March 10, 2011, 5:21 PM

Illinois jumps aboard the online sales tax bandwagon

A new law will subject certain online purchases to the state’s 6.25% use tax.

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Illinois Gov. Pat Quinn today signed a bill that will levy taxes on some Internet purchases.

The law requires online retailers that sell through affiliates in Illinois, and which have at least $10,000 each year in sales to Illinois residents, to collect a 6.25% use tax. The tax resembles a sales tax, but technically applies to the right to use products purchased from Internet and catalog merchants that don’t collect sales tax on behalf of that state.

Illinois has long had a use tax that consumers were supposed to pay to the state on their own. But, as in other states, few consumers make those payments, and the Illinois Department of Revenue estimates that the state misses out on between $153 million and $170 million a year in sales tax as a result. This law will require larger online retailers to collect the use tax, just as e-retailers with a physical presence in Illinois already charge sales tax to Illinois residents.

The bill makes Illinois the latest state to attempt to generate 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. Some online retailers, including the world’s largest online retailer Amazon.com, have, or have threatened to, cut off affiliates in states that have passed similar laws.

Quinn says the bill will allow the state’s bricks-and-mortar merchants to compete on a more even footing with online-only retailers.

“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,” says Quinn. “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.”

A number of bricks-and-mortar retailers voiced support for the bill, including Julie Murphy, senior vice president of operations for Wal-Mart Stores Inc.

“During these economic times, it is vital for the state of Illinois to collect the millions of dollars of unpaid sales tax while allowing it to level the playing field for bricks-and-mortar businesses who support our local Illinois communities,” she says.

However, online retailers, such as Overstock.com, say that the bill is short-sighted because the state will lose income tax revenue as web-only retailers terminate relationships with Illinois affiliates.

“I think fairness is a great notion, but this doesn’t have anything to do with fairness,” says Jonathan Johnson, the retailer’s president. “The local retailers say that because they have to collect sales tax, everyone else should as well. But they collect it because they have boots on the ground in Illinois. We don’t. And the U.S. Supreme Court has said it is not fair for out-of-state retailers to have to serve as tax collectors.” Johnson says Overstock will end its relationships with Illinois affiliates because of the law.

In a letter sent today to Quinn, Johnson wrote: “The Internet is borderless. Internet ads can be served from any geographic location equally, as well as they can from Illinois. Illinois-based affiliates know this. So do the legislators of other states that have rejected this unwise law, who now welcome to their states the portion of our business expenditures formerly destined for Illinois. I hope in the future, when the promised revenues of HB 3659 do not materialize, Illinois will reassess and repeal this law.”

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