Looking for ways to plug a $15 billion budget deficit, Illinois legislators are imposing taxes on online purchases, which they estimate could raise up to $150 million a year. Parties that would be affected by the tax, however, say it will cause out-of-state companies to sever their affiliations with Illinois-based partners.
The Internet tax is an amendment to Illinois House Bill 3659, and calls for a 6.25 percent use tax on online purchases from companies earning more than $10,000 on such transactions each year. Illinois Governor Pat Quinn (D) is expected to sign the bill, which would allow the tax to begin July 1 of this year.
Illinois companies affiliated with Internet merchandisers outside the state predict these suppliers will terminate their business partnerships rather than pay the tax. They note online merchandisers Overstock.com and veterinary products distributor Drs. Foster & Smith terminated business dealings with affiliates in New York when that state passed a similar law.
Brent Shelton, spokesperson for Rockton, Illinois online merchandiser FatWallet, said the new taxes will not only force Web retail giant Amazon.com to sever its relationship with his company but may even force FatWallet to relocate in another state.
“We are affiliated with many retail partners outside of Illinois,” he said. “And if we’re required to collect taxes from our partners, they’ll respond, ‘If that’s the law, we’re not going to work with FatWallet.'”
Supreme Court Obstacle
The Internet sales tax is one of several hoped-for revenue generators passed by the Illinois legislature. Other measures include raising income taxes, hiking corporate taxes, and doubling the state’s cigarette tax.
By subjecting online purchases to a use tax, the legislature would try to circumvent a 1992 Supreme Court decision restricting sales taxes on Internet purchases to companies with a physical presence in a given state. For example, an Internet purchase from a Michigan company by a Michigan resident would be subject to the 6 percent Michigan sales tax, but if a company physically located outside Michigan—such as Amazon.com—sells a book or recording to a Michigan resident, the Michigan sales tax would not apply.
Amazon.com has filed suits against both North Carolina and Texas over similar attempts to collect taxes on online purchases. This past October a federal judge gave a ruling widely perceived as in favor of Amazon.com, limiting information from the retailer required by North Carolina to ordering identification numbers, shipping addresses, and Amazon transaction identification numbers. The state is seeking to collect taxes on online purchases between August 1, 2003 and February 28, 2010.
Amazon also announced last October it would fight Texas, which is attempting to collect $269 million in sales taxes. Texas argues it may collect the tax because Amazon runs a distribution center in the state, but Amazon counters the Irving-based Amazon.com Kydc LLC is legally separate from Amazon’s retail operations.
According to Steve Stanek, tax and budget director of The Heartland Institute, which publishes Infotech & Telecom News, the online purchases tax “will kill more jobs, take more money out of the pockets of consumers, and disappear into the gaping maw of corruption that is Illinois government.”
Shelton concurs, explaining FatWallet will lose many of the merchants with whom it currently works. He says FatWallet may move out of state in order to “keep our company alive.”
Losing FatWallet would be a huge blow for the Rockton community, Shelton says.
“From our perspective, this is a big loss for the state of Illinois,” he said. “FatWallet is all about being a staple in the community. The money we save from advertising is given to charities and sponsorships in the community. We donate hundreds of thousands of dollars to keep the community where our employees live vibrant. We donated more than $250,000 to more than 18 organizations in 2010 alone. Our employees know their work and their company help support their community.”
Calling FatWallet “the dot.com in the cornfield,” Shelton said the company is ranked one of the “20 best workplaces in America. We put a lot of effort into making Rockton our home and FatWallet an unbelievable place to work.”
‘Math Doesn’t Work’
Shelton draws comparisons with other states trying to raise money through Internet taxes. “Funny thing is,” he says, “North Carolina and Rhode Island have been unable to increase their revenues with similar taxes. Why would we follow in those footsteps? Every time I do the math, I can’t figure out how Illinois can make this work.”
Citing the state’s unfunded pension liability, credit rating, and budget deficit as percentage of total spending as “worst in the nation,” Stanek notes, “We’ve lost more than 640,000 people in the last 10 years, which is why Illinois is about to lose another congressional district. It has achieved this astonishing record of failure, with lawmakers increasing dozens of taxes, fees, and fines and allowing huge increases in gambling, all supposedly to fix budget problems.”
Stanek cites figures from University of Illinois researchers concluding the state would “need to add more than 600,000 jobs just to get back to where we were 10 years ago. Nothing has fixed the budget, because no matter how much revenue the state brings in, lawmakers spend it all and more.”
Bruce Edward Walker ([email protected]) is managing editor of Infotech & Telecom News.