A few weeks ago Illinois became the fourth state to try to find a way to collect sales tax from online retailers like Amazon. To do so, the General Assembly passed a copy of a law first passed in New York in 2008. Under a 1992 Supreme Court ruling a state can only collect sales tax from a company if that company has a nexus (a substantive business presence) in that state. Typically a nexus means a brick-and-mortar, physical presence, but the law in Illinois expanded the definition of nexus to include having affiliate programs with Illinois residents. As was the case in North Carolina and Rhode Island, who passed their own versions of the New York law in 2009, the response from online retailers was simply to cancel their affiliate programs and to continue not charging sales tax.
It seems the debate is moving from the state to the federal level. Senator Dick Durbin (D-IL) is expected to introduce a bill into the Senate after Tax Day (Monday the 18th) called the Main Street Fairness Act. The Act would allow states to collect sales tax on companies who sell to their residents, regardless of if the company has a physical presence in the state or not.
Right now, of course, even if you buy something online and you aren’t charged sales tax at checkout, the purchase is not technically speaking tax free. You are expected, in Illinois and most other states, to declare the purchase to the Illinois Department of Revenue and to voluntarily pay the sales tax on the purchase. This is called use tax and IDOR says few Illinois residents actually pay what they owe. States estimate they lose billions in tax revenue every year on undeclared and uncollected sales and use tax.
Durbin’s plan is not alone. The possibility of a nationwide policy on online sales tax has been around for a while. In 2002 members of Congress proposed the Streamlined Sales Tax Agreement. It works like this. States voluntarily join the agreement and they then agree to try to unify and simplify their tax codes, to create some measure of uniformity to the tax landscape. To put this in perspective, right now there are around 7500 tax jurisdictions in the United States and that makes any sort of national sales tax discussion rather confusing. To date, 24 states have joined the agreement.
What will become of Durbin’s proposal remains to be seen. The debate on the issue has already been fierce, as evidenced by Amazon’s continued lawsuit trying to overturn the original New York affiliate tax law, which was passed in 2008. As this issue develops this bl0g will continue to cover it.
For more information on sales tax, use tax, the Illinois Department of Revenue, sales tax audits or other tax concerns, contact the Chicago tax attorneys at Horowitz & Weinstein.