Internet Tax: Good for Drained State Coffers or Bad for Business?

A new Illinois tax would apply to large online retailers like Amazon who do business with affiliates in the state. But local businesses are up in arms, claiming it will hurt their bottom line and lead to the loss of jobs, without raising significant revenue.


Illinois lawmakers have approved something called the Internet Tax Bill, which, if signed by Governor Pat Quinn, would levy taxes on Internet purchases, reports Internet Retailer. The governor has 60 days to act on the bill that the General Assembly has passed on to him; if he signs, it will go into effect July 1.

The tax is a way of going after companies like or, which, though not based in Illinois, do business there through local affiliates. There’s a convoluted history to this tax. In Illinois, for years, residents were already supposed to be keeping track of their Internet purchases and paying a 6.25% “use tax” on them. But few people were even aware such a tax existed, and no one was enforcing it. Last month, Illinois offered “amnesty” over these unpaid taxes up through December 31, 2010–but it did so largely to raise awareness of the fact that Illinois residents were supposed to be paying the tax in the first place.

The new Internet Tax Bill would obligate Internet retailers to collect the use tax themselves. “The bill treats online merchants more like bricks-and-mortar merchants,” a spokesman for one of the Democrats backing the bill, state Senate president John Cullerton, told Internet Retailer.

But the small Illinois businesses who partner with giants like Amazon and Overstock are up in arms about the proposed bill. today put out a plaintive press release with the sub-headline: “Internet Affiliate Jobs Will Be Lost; No Revenue Gained for State.” is an online clearing house for coupons; at the time of this writing, for instance, the site contained a coupon offering free shipping on most orders of $25 or more. By clicking on that coupon, it directs you to, having “activated” the coupon for you en route. CouponCabin then gets a small cut of the sale.

But CouponCabin worries that with the new tax (or new tax enforcement), Amazon or others will just sever relationships with Illinois affiliates, something it says has happened in New York, Colorado, North Carolina, and Rhode Island, which have passed similar laws. “We hope the State will see that this bill will fail to achieve its revenue-raising goal,” said Scott Kluth, founder and president of the Chicago-based company, “and instead cause drastic hardship for small businesses like ours.”


About the author

David Zax is a contributing writer for Fast Company. His writing has appeared in many publications, including Smithsonian, Slate, Wired, and The Wall Street Journal.