Illinois Introduces Affiliate Tax Legislation – Good Intentions, Not-so-Good Approach

Update #2: Rep. Patrick J. Verschoore (the original House sponsor) filed a motion to concur, and now it has been passed to the Revenue & Finance Committee for a hearing to be held right now (notice of the hearing was posted 58 minutes in advance of proceedings). Wow – this here is some fast-moving legislation?!

Updated 1/6/2011 – On Tuesday 1/5/2011 an Illinois state Senate committee approved a floor amendment (mentioned by the Daily Herald) to HB 3659 that would require out-of-state retailers to collect Illinois sales tax if customers purchase an item through an ‘affiliate’ web site located in Illinois. On Wednesday 1/6/2011, the Illinois Senate Passed the Bill as amended and sent it back to the House for concurrence.

This comes on the heels of a sales tax amnesty campaign by Illinois to motivate taxpayers to self-report and pay previously unreported sales tax.

The actual amendment under consideration (new language in blue) is to the definition of a “Retailer maintaining a place of business in this State” with obligation to collect and remit sales tax:

  1. A retailer having or maintaining within this State[…full text available here…]
    1. Beginning July 1, 2011, a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person’s Internet website. The provisions of this paragraph 1.1 shall apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers who are referred to the retailer by all persons in this State under such contracts exceed $10,000 during the preceding 4 quarterly periods ending on the last day of March, June, September, and December.
    2. Beginning July 1, 2011, a retailer having a contract with a person located in this State under which:
      1. the retailer sells the same or substantially similar line of products as the person located in this State and does so using an identical or substantially similar name, trade name, or trademark as the person located in this State; and
      2. the retailer provides a commission or other consideration to the person located in this State based upon the sale of tangible personal property by the retailer.

      The provisions of this paragraph 1.2 shall apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers in this State under all such contracts exceed $10,000 during the preceding 4 quarterly periods ending on the last day of March, June, September, and December.

We understand the motivations — Illinois, like many other states, is facing unprecedented budget shortfalls.  The missed taxes on internet sales could help ease the pain.  However, the Affiliate Tax approach has a downside — large internet merchants are likely to cut affiliate ties with Illinois businesses, as they have already done in other states which enacted such legislation.

We urge Illinois to skip the Affiliate Tax law and rather join 24 other states by enacting legislation conforming to the Streamlined Sales and Use Tax Agreement (SSUTA).  All of Illinois’ neighbors have already done this, now that Missouri introduced SSUTA legislation.  The SSUTA standardizes and simplifies sales tax collection obligations for all retailers, and does not introduce discriminatory taxation based upon a marketing practices. And, with TaxCloud, any merchant can easily comply with all the requirements of the Streamlined Sales Tax Agreement — at no cost to the merchant, and in less than 20 minutes!

Moreover, Illinois (and all states) should urge legislators in Washington D.C. for a national solution (the Main Street Fairness Act) that would require all out-of-state merchants to collect sales tax on behalf of all states that participate in the Streamlined Sales Tax Agreement. Failure by Congress to act at a federal level has forced state after state after state to invent varied forms nexus expansion such as this proposal. Enacting federal legislation would ensure that all businesses collect the appropriate and due tax, without the need for consumers to track, report, and file (or face penalties).

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