An Internet Sales Tax?

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Illinois Governor Signs Amazon Internet Sales Tax Law - Janet Novack - Taxing Matters

After two-months of fence-sitting, Illinois Governor Pat Quinn today signed controversial legislation requiring Internet retailers like Amazon.com^[1] andOverstock.com^[2] to collect Illinois’ 6.25% sales tax if they have affiliate sellers in the state. House Bill 3659, the Mainstreet Fairness Bill, was passed by the state’s lame duck legislature in early January^[3]. Since then, the bill has been the subject of fierce lobbying by traditional bricks and mortar retailers, who supported it, and Illinois-based Internet-only businesses, who warned that if Quinn didn’t veto it some of them would flee the state. Had Quinn done nothing, the bill would have become law tomorrow without his signature.

Amazon has already said it will terminate its Illinois affiliates, just as it has said it will drop 10,000 California based “associates” if similar legislation pending in that state becomes law. Affiliates are paid a fee by Amazon and other retailers for sales brought in through advertisements and links on the affiliates’ web sites. In an escalating PR war, Wal-Mart^[4], Sears^[5], Best Buy^[6] and Barnes & Noble^[7] have all issued public invitations to Amazon’s spurned associates to join their affiliate marketing programs instead. Yesterday, the Alliance for Main Street Fairness, a bricks and mortar retailers organization, even announced a new web site ^[8] to connect affiliates “about to get thrown under the bus” by online-only sellers  with retailers who already collect sales taxes on line.  Quinn’s office said today that the affiliate matchmaking service had been launched at his request.
In a statement, Scott Kluth, founder and CEO of Chicago-based CouponCabin.com called the Governor’s approval of the bill “deeply disappointing” and said he is “actively exploring” moving his seven year-old business to Indiana. Kluth, a long time resident of Chicago, had previously threatened such a move, telling Forbes^[9], “I can see Indiana form the roof of our business.”
But Quinn, a Democrat, described the law as necessary to put the state’s “main street businesses” on “a level playing field” with online retailers and to protect main street jobs. In a statement issued by Quinn’s office, David Vite, president of the Illinois Retail Merchants Association  praised the law as a matter of “fairness for retailers, fairness for the economy but most importantly, fairness for taxpayers.”
Under a 1992 U.S. Supreme Court ruling, only sellers with a physical presence (“nexus” in taxspeak) in a state are required to collect that state’s sales taxes. Just shipping into a state by say, FedEx^[10] or UPS^[11], isn’t enough to establish nexus. Consumers buying online still owe “use” (meaning sales) tax to their states, but few bother to pay. The Illinois Department of Revenue figures it loses between $153 million and $170 million in revenue a year from Internet sales on which taxes are due, but not collected.
The new Illinois law is modeled on one adopted by New York in 2008. While Amazon has been challenging (so far unsuccessfully) the constitutionality of that law in court, it has kept its New York affiliates and now collects New York sales tax on purchases shipped to the Empire State. (It also collects for shipments to its home state of Washington, as well as North Dakota, Kansas, and Kentucky.) After Rhode Island and North Carolina adopted copycat “Amazon” laws in 2009, Amazon ended its marketing deals with sites based in those states. It also jettisoned affiliates based in Colorado, which adopted a law requiring Internet sellers who don’t collect sales tax to report sales to the state. (A federal judge has issued a preliminary injunction blocking the Colorado law.) In addition to California, the states of Arizona, Connecticut, Hawaii, Minnesota, Mississippi, and Vermont are all now considering Amazon laws.
As Forbes suggested here^[12], Amazon’s days of sales tax collection free selling may be numbered for another reason: Amazon’s growing network of warehouse and fulfillment centers. Last year, the Texas Comptroller sent Amazon a bill for $269 million for four years of back sales taxes, based on an Amazon warehouse there. Amazon insists the warehouse doesn’t give it nexus. But last Month, it told its Texas employees that it wouldclose the warehouse, throwing 110 of them out of work^[13].
Thursday 10 P.M.  update: According to Amazon spokeswoman  Mary Osako, the retailer has now sent an e-mail to its thousands of Illinois associates stating Quinn’s signing of the law  “compels” it to terminate them.  The message reads in part:
“We had opposed this new tax law because it is unconstitutional and counterproductive. It was supported by national retailing chains, most of which are based outside Illinois, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that its enactment forces this action.
As a result of the new law, contracts with all Illinois affiliates of the Amazon Associates Program will be terminated and those Illinois residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, or SmallParts.com. Please be assured that all qualifying advertising fees earned prior to April 15, 2011 will be processed and paid in full in accordance with the regular payment schedule.”
Amazon’s e-mail also invites the Illinois associates to apply for reinstatement should they relocate from the state.
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