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Illinois State Tax Revenues Drop Following Affiliate Nexus Tax

Guest Contributor

Illinois had an optimistic outlook when it passed House Bill 3659, which was the state’s affiliate nexus tax. Bill co-sponsor Senator John Cullerton anticipated the new tax would generate an additional $150 million in much-needed revenues. As the Chicagoist reported today, the reality looks far more grim.

January through June 2011, the months before the law went into effect saw the Illinois Department of Revenue collect approximately $139 million use tax. From July 2011 through the end of the year, Illinois collected $127 million in use tax. That’s right, Illinois collected less use tax after their affiliate nexus tax went into effect.

What is affiliate nexus?

In case you weren’t paying attention last year, Illinois and many other states decided they would receive a tax windfall and solve the challenging problem of collecting taxes from residents who purchase across state lines by creating a business nexus around affiliates. Each of the laws attempt to position affiliates as salesmen of the companies they affiliate with, creating a situation where the affiliate’s business address becomes an office for the online retailer. If the online retailer is seen as having offices in the state, the state can collect taxes.

Additional Fallout

Amazon.com and Overstock.com, two of the biggest affiliate programs online, terminated their affiliate programs in Illinois, just like they have in most other states, meaning they avoided the new tax law completely. That also has the side effect of reducing potential income tax revenue from affiliates.

FatWallet, Inc, a coupon site formerly located in Rockton, IL, moved to Wisconsin to avoid the taxes, taking over 50 jobs and any associated taxes with them.

It will be interesting to see if Illinois serves as a wake-up call for other states considering an affiliate nexus tax or if states continue to plow ahead in an ill-conceived attempt to bolster state coffers.

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