Illinois Passes New Tax

by:  Benjamin E. Haskin

HB 3659 amended the “Use Tax Act” and was signed into law by Governor Pat Quinn on March 10, 2011. The new bill expanded the scope of companies required to collect and pay the 6.25% tax imposed for the privilege of using in the state tangible personal property purchased from a retailer. Under the original act, only retailers having or maintaining, directly or by subsidiary, an office or place of business within the state were required to collect and remit the tax. In 1992, The Supreme Court held that states were not allowed to charge a sales tax on merchants who did not have a physical presence within the state. Retailers’ obligations under the “Use Tax Act,” however, are not technically a sales tax but rather the collection and remittance of the consumer’s tax for the use of the good.

The recent amendment of the law expanded the definition of retailers. A retailer now includes a company “having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible person property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person’s Internet website.” The new law thereby includes a company who works in accordance with local affiliates in selling goods online even if that company does not have a physical presence within the state. Specifically, the law targets companies such as Amazon and Overstock that lack a physical presence within the state and instead operate with agreements with local affiliates who maintain a link on their website for products to be sold via Amazon or Overstock in exchange for a fee. As a result, Amazon and Overstock are now required to collect and remit the 6.25% tax on purchases shipped to Illinois. On the other hand, companies that maintain a physical presence in the state in addition to selling online, such as Best Buy and Wal-Mart, have always been required to collect and pay the tax and welcome the law for creating an equal playing field.

The bill has created some predicable backlash. Online companies that had not previously been subject to the tax are now faced with a decision whether to keep Illinois affiliates and charge its customers the additional 6.25%, or terminate the relationships and avoid paying the tax. Amazon was quick to send a letter to its Illinois affiliates declaring the new law unconstitutional and forcing the termination of all affiliate relationships. Amazon is expected to challenge the constitutionality of the Illinois law, as it did in New York after a similar law was passed in 2008.  

Amazon’s complaint in New York state court for declaratory and injunctive relief was dismissed by the trial court and affirmed by the Appellate court in November of 2010. On appeal, Amazon contented that that the law violated the Commerce Clause because it lacked “substantial nexus” with the taxing state. The Appellate court held, nonetheless, that for the purposes of the sales and use tax, although an entity must have some physical presence in the state, this presence need not be substantial. The court explained that the nexus requirement is satisfied if the entity has economic activity in the state performed by its own personnel or on its behalf. The latter is fulfilled when an out-of state vendor enters into a business-referral agreement with a New York resident who receives a commission based on sales in New York. The court also rejected Amazon’s contention that the law violates the Due Process Clause, but left open the possibility of Amazon continuing its claim with an “as-applied” challenge instead of its facially unconstitutional challenge.

The bill has also brought changes to the requirements for consumers. Even under the previous law, Illinois resident who used products in the state for which they paid less than 6.25% sales tax were required to report and the pay the full difference to the state. The Illinois Department of Revenue noted, however, that very few people paid this tax. Taxpayers will now be directly asked on their Illinois 1040 tax form how much they owe in “use taxes.” Additionally, the 1040 instructions will include a worksheet to help taxpayers calculate what is owed. 

SB1783 was introduced as the counter measure of HB 3659 and provided that an advertising link or affiliate marketing link on a website was not sufficient to qualify the retailer or serviceman as a retailer or serviceman maintaining a place of business in this State. This bill was intended to protect online retailers such as Amazon and Overstock from qualifying as a retailer under the “Use Sales Tax.” The bill was re-referred to assignments on 3/18/11 and is not likely to be resurrected now that HB 3659 was passed.

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