The Amazon Battle Continues: Governor Quinn Signs the Illinois Internet Sales Tax Law

Cash RegisterOn Thursday, March 10th, Governor Pat Quinn signed the Illinois internet tax law (Public Act 096-1544) which will take effect immediately. This controversial law, which requires online retailers that work with affiliates in the state to collect sales tax on purchases made by Illinois residents and businesses, has been drawing heated debate across America.

A series of U.S. Supreme Court decisions starting in the late 1960s relating to catalog and mail order companiesNational Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)—have precluded states’ internet taxing authority. According to these cases, collecting different state and local sales taxes was too complex, placed an undue burden on catalog and mail order companies, and was an unreasonable restriction on interstate commerce in violation of the Commerce Clause. The Supreme Court therefore held that only states in which a company has a nexus, i.e., the physical presence of retail outlets or distribution centers, can be required to collect sales taxes.

Technology has since made computing sales tax effortless, and so the justification for the Court’s original ruling is gone. In fact, two other Supreme Court decisions—Scripto Inc. v. Carson, 362 U.S. 207 (1960) and Tyler Pipe v. Washington Department of Revenue, 438 U.S. 232 (1987)—have held that an out-of-state seller is deemed to have a nexus through a physical presence in a state if it uses in-state third parties to help establish a market for its goods within the state.

Modeled after a 2008 New York law, the new Illinois law expands the meaning of “physical presence” beyond a warehouse, factory, or office to include marketing or affiliate companies and website operators who earn commissions for guiding consumers to online stores. Since it has long been established that states can require out-of-state sellers to collect sales taxes if they use independent, commission-based representatives to solicit business within the state, New York’s—and now Illinois’s—laws deem a retailer to have a physical presence within the state when it has independent affiliate websites promoting sales on its behalf within the state. Such affiliates place links on their websites to the retailer’s site and receive a commission when someone follows the link and buys something from the retailer.

As states continue to struggle with the effects of the recession, many are exploring options to increase revenue through internet sales tax laws. The Illinois Department of Revenue estimates that it loses between $153 and $170 million in revenue from uncollected internet sales tax. Nationwide, uncollected online sales taxes reached $8.6 billion in 2010. Legislators in at least seven other states introduced similar bills last year, and legislation passed in North Carolina and Rhode Island, but California’s, Hawaii’s, Connecticut’s and Minnesota’s bills were vetoed by their governors.

Amazon currently collects sales tax in New York—but has a lawsuit against the constitutionality of New York’s 2008 legislation—and in Washington, where it is headquartered, and Kansas, Kentucky, and North Dakota, where it has warehouses. Thus far, Amazon’s legal challenge has been unsuccessful, but regardless of its success Amazon may be on its way out of dominance as it continues to build warehouse and fulfillment centers in more locations. Texas’ Comptroller, for instance, recently sent Amazon a $269 million bill equal to four years of sales taxes to Amazon because it has a warehouse in Texas.

In response to the passage of the new Illinois legislation, Amazon notified its Illinois affiliates that it will terminate its contracts with them and stop paying advertising fees to Illinois residents who refer customers to,, or on April 15th. Overstock also notified its Illinois affiliates that it will cut ties with them as of May 1st unless the law is repealed or the affiliates move to another state without a similar law. Amazon has also threatened to cancel its 10,000 affiliate contracts in California if California’s third legislative effort in three years to pass legislation (AB 153) is successful. In the meantime, Wal-Mart, Sears, Best Buy and Barnes & Noble have issued public invitations to the any affected affiliates to join their affiliate programs instead, and the Alliance for Main Street Fairness, a brick-and-mortar retailers’ organization, has created a new website to connect terminated affiliates with retailers who already collect online sales taxes.

Amazon’s termination of its Illinois affiliates does not have much impact on Illinois consumers. They can continue to buy directly from Amazon or through affiliate websites despite the fact that Amazon will not be collecting the sales tax. Technically, however, under Illinois’s Use Tax Act customers have always been, and will continue to be, required to pay sales tax whether or not the retailer collects it. Moreover, Illinois recently implemented an amnesty program allowing customers to pay sales and use taxes on past online purchases, between June 30th, 2004, and December 31st, 2010, without penalty. Under the amnesty program, which lasts until October 15th, consumers can pay this tax as part of their Illinois Form IL-1040 income tax.

Read the Shriver Center’s previous blog on the Amazon tax law for more information.

This blog post was coauthored by Ji Won Kim.


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