The State of Illinois thought that it would be a good idea to extort money from online retailors by levying a user tax. State politicians and bureaucrats were drooling over the prospect of
The law redefined what constitutes a company's "physical presence" in the state, which is the benchmark used to determine if an out-of-state retailer is required to collect use tax from Illinois customers. Legislators determined that a company simply having an affiliate program in the state—where independent websites provide links back to the retailer in exchange for a small commission—was enough of a "presence" to meet the criteria.
Following a pattern already established in other states that passed similar laws, large online retailers like Amazon.com and Overstock.com simply terminated all affiliate agreements in Illinois, opting themselves out of having to collect the tax.
The result? An actual decrease in use tax collected of over $11 million. Numbers given to Chicagoist by the Illinois Department of Revenue show that in the period of January 2011 through June 2011, IDOR collected approximately $139 million in use tax. After the law went into effect on July 1, the total amount collected between then and the end of the year was approximately $127 million.
Not only did smaller websites based in Illinois lose a revenue stream, but larger companies that rely more heavily on affiliate income like Fat Wallet and Coupon Cabin simply packed up and moved to neighboring states, taking their jobs and income tax with them.