Statement Before the Illinois House Revenue and Finance Committee


     ChairmanBradley and Members of the Committee, my name is John Stephenson, and I am theState Government Affairs Manager for the National Taxpayers Union (NTU), thenation’s oldest and largest non-partisan advocate for overburdened taxpayers. I am honored to appear before you todayand to present these remarks on behalf of NTU’s 14,000 members in Illinois.

     I commend you for holding this hearing on Senate Bill 3353, whichwould amend the state tax code to establish a taxable presence for out-of-stateonline retailers with affiliates in the state (popularly known as an “Amazontax”). NTU has serious concerns about this legislation and, therefore, I urgeyou to oppose it. Under a mis-defined concept of “fairness,” SB 3353 wouldexpand Illinois’ taxing power beyond accepted constitutional limits and declarethis state’s hostility to business, all without yielding much revenue for thestate. Rather than impose an unconstitutional and punitive tax policy, Illinoisshould pursue broad-based tax reforms to bring more stability to the state’sfinances and foster economic growth.

II. Background

      SB3353 would amend the Illinois’s tax code to establish that a person without aphysical presence in the state is presumed to engage in taxable business in thestate if that person 1) enters into an agreement with an in-state resident bywhich the resident agrees, for a commission or some other consideration, torefer customers either directly or indirectly, such as through an Internetlink, to that out-of-state person, and 2) the cumulative gross receipts ofsales from the referrals are greater than $10,000 during the preceding year.[i]


     This scheme is known popularly as an “Amazon” or “affiliates” taxbecause it is aimed at out-of-state online retailers like Amazon withaffiliates, namely websites, that link and market goods for the retailer.Currently, only New York, North Carolina, and Rhode Island have enacted lawsthat create an Amazon tax scheme similar to SB 3353.[ii]Two states,

     Colorado and Oklahoma, have enactedlaws that require online retailers to mail notices to their customers remindingthem that they owe use tax. Another two states, Alabama and California, havesought to educate retailers and consumers about existing sales and use taxlaws. Although the legislatures of California and Hawaii passed Amazon tax laws,the governors of those states vetoed the bills.[iii]

III. TheProblems with Amazon Taxes

     While some may regard a bill like SB 3353 as a tax“reform” to promote fairness, it is actually an unwise policy that does notmake a tax system fairer or more competitive. States attempting to prey upononline businesses beyond their borders by taxing their in-state affiliates runthe risk of inviting constitutional challenges. Moreover, they have not raisedthe desired revenues. What taxes aimed at online retailers do is declare astate’s hostility to the business community.

A. Amazon Taxes Are Unconstitutional Expansions ofthe Tax Power

     The U.S. Supreme Court has ruled that onlyretailers with a physical presence, or “nexus” to a state, such as a warehouse,an outlet, or employees located in the state, are obligated to collect thestate’s sales tax. As the Supreme Court said in Quill v. North Dakota, there are simply too many tax rates andrules in the United States for a retailer to keep track of them all; to do so wouldimpede interstate commerce.[iv]Although the Quill case dealt with a mail-order retailer, thesame principle is true for online retail businesses. An online retailer doesnot have a physical presence merely because a website in Illinois links to theretailer.

     States that have enacted Amazon taxes have beensued for violations of the constitution and other statutes. New York, which in2008 enacted the first Amazon tax law requiring out-of-state retailers tocollect sales taxes for online transactions through affiliates in New York, hasbeen sued on this very issue.[v]The litigation continues to this day. North Carolina, which earlier this yearasked Amazon to provide the names of its customers, has been sued in a federaldistrict court for violations of privacy laws.[vi]Pursuing a law that is almost guaranteed to invite an expensive, multiyearlegal challenge is not prudent and should be avoided.

B. Amazon Taxes Come Up Short in Delivering Revenue

     Aside from inviting constitutional challenges,Amazon tax laws have not yielded the promised revenues. Although New York hascollected about $70 million in revenues, this is an anomaly when compared toother states and the constitutional challenge to its tax law raises questionsabout whether the state can ultimately keep the money that’s left afterlitigation costs are taken into account. Further, these collections are a dropin the bucket when compared to New York’s $19 billion budget deficit. Finally,when lower collections of other types of taxes from reduced economic activityare factored in, Amazon taxes are more likely to cost the state revenue.

     Statesare already collecting the majority of expected revenue from onlinetransactions due to the physical presence of Internet retailers in most of thestates. For example, according to STORESmagazine, 13 of the top 20 favorite online retailers also have stores andoutlets in states throughout the country. [vii] Moreover, the Internet Alliance,a trade group representing online retailers, reports that affiliate referralsaccount for less than 10 percent of the annual revenues for the group’s membercompanies. [viii] This means that expectations fora large revenue windfall through taxing online retail affiliates are highlyunlikely.

