January 7, 2011, 3:57 PM

Taxing decisions

A proposed Illinois web tax leaves retailers based in that state worried about lost business.

Lead Photo

Scott Kluth

Scott Kluth runs CouponCabin.com from an office in downtown Chicago. Some days, he says, he can see Indiana from the top of his company’s building.

Even though Friday was typically grey and frigid, the kind of weather for which the Second City is infamous, Indiana was looking brighter this morning than ever before.

That’s because Kluth says he faces the loss of up to a third of his business if Illinois Gov. Pat Quinn signs into law a measure that would require online retailers such as Amazon.com and Overstock.com to collect taxes of 6.25% on web purchases made by state residents that came to those retail sites from Illinois-based web sites like CouponCabin.com. Consumers who visit the CouponCabin site can find digital coupons for discounts from such online retailers as Sears Holdings Corp., The Home Depot Inc. and Vistaprint, each of which is part of the Internet Retailer Top 500 Guide. Because those retailers pay CouponCabin a commission when consumers make purchases with those coupons, they would be subject to the sales tax law, and likely would cut ties with CouponCabin rather than collect the levy from shoppers, Kluth says.

“Our only remedy would be moving out of state,” he says.

Kluth’s fears of losing business are well founded. Already, Overstock.com and Amazon.com have promised to stop dealing with the thousands of web site operators in Illinois—known as affiliates—who via ads and links send shoppers to those large e-commerce sites in return for a cut of the sale. Overstock already has done so in New York, and last year Drs. Foster and Smith killed its entire affiliate marketing program because the Wisconsin-based online retailer of pet supplies didn’t want to face tax liabilities.

Amazon, the world’s largest online retailer, said today that if Quinn signs the tax into law it would end its relationship with thousands of Illinois-based affiliates. “Over a dozen other states have considered essentially identical legislation but have rejected these proposals largely because of the adverse impact on their states’ residents,” an Amazon spokeswoman says.

Overstock works with nearly 100 affiliates in Illinois, all of whom have been sent letters informing them that the retailer will cut them off if Quinn signs the bill. “The state will lose income taxes it was getting from those affiliates,” says Jonathan Johnson, the president of the online retailer. “We don’t want to run the risk of creating a sales tax nexus in Illinois.”

Nexus is a dreaded legal concept for online retailers. Born of a 1992 U.S. Supreme Court ruling, nexus means that online retailers must have a physical presence in a given state—this can include a distribution center, a bricks-and-mortar store or a corporate headquarters—in order for that state to require the retailer to collect sales taxes on online purchases made from that retailer. The Illinois bill would require Internet retailers that sell through affiliates in Illinois, and which sell at least $10,000 worth of goods each year to Illinois residents, to collect the taxes. The online retailers opposed to such taxes argue that they place a burden on the operators of small web sites, lead to reduced state tax revenue because of the resulting decrease in affiliate business, and cut too far into their own profits.

Those in favor of the taxes—for instance, the National Retail Federation, a trade group that includes retail chains that own many bricks-and-mortar stores—say that not taxing online retailers is unfair to other merchants. And states, many of which face large deficits and are trying to find ways to pay down debts, are eager to find new sources of revenue.  Illinois tax officials have estimated the state could collect $150 million annually in taxes from online purchases; technically, consumers in the state are already required to pay taxes on web purchases, but few do. Quinn has about 30 days to sign the bill. If he does—he already is backing a state income tax increase of more than 50%‑‑the tax would start on July 1.

“We hope consideration will be given to the impact on small businesses before this bill becomes a law,” Kluth says. He says CouponCabin is enjoying healthy growth, with the company’s staff doubling this year. A report on online coupon sites released late last year by web measurement firm comScore Inc. said that Groupon attracted 10 million unique visitors in November, followed by 8.8 million for CouponCabin. “We hope the state will see that this bill will fail to achieve its revenue raising goal,” Kluth says.

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