This article from Diana Sroka Rickert at the Illinois Policy Institute was featured in the Chicago Tribune on April 4, 2013.

To tax-hungry politicians, the Internet is like California in 1849 — a vast expanse of untapped wealth.

At the federal level, Illinois’ own Dick Durbin is leading a national effort to change the way sales and local taxes are collected from online purchases. He’s suggested a web of complicated regulations on small businesses, all in the name of “tax fairness.” But back in Illinois, politicians have already tried to tap into the Internet tax base — without much success.

Two years ago, Illinois enacted what’s become known as the “Amazon tax.” This measure, championed by Senate President John Cullerton, D-Chicago, essentially forced online retailers to pay Illinois taxes even if they didn’t have a storefront or other physical presence in the state. Under this law, working with Illinois-based marketing affiliates — such as a blogger who links to your product on his site — became enough to trigger an Illinois tax bill.

In his sales pitch, Cullerton positioned the Amazon tax as good for Illinois’ struggling economy: “House Bill 3659 will help spur economic activity and job growth within the state,” he said, adding that the tax would generate $150 million, which would “prevent millions of dollars in cuts to public safety, health care, and education.”

As it turned out, the tax did spur economic growth — in other states.

After the law was enacted, businesses fled. and ended their relationships with Illinois-based marketing affiliates. Chicago-based CouponCabin moved to Indiana. And, which had been headquartered near Rockford for three years, skipped the border to Wisconsin.

“The so-called Amazon tax was misguided,” said Brent Shelton, a spokesman for “(It) did little to increase the competitiveness of the local merchants it was purportedly designed to protect. It’s primary result was to cause businesses like ours to leave the state.”

Each of these companies took with them people, jobs and money.

And the $150 million?

The actual money generated by the law was much less. According to the Illinois Department of Revenue, the law generated just $3.8 million between July 2011 and January 2012. The state was on pace to net $6.4 million from the tax by the end of the fiscal year. This law, billed by one of Illinois’ top political leaders as a step toward solving Illinois’ economic and fiscal problems, failed to achieve even 5 percent of its intended target.

When asked for more recent revenue figures to see if the tax had picked up steam, the Revenue Department said the agency no longer was tracking this law’s performance.

Illinois’ Amazon tax, like so many other laws, had unintended consequences and underwhelming results. Forcing businesses to cross state lines in order to survive is hardly tax fairness.

Since this law has failed to produce its anticipated revenue and resulted in Illinois losing jobs to border states, Illinois should repeal the Amazon tax. It has not helped the state; it has hurt it.

As for Durbin, his proposal is not identical to Illinois’ but he’s using the same sales pitch: “economic fairness” and “leveling the playing field.” His proposal is anything but either of these terms.

Durbin’s proposal would force online retailers to collect and remit the tax rates for consumers’ place of residence — a standard that is not applied to bricks-and-mortar stores. It would put online businesses at a supreme disadvantage by requiring them to learn and enforce the rules and regulations of more than 9,600 taxing jurisdictions nationwide.

Illinois is not a pioneer in many areas, but it is in taxation. Sen. Durbin should learn a lesson from his home state: The Internet might seem like an untapped treasure trove for tax dollars, but strangling the digital economy with red tape will choke the life right out of it.

Diana Sroka Rickert is a writer with the Illinois Policy Institute.

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