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Thursday, Feb. 21, 2013 06:30 pm

National ‘Amazon tax’ could mean big bucks for Illinois

Businesses would collect sales tax on Internet purchases

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As Illinois residents file their income tax returns, they’re faced with a choice: admit to buying something online and pay sales tax to the state, or skip the tax and risk paying a penalty later if they get audited. With the understaffed Illinois Department of Revenue swamped by a backlog of unprocessed filings, taxpayers who illegally skip the tax probably aren’t in much danger of getting caught for now. But the effectively tax-free online market could disappear soon if Illinois’ senior senator in Washington, D.C., gets his way.

Sen. Dick Durbin, D-Ill., is pushing for a national “Amazon Tax” on goods purchased over the Internet. Durbin calls it a way to “level the playing field” between businesses which sell online and those which don’t.

“Businesses in Illinois aren’t looking for a handout from Washington,” Durbin said at a Feb. 14 press conference announcing his legislation. “They don’t want special treatment. All they want is a level playing field.”

Internet purchases have always been subject to Illinois’ sales tax, but the state previously relied on taxpayers to self-report Internet purchases and pay the appropriate tax. The advent of the Internet made it easier for businesses to sell across state borders, and states have no legal mechanism to collect taxes on businesses that don’t have brick-and-mortar stores inside their borders. Without online businesses collecting the sales tax, states have no efficient way to check whether taxpayers actually pay up.

So in March 2011, Illinois Gov. Pat Quinn signed a law requiring Illinois businesses to collect sales tax on every Internet sale and send it to the state. Last year, Illinois received $12.1 million in sales taxes for Internet purchases, according to data provided by the Illinois Department of Revenue. The average tax payment was $46.65, and 260,428 individual taxpayers – about 4 percent of total individual tax filers – paid the tax.

But because Illinois can’t force an online retailer in another state to collect sales tax, the state is missing out on valuable tax revenue. The Department of Revenue last estimated in 2011 what it calls “foregone” revenue – the money not collected because out-of-state online retailers generally don’t collect the use tax. That came to an estimated $212 million for 2013, with $130 million of that potentially coming from household taxpayers and $82 million potentially coming from businesses.

In April 2012, a Cook County circuit judge found the law unconstitutional under the Commerce Clause of the U.S. Constitution.  That case is currently on appeal before the Illinois Supreme Court.

One of the parties which sued the state was the Performance Marketing Association, a California-based trade group representing online publishers that make money from running ads in Illinois and other states. Rebecca Madigan, executive director of PMA, says her group actually doesn’t oppose the notion that online retailers should collect the tax, but she says it must be done nationwide in order to be fair and effective. She says states like Illinois that have passed an “Amazon tax” did so knowing it could be overruled, with the intent of putting pressure on the federal government to pass a version of the tax that applies nationwide.

Madigan cites a study showing an estimated $23 billion in uncollected online sales tax revenue over the next two years. With a little more than 4 percent of all U.S. businesses “residing” in Illinois, Madigan says that could mean $920 million in taxes for Illinois over two years – a significantly higher estimate than that developed by the Illinois Department of Revenue.

“Sales tax collection for Internet purchases is going to happen,” Madigan says bluntly. “I know some consumers get irritated by that, but it allows states to reduce other taxes. It doesn’t really increase anyone’s tax burden in the long term.”

Durbin’s Marketplace Fairness Act would allow states to require out-of-state businesses to collect and remit sales and use taxes already owed to the states, instead of relying on consumers to self-report.

“By giving states the authority to enforce existing tax laws, the Marketplace Fairness Act of 2013 eliminates the competitive advantage currently enjoyed by many internet retailers at the expense of local businesses,” Durbin said. “Every day we don’t act to pass this bill, we risk another small business closing its doors because they can no longer survive.”

Contact Patrick Yeagle at pyeagle@illinoistimes.com.

The state law:
http://ilga.gov/legislation/ilcs/ilcs3.asp?ActID=579&ChapterID=8

The bill that made it law:
http://ilga.gov/legislation/BillStatus.asp?DocNum=3659&GAID=10&DocTypeID=HB&LegId=46435&SessionID=76&GA=96

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