Chicago Business Attorney Blog
The Illinois Supreme Court overrules the Amazon Tax Law
Illinois lawmakers’ attempts to level the playing field for Illinois small businesses took a major hit by our own Illinois Supreme Court last week.
We all know that we don’t pay Illinois sales taxes on purchases made thru the web. Those books we buy thru Amazon.com don’t have the Illinois sales/use tax added. But, the same book purchased at a “bricks and mortar” business in Illinois is subject to the Illinois sales tax. What consumers don’t know is that if the retailers don’t collect the pay the sales tax, the buyer must report the sale and pay the “use tax” on the transaction. (Which is why it is called the Sales/Use tax!)
So, the Illinois legislature adopted a law requested by Illinois business owners to level the playing field by requiring the sellers on the web to collect and pay the Illinois sales tax on sales made to Illinois citizens, and the Illinois legislature responded with the a taxing statute – Public Act 96-1544 effective in 2011 – called the “Main Street Fairness Act” which has been referred to as the “Amazon.com Tax Law.”
The Act also expanded the definition of a merchant’s physical presence in the State to include affiliate companies – companies like CouponCabin.com and FatWallet.com – who act as an on-line store for merchandise. (BTW – those companies closed their offices in Illinois after the law was enacted and moved to Indiana.)
The law was quickly challenged by these internet publishers – they display website texts or images such as a retailer’s logo which are links to a retailer’s website. These businesses are paid by the retailer when a consumer clicks on the link and makes a purchase from the retailer. These out-of-state retailers who have sales of over $10,000/year were subject to taxation under the Illinois Amazon Tax Law. They based their argument on federal Internet Tax Freedom Act (47 U.S.C. 151) which prohibits discretionary taxes on electronic transactions and the commerce clause of the U.S. Constitution.
On October 18 the Illinois Supremes ruled the Amazon Tax Law to be invalid. The Supremes noted that these online sales marketing cannot be taxed under the Illinois law because it was a discriminatory tax on electronic commerce within the meaning of federal law, which preempts it. (And preemption is a whole new discussion – ask me about it at a cocktail party sometime.)
The law was filled with good intentions – to help Illinois retailers level the playing field with the online retailers. However, once again our Illinois law makers shot us all in the foot. After the law was passed, Amazon cut ties with some 9,000 online retailers and two of the largest – which were based in Illinois – fled to Indiana to avoid the tax. The result is that Illinois has not only lost the sales tax on online sales, but also lost several more businesses. And, Illinois consumers are still liable for the “use tax” on purchases, but how that will ever be enforced remains a mystery.