The problem Illinois needs sustainable private sector job growth. Yet in the midst of continued economic troubles, political leaders enacted a state law that is driving technology-driven jobs away. That shortsighted directive is called the “affiliate nexus law,” also known as the “Amazon Tax.” Sold as a significant revenue raiser and a step toward improved tax fairness, it is accomplishing little more than pushing online entrepreneurs out of state.
In this video, Emily Dietrich of the Illinois Policy Institute interviews two entrepreneurs from Rock Island, Illinois - Jonathan Wallace and Mike Martin. Overnight, Wallace and Martin were hurt by the Affiliate Nexus Law.
The misguided affiliate nexus law attempts to offer a backdoor “solution” to the thorny issue of online sales tax collections. In 1992, the U.S. Supreme Court ruled that out-of-state retailers who do not have “nexus” – a significant physical presence in a given state – are not required to collect sales tax on purchases made by consumers in that state.
Illinois sidestepped this decision by legislating that an advertising relationship with an Illinois-based online affiliate marketer creates enough of a physical presence to compel tax collection from an out-of-state retailer. Online affiliate marketers are individuals, start-ups, established small businesses or nonprofit organizations. These affiliate marketers direct traffic to retailers through a link or coupon website in exchange for a small portion of resulting sales.
As soon as Gov. Pat Quinn signed the affiliate nexus law in spring 2011, out-of-state sellers quickly terminated thousands of advertising agreements. Revenue streams for many Illinois-based online affiliate advertisers are drying up. Marketers stand to lose up to an estimated $744 million in annual revenue. Facing a dramatic loss in business, employers like CouponCabin.com and FatWallet.com simply packed up and moved elsewhere. Those who remain are considering leaving.
It’s becoming painfully obvious that those benefiting from the affiliate nexus law are Illinois’ neighbors. It is a policy that is all pain and no gain.
Our solution Illinois should immediately repeal the affiliate nexus law. At the very least, this failed law should be suspended pending litigation and federal action. It is costing the state jobs and taxable income, neither of which Illinois can afford to lose. Why this works Illinois needs more 21st century jobs, many of which will increasingly revolve around the Internet. Before the affiliate nexus law, the growth of an online marketing community had been a bright spot for job creation.
How to properly collect taxes owed from online sales is a complex issue, but it’s unlikely that the state will take in significant amounts of additional use tax revenue from the affiliate nexus law. Even more, as the law drives away business and therefore taxable income, the state could experience a net loss in other revenue.
A constitutional challenge to the law is currently pending in Illinois State Court. Similar laws in other states are being litigated on constitutionality (New York), up for repeal (Rhode Island), or suspended (California). It’s unfair and hasty for Illinois to continue to unilaterally punish homegrown marketers while Congress considers various federal proposals related to online sales tax collection.
Repealing the affiliate nexus law would send a strong message that the state is motivated to create a welcoming policy environment for all Illinois businesses.