Illinoisans should prepare to pay more for online purchases from out-of-state retailers.
The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair Inc. is projected to increase revenue to the Illinois state budget by $140 million this year. As a result of the decision, and a change in Illinois law passed with this year’s budget bill, most out-of-state retailers who sell to Illinois customers will be required to collect and remit a “use tax” of 6.25 percent on all online transactions starting Oct. 1.
Technically, Illinoisans are already required to pay the use tax – an alternative to the sales tax paid on transactions at brick-and-mortar retailers – on online transactions. However, not many do. And under Supreme Court precedent established in 1992 in Quill Corp. v. North Dakota, only businesses with a physical presence in the state were required to collect sales taxes for online purchases.
Therefore, in practice, many online purchases from out-of-state retailers were free from state taxation. Proponents of the Wayfair decision believe that Quill created an unfair advantage for online retailers over brick-and-mortar stores.
The Illinois General Assembly changed the requirements under which companies must collect and remit the use tax in the fiscal year 2019 budget implementation bill. Anticipating the outcome of Wayfair, Illinois’ requirements now mirror those of South Dakota. All businesses with over $100,000 of online sales in Illinois, or at least 200 discrete transactions, are required to collect the tax on all purchases.
The new rules take effect Oct. 1. The Illinois Department of Revenue estimates the stricter collections requirements will generate an additional $200 million in sales tax collections annually. Because the rules are not in effect for all of fiscal year 2019 – which goes from July 1, 2018, to June 30, 2019 – the estimate for the first year of collections is $140 million.
However, some uncertainty around this new tax remains.
A bill introduced in the U.S Congress by Wisconsin Republican Jim Sensenbrenner would delay implementation until Jan. 1, 2019, and would also restrict the businesses subject to collection requirements to those that generate more than $10 million in annual U.S. e-commerce sales. Both changes would likely reduce the amount of revenue Illinois could raise this year.
New federal restrictions on states’ collection of online sales taxes would put another hole in Illinois’ fiscal year 2019 budget, which is already as much as $1.5 billion out of balance due to its reliance on budget gimmicks and structural overspending.
Sensenbrenner’s bill, which is co-sponsored by two Democrats, according to Reuters, also calls on states to create interstate agreements that simplify sales tax collections for out-of-state online retailers.
South Dakota’s participation in the Streamlined Sales and Use Tax Agreement, or SSUTA, was cited as a positive factor by the Supreme Court in Wayfair. The SSUTA, which currently has 23 full member states, simplifies online sales tax collections by creating uniform rules and processes for compliance. Illinois is not a member.
While the exact timing and scope of the change remains somewhat uncertain, one thing is clear: Illinoisans will soon be paying taxes on more online purchases. Unfortunately, the Illinois General Assembly has already planned to spend this money rather than using it to pay down debt or repeal other harmful taxes.