'Amazon Tax' Fails to Raise One Cent of New Revenue

By Prescott Carlson in News on Mar 16, 2012 5:20PM

When House Bill 3659, otherwise known as the "Amazon Tax," was first passed in January of last year, state Sen. John Cullerton (D-6th), who co-sponsored the bill with state Rep. Pat Verschoore (D-Milan), boldly stated that "Illinois would generate an additional $150 million in much-needed revenues" under the new law. Skeptical of that huge amount of money (which would have been a more than 50% increase in use tax collected), we looked at the numbers and determined it was way off.

The law redefined what constitutes a company's "physical presence" in the state, which is the benchmark used to determine if an out-of-state retailer is required to collect use tax from Illinois customers. Legislators determined that a company simply having an affiliate program in the state—where independent websites provide links back to the retailer in exchange for a small commission—was enough of a "presence" to meet the criteria.

Following a pattern already established in other states that passed similar laws, large online retailers like Amazon.com and Overstock.com simply terminated all affiliate agreements in Illinois, opting themselves out of having to collect the tax. Many smaller online retailers don't even offer affiliate programs, making them exempt as well. This puts the state in the same position it was before the law was passed, having to collect the tax directly from taxpayers: something it has had trouble doing.

The result? An actual decrease in use tax collected of over $11 million. Numbers given to Chicagoist by the Illinois Department of Revenue show that in the period of January 2011 through June 2011, IDOR collected approximately $139 million in use tax. After the law went into effect on July 1, the total amount collected between then and the end of the year was approximately $127 million.

We hate to say we told you so, but we told you so.

Perhaps U.S. Sen. Dick Durbin knew that the math was as bad as we did when he introduced the Main Street Fairness Act last July, which would make the collection of sales tax by online retailers required by federal law. That bill currently seems to be stalled in committee.

Not only did smaller websites based in Illinois lose a revenue stream, but larger companies that rely more heavily on affiliate income like Fat Wallet and Coupon Cabin simply packed up and moved to neighboring states, taking their jobs and income tax with them.