In addition to last night's crippling tax deal, the legislature has approved an unconstitutional affiliate nexus tax on online sales. House Bill 3659 would require out-of-state retailers to collect state sales tax on online purchases. While the state income and cigarette tax increases will absolutely drive jobs out of state, the affiliate nexus tax will eliminate an entire segment of the advertising industry.
That's because expansion of the definition of nexus will simply cause online retailers to terminate their relationship with online advertisers based in Illinois. The affiliate nexus tax thus raises zero revenue for the state. Similar efforts in Rhode Island and North Carolina have failed to raise any money whatsoever.
ATR President Grover Norquist wrote an letter to Gov. Quinn today urging him to veto HB 3659, in which he makes the case that the bill will actually reduce revenue in Illinois. An excerpt follows:
Since advertising agreements will be terminated if this measure is signed into law, the legislation will lower – not raise – tax revenue. Rhode Island and North Carolina, which both passed similar bills, have confirmed it has not increased tax collection at all. Instead, small online businesses in Illinois will pay less in overall business taxes due to lower profits once ad contracts are ended to sever the nexus established under this law.
To read the entire letter, see below. For a PDF copy, click here.
January 7, 2011
The Honorable Patrick Quinn
Governor, State of Illinois
207 State Capitol Building
Springfield, IL 62706RE: Veto Request for HB 3659
Dear Governor Quinn,
I write urging you to veto House Bill 3659, which would establish an unconstitutional affiliate nexus tax on Internet sales. Senate Amendment 3 to the bill intends to require out-of-state retailers to collect sales tax on residents’ Internet purchases, however it will fail to raise any tax revenue and instead put in-state companies out of business.
HB 3659 will inadvertently punish small Illinois advertisers and other businesses. This tax expands the definition of doing business to include a retailer that, while based out of state, advertises on an Illinois-based website. If advertising on these websites creates a nexus, out-of-state retailers will simply terminate advertising agreements with small business advertisers. Such action has already been taken by online retailers in states that passed similar legislation, and has led 14 other state legislatures and governors to reject or veto the measure to date.
Since advertising agreements will be terminated if this measure is signed into law, the legislation will lower – not raise – tax revenue. Rhode Island and North Carolina, which both passed similar bills, have confirmed it has not increased tax collection at all. Instead, small online businesses in Illinois will pay less in overall business taxes due to lower profits once ad contracts are ended to sever the nexus established under this law.
Current jurisprudence, under the Supreme Court’s ruling in Quill v. North Dakota, requires that a business have a physical “nexus” in a state in order for the state to compel that business to collect and remit sales taxes. However, Senate Amendment 3 to HB 3659 would attempt to circumvent this law by presuming a company has a physical nexus if business is solicited through a third-party advertiser in the state – thereby requiring the retailer to collect sales tax. Not only does this fly in the face of the Supreme Court’s ruling, it could bring an unnecessary and costly lawsuit to Illinois at a time when the affiliate nexus tax is already undergoing significant legal challenge in New York.
For these reasons, I urge you to veto HB 3659. If you have any questions, please contact Kelly William Cobb or Joshua Culling, state affairs managers, at (202) 785-0266.
Onward,
Grover Norquist
President, Americans for Tax Reform