Small Business Finance News

Illinois' Internet Tax Ruled Invalid

Written by Tim Morral
Published: 10/28/2013

State Supreme Court overturns Illinois' 2011 Main Street Fairness Act, blocking a mechanism that forces online retailers to collect sales tax.

The war between brick-and-mortar brands and online retailers is a familiar battleground. In addition to lower overhead requirements, online retailers often benefit from other competitive advantages and strategies for ecommerce, including the ability to avoid the collection of sales tax from customers in states where the retailer does not have a "physical presence."

Illinois Internet Sales Tax

Although consumers are responsible for paying sales tax for purchases from all online retailers (regardless of whether or not the retailer has a physical presence in the state), e-commerce providers are usually exempt from collecting and reporting sales tax from customers who reside outside their physical presence state(s).

However, several states have enacted legislation in an attempt to improve the enforcement of sales tax for online purchases. In 2011, Illinois passed the Main Street Fairness Act, a piece of legislation that expanded the "physical presence" requirement used to determine whether e-commerce retailers must collect sales tax at the time of purchase.

By expanding the definition of "physical presence" to include affiliate companies (e.g. deal and coupon website operators), Illinois hoped to establish a mechanism for the collection of tax from all consumers, creating a more competitive environment for brick-and-mortar stores.

But in a recent decision, the Illinois Supreme Court determined that the state's Main Street Fairness Act does not supercede the federal Internet Tax Freedom Act, a move that prohibits Illinois from enacting enforcement provisions for the collection of tax by e-tailers.

Although 18 states currently have similar laws on the books, this is the first instance in which a court has ruled against this type of legislation. Illinois Senator Dick Durbin (D) has sponsored a federal bill known as the Marketplace Fairness Act to force Internet retailers to play a larger role in the collection of tax. However, many experts believe that the taxation of Internet sales is an issue that will ultimately be decided by the U.S. Supreme Court.

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