Some Illinois-based Web businesses were furious Thursday at a legislative plan that would require online retailers, such as Amazon.com and Overstock.com, to collect a 6.25 percent state tax if they have commissioned affiliates in the state.
That puts at risk huge revenue streams for such Illinois-based Web sites as FatWallet.com,CouponCabin.com and BradsDeals.com, which receive much of their commissions from sending customers to major online retailers. Their commissions are at risk because large retailers have shown in the past that they will sever business relationships with affiliates like those to avoid collecting state sales tax, called a use tax in Illinois, on products they sell.The bill, passed Thursday afternoon, needs approval from Gov. Pat Quinn.
"I feel like I've been completely flipped the bird," said Tim Storm, chief executive of FatWallet, based in Rockton, near Rockford. "Essentially, 30 to 40 percent of our revenue gets shut off instantaneously."
"The reality is that as a business owner with 52 employees, we're not going to just get shut down because of a law Illinois passes. Our customers don't care whether we're in the state of Illinois," he said.rad Wilson, founder of BradsDeals, in Chicago, said about half his revenue would be in jeopardy, along with 20 jobs at his company.
"We don't have much choice. If this is going to stick, we literally can't physically be in Illinois," Wilson said. "My wife is from Cleveland and would be thrilled if we moved back there. That's the kind of thing that's going through my head."
Though consumers are technically supposed to pay sales tax on Internet purchases via their state income tax forms, few do. That amounts to a built-in discount for consumers and a competitive advantage for online retailers who sell to them.
Currently, only online retailers that have a physical location in Illinois — a retail store, headquarters or warehouse, for example — have to collect state tax at checkout. The new law, which would take effect July 1, would define online retailers as having a physical location in Illinois if they have affiliates in the state.
"The point is that someone is supposed to be collecting this tax," said John Patterson, spokesman for state Senate President John Cullerton, who pushed for the change. "All other retailers in Illinois have to collect the sales tax. They're at a competitive disadvantage from online retailers.
"The motivation is to create some tax fairness among retailers in Illinois."
The Illinois Retail Merchants Association supported the bill.Revenue at CouponCabin, in Chicago, would be cut by one-third if the large retailers cut it off, said Scott Kluth, founder and president. He said he was dismayed that the bill was hurried through the Legislature.
"It was disheartening that this bill was passed by both houses in 30 hours without a full and fair opportunity for the voice of Illinois small businesses to be heard," he said. "Unfortunately, this bill will do significant harm to our growth."
Illinois affiliates were notified this week by some large online retailers that they would cut off business relationships if the bill became law. One letter from Overstock to BradsDeals read, "We are writing to inform you that if (House Bill) 3659 passes, Overstock.com will have to end our relationships with all Illinois-based affiliates before the bill becomes law. … Only three states have passed these laws, and in each … our response, and the response of most large Internet retailers, was to terminate affiliate services in those states."Wilson said he got a similar letter from Amazon.
The bill applies only to affiliates that have at least $10,000 a year in revenue. But if large retailers, such as Amazon, cut off all affiliates in Illinois, it would end commission streams to small Web sites, such as bloggers, who might sell Amazon goods at their sites. Amazon could not be reached for comment.
The bill would not affect Groupon, the wildly successful Chicago-based daily-deal site that offers discount certificates, mostly for use at local businesses, said spokeswoman Julie Mossler. Use tax is handled by merchants at the point of redemption, she said.