January 6, 2011, 12:21 PM

Illinois moves to tax online purchases

Lawmakers in Illinois have voted for a 6.25% tax on online retail purchases.

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Illinois would levy taxes on Internet purchases under a plan that won final General Assembly approval today with an 88-29-0 vote in the state House. The law would make Illinois the latest state to try to squeeze revenue from online retail purchases, though other states have faced court challenges and the threat of lawsuits after trying to collect taxes from web sales. And some online retailers have simply cut off affiliates in states that have passed similar laws.

The Illinois law still needs approval from Gov. Pat Quinn, a Democrat. Lawmakers have 30 days to send it to him, and he then has 60 days to act. The tax would start on July 1.

The tax is part of an amendment to Illinois House Bill 3659. The tax would subject certain online purchases to the state’s 6.25% use tax. Those taxes resemble sales taxes, but, technically, apply to the right to use products purchased from Internet and catalog merchants that don’t collect sales tax on behalf of that state.

The law would require Internet retailers that sell through affiliates in Illinois, and which sell at least $10,000 each year to Illinois residents, to collect the taxes, says a spokesman for state Senate president John Cullerton, a Chicago Democrat backing the bill.

“The bill treats online merchants more like bricks-and-mortar merchants,” the spokesman says. “The retailer would be responsible for collecting the tax.” He notes that the bill covers only online retailers that have affiliates in Illinois in an effort to satisfy a 1992 U.S. Supreme Court ruling that says only web merchants that have a presence within a given state must collect taxes there.

The spokesman could give no estimate about how much Illinois might collect from such a tax, but, previously, a spokeswoman for the Illinois Department of Revenue told Internet Retailer the state could recoup $150 million annually from the use tax.

The bill won approval from the Illinois Senate earlier this week. The use tax is part of a Senate amendment to the House bill.

Such states as North Carolina and Texas are trying to collect sales taxes from online retailers but have faced challenges, mainly from Amazon.com, No. 1 in the Internet Retailer Top 500 Guide.

In October, for instance, a federal judge ruled that Amazon did not have to turn over customer information beyond order I.D. numbers, ship-to address, and Amazon’s own transaction identification numbers to the North Carolina to help the state fix how much sales tax is owed on online purchases between Aug. 1, 2003 and Feb. 28, 2010. The information would help North Carolina learn more about who made the purchases and how much tax is owed.

Also in October, Amazon vowed it would fight an effort by Texas to collect $269 million in sales taxes for web purchases made by Texas consumers. Texas says it can collect the taxes because Amazon has a physical presence within the state—in this case, a distribution center operated by Amazon.com Kydc LLC, an entity separate from the Amazon retail organization.

Other retailers have taken more direct action. Overstock.com cut off its New York affiliates when that state passed a law requiring retailers to collect sales taxes on sales to New York residents through affiliates based in the state. Drs. Foster and Smith discontinued its entire affiliate program last year for fear of the tax implications of such programs.

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