SPRINGFIELD – A U.S. Supreme Court decision last year allows states to collect sales taxes from online retailers, even if they don’t have a physical presence in the state.
Now, Illinois cities and counties want in on that action, too.
“We just want to make sure that we can capture locally-imposed sales taxes on out-of-state retailers online,” said Brad Cole, executive director of the Illinois Municipal League, which represents more than 1,200 local communities throughout the state — including Bellwood, Broadview, Maywood and Melrose Park.
Cole answered questions last week from members of the House Revenue and Finance Committee about how that might be accomplished. The short answer? Not easily.
“… A lot of different organizations, entities and interests need to be aligned to get this right, and … I’m not prepared to say that we have that ready today,” Cole said.
The court’s decision last June in South Dakota v. Wayfair paved the way for states to collect sales taxes from online retailers like Amazon.
In Illinois, “remote” online retailers that have more than $100,000 in online sales in the state, or at least 200 discrete transactions, must collect the state’s 6.25 percent use tax.
Last year, the Illinois Department of Revenue estimated the change, which went into effect Oct. 1, could bring in more than $200 million of new revenue every year.
Local governments like cities and counties also collect sales taxes on top of the state sales tax. Cole and other advocates say local governments should also be allowed to collect sales taxes from online retailers. That, they say, would level the playing field for local brick-and-mortar retailers, who already must add a local tax on sales.
But opponents say trying to impose and collect local sales taxes on online purchases would be overly complicated.
“Municipalities collecting their own sales taxes would be a hideous administrative nightmare,” said Rob Carr, president of the Illinois Retail Merchants Association. “I find it difficult to believe that a local municipality could either afford their own department of revenue or the hiring of a third party to do that for them.”
Yet some local entities, such as northeast Illinois’ Pace busing division, will soon rely on that extra revenue to maintain operations.
“We’re not capturing those out-of-state taxes,” said Rocky Donahue, executive director of Pace, which was created in 1984 with the revenue of a regional sales tax. “And it’s really hurting our bottom line.”
One option, suggested by committee member Rep. Joe Sosnowski (R-Rockford), would be to create a state tax specifically for remote online retailers. The revenue would be dispersed to local governments based on an established formula.
That way, Sosnowski said, the state wouldn’t have to deal with administering “a thousand different tax rates.”
At least one municipality – the City of Chicago – already applies an extra 1 percent tax to remote online retailers, on top of the state’s 6.25 percent.
If extended to other municipalities, that 1 percent sales tax alone, according to GOP Rep. Ryan Spain (R-Peoria), could bring significant money to the state.
“We want to help close the gap for lost revenues from online purchases compared to purchases from a local retailer,” said Spain, who is sponsoring a bill to extend the 1 percent online use tax to all home-rule municipalities regardless of population size.
Spain added that Peoria alone could see $2 million to $3 million in new revenue every year.
Carr, of the Retail Merchants Association, said he understands the pressure to include a solution in the next fiscal year’s budget, but it’s an issue that “has to go very, very carefully,” because the Supreme Court’s vote was 5-4, and it’s not clear how similar future cases will be decided.
But the committee chair, Democratic Rep. Michael Zalewski, of Riverside, said he feels “an abundant pressure” to solve the issue in the upcoming budget, because lawmakers “want to see local governments get their fair share.”
According to Cole, of the Municipal League, Illinois would be the first state to fully address local government sales taxes applied to online retailers.