Illinois General Assembly Enacts "Amazon" Law Imposing Use Tax Obligations on Certain Out-Of-State Retailers and Service Providers

On January 6, 2011, the Illinois General Assembly passed H.B. 3659, which requires the collection of the state's use tax by certain out-of-state retailers and service providers who have contracts with in-state persons.  Under the bill, the state's use tax will be required to be collected by retailers and service providers who have contracts with persons located in Illinois under which the Illinois person directly or indirectly refers potential customers to the retailer or service provider by a link on the Illinois person's website. These new provisions apply only if (1) the in-state party is compensated by a commission or other consideration based on the sale of tangible personal property or services by the out-of-state retailer or service provider; and (2) the cumulative gross receipts from sales of tangible personal property or services by the out-of-state party to customers who are referred by all persons in Illinois under contracts subject to the new law exceed $10,000 during the preceding four quarterly periods. 

The Illinois legislation is styled after New York's contentious law passed in 2008.  An important distinction, however, is that the Illinois bill provides definitively that the out-of-state retailer or service provider maintains a place of business in the state (and is thus subject to the tax-collection obligation).  The New York law (and similar laws passed in Rhode Island and North Carolina) merely establishes a presumption that the out-of-state retailer is soliciting business in the state through an independent contractor, but it allows the presumption to be rebutted.  That ability to rebut the presumption is an important constitutional safeguard that is not present in the Illinois bill. 

The Illinois legislation also includes provisions similar but not directly tied to the recent Amazon-style legislation in other states.  (This legislation is often referred to as "Amazon" legislation because much of the discussion surrounding the adoption of these news laws has focused on the business practices of Amazon.com.)  Those provisions impose the obligation to collect the state's use tax on out-of-state retailers or service providers who have contracts with Illinois persons who sell the same or substantially similar products or services as the out-of-state party and who do so using an identical or substantially similar name, trade name, or trademark as the out-of state party.  Both conditions that apply in the Amazon-style provision (i.e., the presence of a commission payment and a $10,000 minimum threshold) apply to those provisions as well.  Additionally, those provisions suffer from the same constitutional uncertainty because they provide a rule rather than a rebuttable presumption that the out-of-state retailer or service provider is required to collect the state's use tax. 

If the Illinois governor approves this legislation, the changes will be effective July 1, 2011.  However, taxpayers can expect that litigation challenging the new law will follow.