing to do with Amazon anymore.
ryggesogn2
1.8 / 5 (5) Mar 26, 2011
"The chairman and CEO of Peoria-based Caterpillar Inc. is raising the specter of moving the heavy equipment maker out of Illinois."
""I want to stay here. But as the leader of this business, I have to do what's right for Caterpillar when making decisions about where to invest," Oberhelman wrote in the letter obtained Friday by the Lee Enterprises Springfield bureau. "The direction that this state is headed in is not favorable to business and I'd like to work with you to change that.""
http://www.pantag...2e0.html

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