Illinois has just amended its sales tax laws so that more out of state retailers will have to collect Illinois sales tax. The law, which is sure to be challenged, creates taxable nexus when a remote or online seller hires an Illinois resident to refer sales by way of the resident's website. The revised law, effective July, 2011, has two primary implications:
Click Through Nexus
A state such as Illinois can only require a retailer to collect Illinois sales tax if the retailer has "nexus" in Illinois. Under long standing precedent, a retailer has nexus in Illinois (or any state) only if the retailer has some physical presence in the state, such as an office, warehouse, or deliverymen in the state. Now, under the revised law, an out of state retailer will be deemed to have taxable nexus if the retailer has a contract with an Illinois resident by which the Illinois resident refers potential customers to the out of state retailer by way of a link on the Illinois resident's website. Thus, for example, if the Tribune (based in Illinois) has a link on its website that refers customers to Amazon (not based in Illinois), Amazon would be deemed to have nexus in Illinois so that Amazon would have to start collecting Illinois sales tax. There is a threshold based on amount of sales; the out of state retailer would have to have more than $10,000 in sales during each of four consecutive quarters in order to trigger nexus.
A second change is a direct challenge to a well established practice of setting up affiliated companies to conduct online-only sales. Typically, a nationwide retailer (with nexus in a number of states due to the presence of its bricks and mortar stores, e.g. Wal-Mart) will establish a wholly owned subsidiary (Wal-Mart Online) that will be based solely in one state, and the subsidiary will sell the retailer's products online only. Since the subsidiary and its retailer/parent company are two different companies, the nexus of the parent cannot be attributed to the online subsidiary, so you can avoid sales tax on the online sales made by the subsidiary. However, under the revised Illinois law, the online sales subsidiary would have nexus if (i) the parent retailer and the online sales subsidiary sell similar products using a similar name, logo or other identifying tradenames, and (ii) there is some consideration to the parent for the subsidiary's sales. This provision also has a $10,000 over four quarter trigger.
Note that New York adopted legislation that is similar to the first change adopted by Illinois and that New York legislation is being challenged. Since both the Illinois law and NY law are based on the same Constitutional limitations and judicial decisions, expect a similar challenge to Illinois' law.