On March 10, 2011, Illinois Governor Pat Quinn approved a new tax law for the state of Illinois. The new law directs online retailers to collect sales taxes from their affiliate programs, if their affiliate program results in purchases from Illinois residents.
As a result, Online retailer tycoon, Amazon, completely cancelled its Illinois affiliate marketing program. No longer will people residing in the state of Illinois be permitted to earn revenue from advertising commissions for Amazon.
The major issue of contention for Amazon was the fact that its business is not headquartered in Illinois, since it conducts the majority of its business transactions online. On the other hand, Illinois legislatures contended that Amazon’s revenue model deprived the state of taxes that would normally be collected from an out-of-state business.
Critics suggest that the Illinois legislatures lack of understanding the ways that Internet marketing contributes jobs to the state. They further state the the new law will likely cause an increase in unemployment, because many people use affiliate marketing programs to supplement their income.
Marketing analysts suggest that online affiliate programs raise $611 million in advertising revenue, which can generate up to $18 million in tax revenue for Illinois. With the passage of the new law, they fear that Illinois will lose up to 30% of tax revenue from the migration of online business working to avoid the use tax.
In response, Governor Quinn said that the law would “level the playing field” for in-state based businesses against online retail competitors. Quinn and other Illinois legislatures combatted Amazon’s resistance to collecting sales tax, because a normal brick and mortar based business would often lose sales to the online retail giant, since it would collect sales tax.
Clearly, when faced with the choice between paying a lower price for a service or a higher price for a service, consumers often opt for the lower price, especially now that many consumers are finding themselves with limited cash. For this reason, Amazon and other retailers became the alternative sources for products as many consumers searched for the lowest cost providers of goods.
In turn, affiliate marketers earned higher commissions, because customers would generally choose to shop online, if they could find a good for a cheaper price online and the affiliate marketers served as the third parties helping these customers find these online products. Quinn and other tax law supporters argue that this price hunting tended to drive business away from Illinois in-state business harming the state economy.
Ultimately, the impact of the bill will not become apparent until it goes into affect in July 2011. While many affiliate programs, like Amazon, may leave Illinois, the bill does not necessarily prevent other alternative or competitive affiliate programs from entering the market in the state.
Sources:
Illinois Legislature. “HB 3659 – Use Tax Act Amendment, ” Illinois General Assembly.
Jessica Sander. “HB 3659: What’s Fair About Harming Online Illinois Businesses?” PR Newswire.com.
Stu Woo. “Amazon Takes Action in Illinois as War on Sales Taxes Continues,” WSJ.com.
