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f you have filed your 2010 Illinois income tax return, you probably noticed the new Line 22 – Use Tax. As the instructions tell you, Illinois Use Tax is a sales tax that you, as the purchaser, owe on items that you buy for use in Illinois. If the seller does not collect this tax, you must pay the tax to the Illinois Department of Revenue. The most common purchases on which the seller does not collect Illinois Use Tax are those made over the internet, from a mail order catalog, or made when traveling outside Illinois. The Use Tax Act was actually passed by the General Assembly in 1955, but it has been receiving a lot of attention in the past few years because of the huge amount of sales taking place over the internet.

As you know, merchants in Illinois must collect sales tax on all sales within the state and remit the money to the Illinois Department of Revenue. Illinois can require any merchant with a physical location in Illinois to collect the tax. If the merchant does not do so, the Illinois Department of Revenue can take actions such as seizing the merchant’s assets or revoking the merchant’s licenses such as a liquor license.

If a merchant does not have a physical presence in Illinois, however, then the State does not have jurisdiction over the merchant and cannot make it collect sales tax. In an effort to expand the definition of physical presence, Illinois passed the Main Street Fairness Act (commonly referred to as the “Amazon Tax Law”) in 2010.

Prior to the Governor signing this law, the United States Supreme Court ruled back in 1992 that out-of-state retailers would only have had to collect a use tax on shipments to Illinois if they had physical stores, a warehouse, or a sales office located in Illinois. Under that paradigm, the Illinois Department of Revenue estimates it misses out on $153 million to $170 million in uncollected sales taxes each year from online purchases.

The new law extends the concept of having a physical presence in the state such that it now requires an out-of-state retailer to collect the tax if it has “affiliates” located in Illinois. Affiliates are typically deal and coupon website operators that earn commissions for directing shopping traffic to an online store and can range from stay-at-home moms looking to make a few extra dollars to large companies.

The Act is aimed at large online retailers such as Amazon.com and Overstock.com which limit their physical presence to one or very few states but have thousands of affiliates nationwide, including in Illinois. Rather than collect Illinois sales/use tax, Amazon and Overstock have terminated their relationships with all affiliates in Illinois. In a letter to its 9,000 Illinois affiliates, Amazon stated, “We had opposed this new tax law because it is unconstitutional and counterproductive. We deeply regret that its enactment forces this action.” “We think that states that do this are making a mistake,” said Jonathan E. Johnson, president of Overstock. “We think this kind of law doesn’t really hurt Overstock that much. The affiliate business can be borderless. If a Web shopper is looking for a coupon, they don’t care if they get it from an Illinois-based affiliate or an Indiana-based affiliate.”

Governor Quinn has said that “Illinois’ Main Street businesses are critical to ensuring our long-term economic stability, which is why they must be able to compete with every company doing business online in Illinois.” “This law will put Illinois-based businesses on a level playing field, protect and create jobs, and help us continue to grow in the global marketplace.”

The state sales tax rate in Illinois is 6.25%. The amount of sales tax in your area that is greater than 6.25% is imposed by local governments such as a city. The use tax only applies to the state portion of the sales tax, and it only applies to the extent you pay less than 6.25% in sales tax to another state. For example, if you purchase an item in a state with an 8.00% sales tax and the tax is collected by the seller, you do not owe any Illinois use tax. On the other hand, if you purchase an item in a state with a 5.00% sales tax, you owe the State of Illinois 1.25%. If you purchase an item from Amazon, which does not collect any sales tax, then you owe Illinois 6.25%.

What does this mean for you at a practical level? First, if you have never paid the use tax in the past, the General Assembly also passed an amnesty program - view it here. For the current year, a Use Tax of less than $600 must now be reported on your Illinois 1040. If it’s more than $600, you must fill out form ST-44 (the Illinois “Use Tax Return”). You report your major purchases and the amount, if any, of sales tax you paid on the purchases. If you had no major purchases and you do not have receipts to figure your purchases, you can use the table listed on page 9 of this link to estimate your annual Illinois use tax liability based on your AGI (adjusted gross income).

Interestingly, current reports indicate that Senator Durbin may soon introduce a similar bill in the U.S. Senate that would apply across our nation. It remains to be seen if there is sufficient bi-partisan support. And, similar laws exist in New York, Hawaii, North Carolina, and Rhode Island. They are also being considered in California, Arizona, Vermont, and several other states.

by Thomas C. Pavlik, Jr.
Posted in: May, 2011
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