By Jamey Dunn
Gov. Pat Quinn signed a bill today that is intended to make large Internet retailers collect state sales tax on Illinois residents’ online purchases. However, some small business that have partnerships with the large sellers may flee the state as a result.
Although Illinois residents owe taxes on anything they purchase online, the U.S. Supreme Court ruled in 1992 that the state cannot make retailers collect the tax if they do not have a physical location in the state. Illinoisans are supposed to send the tax they owe on these purchases to the state, and this year there will be a special box on the state sales tax form to declare any such tax owed. However, few residents actually send the money, and the state is missing out on revenues.
Other states — including New York, Rhode Island and North Carolina — have tried to make retailers, such as Amazon, collect the sales tax by targeting businesses within their borders that have marketing relationships with out-of-state-sellers. Those marketing affiliates draw customers to their websites by offering deals on a variety of products from multiple sellers. They drive traffic to the retailers’ websites and receive a commission on any purchases customers make once they get there. Under the new Illinois law, such marketing relationships are equivalent to online sellers having a brick-and-mortar location in the state and as a result, they have a legal obligation to collect the tax.
Proponents say the new law will create fairness between Illinois stores and online retailers that do not have to collect a tax. “We think that now, retailers will be on a level playing field with their Internet counterparts who don’t do direct business here. We hope that we can maintain all the local retailers that we have. … We hope that by having an equal footing they won’t be used as showrooms anymore for those people who go in, get the serial number and then go on Amazon.com and buy it [and avoid paying the sales tax],” said David Vite, president of the Illinois Retail Merchants Association.
However, in other states that have passed the similar laws, Amazon has ended its relationships with the in-state marketers to avoid collecting sales tax. Tim Storm, chief executive officer of one such Illinois marketer called Fat Wallet, said he plans to move his business out of the state before the law takes effect in July. He said he cannot afford to lose his relationships with out-of-state retailers, which make up about 40 percent of his business. Storm said he agrees with the Vite that the tax code should treat all business the same, but he says the law will not accomplish that goal because big retailers will just cut ties with businesses such as his in Illinois. “This bill will accomplish nothing for the state of Illinois. It’s been a big political power play of appeasing big retail,” he said.
Storm joined Scott Kluth — president of Chicago-based Internet marketer Coupon Cabin, who said he also planned to move his business out of state — last week to ask Quinn to veto the bill. Storm said he is disappointed with the governor’s decision but relieved to have an outcome on the issue.
“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 in a written statement.