While the Illinois state legislature waits to see if Gov. Pat Quinn signs a bill into law requiring out-of-state Internet retailers to collect a 6.25 percent sales tax on purchases made by Illinois residents, the Illinois Department of Revenue is moving ahead with its own plan to put the taxpayers on the hook for the tax, requiring it be paid alongside the state’s income tax.
Critics say that the move puts ordinary residents at risk of being tax evaders if they don’t keep track of all the items they purchase online, or pay an estimated tax suggested by tax officials.
Other states are likely to adopt the Illinois plan, if legislators in other financially-troubled states see it as an easy way to collect more revenues from taxpayers.
Currently, federal law protects online retailers from having to collect sales tax on goods they ship to states in which they do not have a physical presence. A 1992 court decision, Quill v. North Dakota, established the law, which at the time applied to catalogue sales, although has been interpreted to also include Internet sales.
Existing laws in Illinois and many other states require that companies or individuals report online purchases for which no sales tax was paid, and pay a “use tax.”
In Illinois, a use tax return, Form ST-44, is used by those wishing to report the tax. According to the Illinois Department of Revenue, about 5,000 to 6,000 taxpayers file the form annually and pay about $6 million in use taxes.
Starting this year, state tax officials plan on putting a separate line on its income tax form, highlighted in bright red, requiring individuals to report their online purchases or pay an estimated tax based on a schedule provided by the state.
In order to avoid penalties, taxpayers will have to sift through credit card records and report all online purchases, or cough up an estimated tax, which at $100,000 of gross income, amounts to $52.
Accountant James Funkhouser, head of TTS Tax Services, called it a “stealth tax.” He said that it’s another incidence of the cash-starved state “raking through their old records looking for anything that pops up and sending out a bill.”
Others say that the state is merely collecting tax that it is rightfully owed. State Rep. Don Moffit, said “It’s voluntary. There’s no new penalty, fine, or fee, no new enforcement. It’s a way in get new money without raising taxes.”
However, the instruction guide for this year’s individual Illinois income tax return describes it a bit differently, how they intend to enforce the tax: “If we find that you owe additional tax, we may assess the additional tax plus applicable penalties and interest. We conduct routine audits based on information received from third parties, including the U.S. Customs Service and other states.”
The state is also offering amnesty for taxpayers for sales or use tax that they did not report in previous years. Those wishing to take advantage of the amnesty program can fill out form ST-44, including all the Internet purchases made between July 1, 2004 and December 31, 2010, write “Amnesty” on the top of the form, and pay the tax due by Oct. 15.
A spokesperson at the Illinois Department of Revenue, Sue Hofer, said authorities won’t be chasing after taxpayers for minor purchases such as a pair of shoes. However, “if you go online and buy a boat…in Florida, we have a number of ways to learn about that transaction.”