Illinois's Amazon Tax Law Overturned
Illinois’s state budget deficit still stands at over $13 billion, including over $6 billion in unpaid bills. The state’s unpaid public worker pension liabilities exceed $83 billion and this could reach an estimated $140 billion by 2030 if nothing is done to close this deficit.
In March 2011 Governor Quinn signed the Internet Tax Law, Public Act 096-1544, or so called “Amazon Tax Law”, which requires online retailers that work with affiliates in the state to collect sales tax on items purchased by Illinois residents and businesses. Before this the law was enacted, online companies only had to charge sales tax if they had a brick and mortar location within the state. For example, Sears was required to collect taxes because it is both headquartered and also has retail stores in Illinois. Amazon.com, on the other hand, did not have to collect sales taxes because it had no physical presence in the state. By expanding the definition of “physical presence” beyond warehouses, factories and offices, and including affiliate companies (i.e., companies that are typically associated with coupon website generators), the state now has the authority to require online sellers to collect these sales taxes.
Illinois was also one of the first states to offer an amnesty program to allow residents to retroactively pay sales taxes on items they had previously purchased online. However, the program only brought in $10 billion of the estimated $150 billion that potentially could have been paid.
Illinois is not alone in its efforts to collect sales taxes on Internet sales. New York was the first state to pass legislation requiring online retailers to collect sales tax in 2008, and North Carolina and Rhode Island followed suit in 2009. States such as Iowa, Maryland, Mississippi, New Mexico, and Tennessee and many others have also introduced similar legislation. California even cut a deal with Amazon.com where the company agreed to drop a lawsuit challenging the pending legislation in return for the push back of the tax collection date by one year.
Although the Illinois law could have brought in millions of dollars in tax revenue for the state, dramatically decreasing the budget deficit, it was recently ruled unconstitutional by Cook County Circuit Judge Robert Lopez Cepero. The complaint, which was filed by the Performance Marketing Association against the Illinois Department of Revenue, alleged that the law violated the Commerce Clause and the Federal Internet Tax Freedom Act (IFTA). The suit also claimed that the tax would be burdensome on Internet retailers, which was the defense for catalogue companies’ years ago, but thanks to technology is no longer a valid excuse. The judge held that the law was superseded by the Internet Tax Nondiscrimination Act, which prohibits taxes on electronic commerce until the end of 2014, and was therefore unconstitutional.
When the law initially passed Amazon cut ties with all of its Illinois-based affiliates, and it is unclear whether or not it will enter into new contracts with such affiliates.
While Internet retailers are applauding the ruling, the state is still reeling from the economic downturn and trying to climb out of a deepening budget deficit. In response to the ruling, the Department of Revenue said “We respectfully disagree with the court's ruling and are reviewing our appeal options with the Attorney General's office, and we need to protect ‘brick and mortar’ stores from an unlevel playing field and we need to recoup some of the estimated $153 million that was not paid by online merchants prior to the law being implemented.”
All over the country, legislators are taking steps to ensure that online consumers pay state sales taxes during these times of economic uncertainty. Illinois may have hit a roadblock, but advocates will not stop fighting big business to get the revenue that the state is entitled to.
For more information on the “Amazon Tax Law” see our previous Shriver Brief posts here and here.
This blog post was co-authored by Alison Terkel.