     In response to the new tax collection and reportingobligations, Amazon has shut down its affiliate programs in Colorado, NorthCarolina, and Rhode Island. Other online retailers that use affiliates, such,, and B&H Photo Video, have followed suit byeliminating or scaling back their affiliates programs.[ix]As Amazon explained in an e-mail to its Colorado affiliates, the reportingrequirement “is clearly intended to increase the compliance burden to a pointwhere online retailers will be induced to ‘voluntarily’ collect Colorado salestax – a course we won’t take.”[x]

     Ironically, the Amazon taxes have the effect ofdepriving the states of the very revenues they sought. Without the affiliates,there is simply no tax to collect. Rhode Island has not collected any revenuedue to the Amazon law; one business trade group in Rhode Island suggests thatthe state has collected less in taxrevenue because the loss of affiliates means less in business income.[xi]Notably, Rhode Island’s gross receipts threshold for tax liability ($5,000) ishalf of what New York’s law and SB 3353 require.

     Now, Frank Caprio, Rhode Island’s treasurer, has urgedthe General Assembly to consider repealing the statute.[xii]Caprio said, “Theaffiliate tax has hurt Rhode Island businesses and stifled their growth, asthey’ve been shut out of some of the world’s largest marketplaces, and [it]should be repealed immediately.”[xiii]North Carolina reports that it is not keeping track of revenues from the Amazontax.[xiv]Collection problems with the New York-style approach are, in part, what ledColorado and Oklahoma to pursue reporting requirements instead. Even someproponents acknowledge that Amazon tax laws do not collect desired revenues inthe short term.[xv] Aloss of business activity and revenues is the last thing any state needs duringthis time of economic uncertainty.

C. Amazon Taxes Declare a State’s Hostility toBusiness

     By effectively shutting down affiliate activities,Amazon taxes deliver a blunt message to the business community, especiallyentrepreneurs and innovators: the state is hostile to new business. The starkreality is that these policies precipitate business closures, leading to lossof revenues for the state, reduced employment opportunities, and higher pricesfor consumers, which deter entrepreneurs from starting new businesses in thestate.

     Proponents say Amazon taxes help to “level theplaying field” between online retailers and local “brick-and-mortar” retailers.We have heard these types of arguments before. But in reality, these lawspunish one business model to give a competitive advantage to another. Whilebrick-and-mortar retailers claim that the online retailers have the advantage,the brick-and-mortars have several advantages over their online competitors,including greater customer-retailer interactions and immediate purchases.

     Amazon taxes require online businesses to shouldera higher cost of compliance due to the very heavy burden of complying with eachof the sales tax jurisdictions where the customers reside. The Tax Foundationreports that 8,000 separate tax jurisdictions exist in the United States.[xvi]Although some tools exist to provide information on sales tax requirements inthese jurisdictions, these are not always the most reliable sources of data.Indeed in the latter area, online retailers, who represent an important segmentof the nation’s economy, are subject to a competitive disadvantage frombrick-and-mortar retailers, who only have to remit the sales tax where they arelocated.

     If Illinois enacts SB 3353, it will be the onlystate in the Midwest to enact an Amazon tax thus far. There are nearly 9,000affiliates in Illinois, many of them small businesses, who paid $18 million instate income tax in 2009.[xvii]Does this Committee really want to pass a law that would threaten the survivalof these taxpayers for revenues that likely will not appear?

IV. Illinois Should Pursue Budget and Tax ReformInstead of Punitive Taxation

     Instead of finding creative ways to collect moretax revenue from in-state affiliates of online firms, this Committee shouldexamine ways to make Illinois’ tax code simpler, fairer, and more competitive.Illinois currently has the 14th-highest per capita state and localtax burden in the nation.[xviii]Moreover, the state’s business climate ranks 30th out of 50 and thecombined state and local sales tax rates are the sixth-highest in the nation.[xix]Property taxes as a percentage of median home value are also the nation’ssixth-highest.[xx]By taking the path of true tax reform, Illinois can attract more taxpayingindividuals and businesses, which will generate more revenue for the state andencourage economic growth through which all Illinoisans can prosper.

V. Conclusion

     NTU stronglysupports efforts to improve Illinois’s tax code for the benefit of the stateand its citizens, both current and future. But enacting SB 3353 and taxing theaffiliates of online retailers is not the correct way to proceed. NTU and itsmembers stand ready to work with you in devising proposals that can and will dobetter. I appreciate the opportunity to present these views and I am happy toanswer any questions. Thank you.






[iii] Id.


[v] Id.

[vi] Id.









[xv] Id.



[xix] Id.

[xx] Id.