If you are selling goods or products online to customers located in Illinois, you should be aware of Illinois’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Illinois is one of a significant number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
A Note on Illinois Sales Tax Terminology
Along with the more common term sales tax, Illinois’s tax laws frequently refer to the retailer’s occupation tax, which in many ways is equivalent to sales tax. Further explanation of how sales tax in Illinois is, in fact, a combination of several types of taxes is available on a page of the Illinois Department of Revenue (IDOR) website.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means having:
The corollary to the physical-presence rule is that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are operating solely out of an office in Abilene, Texas and make a sale to a customer in Rockford, Illinois—a state where your business has no physical presence: You are not required to collect sales tax from the Rockford customer (with the exception of sellers who fall under Illinois’s Amazon law).
Example 2: You are operating solely out of an office in Peoria, Illinois and make a sale to a customer in Joliet, Illinois: You are required to collect sales tax from the Joliet customer.
Example 3: After several years of operating solely out of a warehouse in Abilene, Texas, you open a one-room satellite office just outside of Springfield, Illinois—a state where previously you had no physical presence. A day later, you make a sale to a customer in Waukegan, Illinois: You are required to collect sales tax from the Waukegan customer.
In 2015, Illinois enacted a new law, codified as 35 ILCS 105/2(1.1) within the state’s Use Tax Act and 35 ILCS 110/2(1.1)within the state’s Service Use Tax Act. The laws expand the definition of having or maintaining a place of business in the state. Under the 2015 law, larger Internet retailers with no physical presence in Illinois are required to collect and pay the state’s sales under certain conditions. More specifically, an out-of-state retailer must collect sales tax from Illinois customers if that retailer:
Similar laws have been enacted in other states; they are commonly referred to as Amazon Laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
It is important to note that, in 2011, the Illinois legislature attempted to enact a similar law to the 2015 law. However, in 2013, the Illinois Supreme Court found that the 2011 version was unconstitutional.
While the physical presence rule may seem clear, that is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Illinois, have used the term nexus rather than physical presence in their sales tax laws and other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
A more specific statement of what can count as physical presence under Illinois law can be found in the Definitions section of Illinois’s Use Tax Act and in the IDOR’s Publication 113. Publication 113 states that a retailer may rebut the presumption that the Amazon law applies to it by proving that “it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.” The nexus standards referred to currently are those laid out in Quill.
Certain items sold via the Internet to Illinois customers may be exempt from sales tax (also known as retailer’s occupation tax) under Illinois law. IDOR Regulation 130.120 lists several dozen situations where no Illinois sales tax is due. More specific sets of situations are covered in related regulations. For example, as stated in IDOR Regulation 130.2105, sales of data downloaded electronically, newspapers, magazines, books, sheet music, and musical recordings are exempt from sales tax.
For further guidance, consult the index page for Part 130 of the IDOR Regulations.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known as a use tax rather than a sales tax (or retailer’s occupation tax). According to guidance from the IDOR, under Illinois law, “If the seller (typically an out-of-state business, such as a catalog company or a retailer making sales on the Internet) does not charge Illinois Sales Tax, the purchaser must pay the tax directly to the [IDOR].”
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses (that don't fall under Illinois's Amazon Law), it is the long established physical presence rule that will apply in Illinois. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Illinois Department of Revenue to see if the rules have changed. In addition, apart from state sales tax, Illinois also has local sales taxes that can apply in certain places.
Updated: April 29, 2016