One day before it would have become law automatically without his signature (if the Governor doesn’t act on a bill within 60 days it becomes law automatically) Governor Quinn signed the internet affiliate tax bill into law that first arrived on his desk in early January. The new law goes into effect July 1 of this year.
Because of a 1992 Supreme Court decision, states are not allowed to charge sales tax on merchants who do not have a physical presence or “nexus” within their state. An online purchase from Sears will incur sales tax because Sears has physical locations in Illinois, but the same purchase from Overstock.com, for the moment, would not incur sales tax because Overstock doesn’t have a brick and mortar presence in the state.
The new law changes the definition of nexus to include situations when a company works through affiliates. Amazon and others have long had agreements with other websites where the website hosts Amazon links and in exchange is paid when users follow those links to Amazon and make purchases. This relationship, under the new law, constitutes having a nexus in Illinois and thus any online retailer with Illinois affiliates, after July 1, will be required to charged Illinois’s 6.25% sales tax.
Illinois is the fourth state to pass such a law. The first, New York, passed its law in 2008. Amazon challenged its constitutionality in court and that case is still ongoing. In 2009 North Carolina and Rhode Island passed similar laws. Amazon terminated its affiliate agreements with residents of those states, thus avoiding the new laws, a course of action it has already announced it is going to repeat in Illinois.
Even before this law was passed, as in other states, Illinois residents who use products for which they paid less than 6.25% sales tax, are required to pay the difference (up to the full 6.25% if they paid no sales tax) as use tax to the state. Most people do not file use tax, however, and the Illinois Department of Revenue reports it loses between $153 million and $170 million every year in this way.
Advocates of the new law say Amazon and other online retailers need to charge sales tax to even the playing field between them and traditional retailers. Senator Dick Durbin (D-IL) has advocated a national law allowing states to charge sales tax on online sales to their residents.
For more information on the new law, on sales or use tax, or for help with other tax issues, contact the Illinois tax lawyers at Horowitz & Weinstein.