Illinois Announces New Taxes on Everything Invented Since Y2K
Illinois recently passed a budget that includes new taxes on social media companies, digital advertising, cryptocurrency transactions, prediction markets/fantasy gambling platforms, and an annual license fee for all TVs.
Alright, I was joking about the TV license fee, but you believed it, didn’t you? (They actually do that across the pond). Let’s look at the list of tech taxes actually included in Illinois’s new budget:
Social Media User “Fee”
First up is a new “fee” (tax) that social media platforms with over 100,000 Illinois users must pay for each Illinois user who uses their platform each month. The rate ranges from $0.10 per user to $0.50 per user depending on the number of Illinois customers.
The actual legislative text behind this new social media tax is, to put it generously, an absolute disaster. Jared Walczak goes through the problems in more detail over at Tax Foundation, but to summarize the terms and concepts that are inadequately thought through or defined:
- What constitutes a social media platform?
- What is a social media user? Is a single user with two accounts two users or one? Does a person even need an account to count as a user?
- What is an Illinois user? Is it an Illinois resident, or someone using the social media platform in Illinois?
Oh, and the lawmakers also accidentally broke their own tax with an inflation adjustment that rounds the tax down “to the nearest whole number.” This could possibly be read to either make the inflation adjustment $0, or make the resulting tax $0. So, that’ll be fun for Illinois legislators to work through.
But even if the law was drafted thoughtfully and carefully, it would still be problematic. The tax contains multiple legal and constitutional issues which will probably prove fatal. It almost certainly violates the federal Internet Tax Freedom Act, not to mention the First Amendment, Commerce Clause, and Due Process Clause.
It’s also bad policy. The bill attempts to prevent companies from passing on the costs to Illinoisans by prohibiting any variation in access or pricing for Illinois customers, but that will face legal challenges of its own. It also encourages social media companies to move from free, advertising-funded services to paid subscription models, which is good for no one. Which leads us to . . .
Digital Advertising Tax
Illinois joined Maryland, Utah, and Washington in taxing digital advertising, imposing a staggering 10% gross receipts tax on businesses with over $1 million in digital advertising revenue from Illinois customers.
Digital advertising taxes may be a new fad, but they’re bad policy. Digital advertising is a business input, purchased almost exclusively by other companies looking to sell their product to another final consumer. Taxing business inputs muddies the tax base and obscures the costs that the sales tax system is passing on to consumers.
They also suffer from the same legal issues. NTUF warned Maryland of this all the way back in 2020 before it began the digital advertising tax trend, and the state is still mired in lawsuits today while bringing in barely more than a third of what it initially hoped to collect. Illinois watched Maryland fall into this hole, and decided to go jump in after it.
Cryptocurrency Transaction Tax
Last on the Pritzker hit list this year was cryptocurrency. While most states with an income tax apply it to capital gains from cryptocurrency, Illinois will become the first state to charge a special tax on cryptocurrency transactions themselves.
Under Illinois’s new budget, Illinois firms and brokers trading in cryptocurrency must pay 0.2% of the value of the transaction. These costs will inevitably get passed on to regular Illinoisans buying and selling cryptocurrency.
At NTUF, we’ve written critically about proposals at the federal level to impose similar taxes on financial transactions of all kinds. They increase the cost of raising capital, pass costs on to consumers, and arbitrarily target assets that are frequently traded over less-traded assets.
In Illinois’s case, though, this type of financial transaction tax (FTT) is exclusively targeted at cryptocurrency assets. That means that the cryptocurrency will face tax obligations that no other form of asset or currency transaction will face. If the arbitrary targeting concern exists with broad-based FTTs, imagine how much more it applies to a specific cryptocurrency FTT.
All that said, there is one benefit of this bevy of new tech taxes: it should act as a massive stimulus for Illinois’s tax litigation industry.
Illinois Is in a Class of Its Own on Harmful Digital Taxes
States levying discriminatory taxes on digital products and services
State | Digital Advertising Tax | Cryptocurrency Tax | Social Media Fee |
Illinois | ✗ | ✗ | ✗ |
Maryland | ✗ |
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Utah | ✗ |
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Washington | ✗ |
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Hawaii and New Mexico tax digital advertising, but also tax traditional advertising. Two wrongs don’t make a right, but in this case, they at least make a tax non-discriminatory.