If you are selling goods or products online and some of your customers are located in Illinois, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Illinois. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
A Matter of Debate and Legislation
The issue of how to collect tax on Internet sales has been a matter of heated debate both nationally and in Illinois. Within the last eighteen months, the Illinois legislature attempted to change its laws regarding collection of sales tax by online sellers. As further discussed below, that legislation was recently found unconstitutional by the Cook County Circuit Court. The status of the legislation is therefore unsettled at this time; it may well be invalid. However, several important Illinois government websites continue to reflect that the new legislation has not been invalidated.
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 General Rule: Physical Presence in the State
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 such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
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. Be aware that, at this time, both of these documents as they appear online continue to reflect special rules that would apply to online retailers located out-of-state. However, as discussed below, those rules have been ruled unconstitutional by the Cook County Circuit Court.
Not unexpectedly (and putting aside Illinois’s questionable new legislation), 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.
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.
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.
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.
The Customer’s Responsibility
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].”
(The current text of the Use Tax Act as available online continues to reflect a somewhat different rule. That different rule, however, was recently ruled unconstitutional by the Cook County Circuit Court.)
Illinois’s Apparently Unsuccessful “Amazon Law”
In March 2011, the Illinois legislature enacted a new law, the Main Street Fairness Act, which would require larger online retailers to collect sales tax from Illinois customers even if those retailers have no physical presence in Illinois. This type of law, which has been attempted in various forms in various states, is sometimes referred to as an “Amazon law.” (As you may have guessed, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently considered to constitute significant lost tax revenue for those states.)
The Illinois Act would require out-of-state retailers without a physical presence in Illinois, but with so-called “click-through” arrangements with persons in Illinois, to nonetheless collect sales tax. More specifically, such a retailer would need to collect sales tax from Illinois customers if that retailer:
- had an agreement with a person in Illinois to direct potential buyers to the retailer via a website link
- compensated the person in Illinois for directing potential buyers to the online retailer, and
- the retailer’s “cumulative gross receipts” from such directed sales to Illinois customers exceeded $10,000 within the preceding 12 months.
However, in April 2012, the Cook County Circuit Court held that the new law is unconstitutional. Therefore, the status of this law is uncertain at this time.
At the moment in Illinois, it is unclear whether the physical-presence rule continues to apply for Internet retailers. If you have Illinois customers, you should at least keep checking the Illinois Department of Revenue website. You might also consider consulting with a lawyer who is up to date on the situation Illinois. The law in this area is clearly in a state of flux, at both the state and federal levels.
For information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws. Also, for more general information on taxes on Internet sales, see Nolo’s article, Sales Tax on the Internet.