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Illinois to Start Taxing Online Sales

NEW YORK (MainStreet) - Illinois Governor Pat Quinn signed a law Thursday requiring online retailers that partner with businesses located in the state to charge sales tax and report the tax revenue they collect.

The law, known as the Mainstreet Fairness Bill, is intended to force online retailers to abide by the same tax standards as brick and mortar businesses. Until now, retailers in Illinois, and in the majority of states, only had to collect sales taxes if they had a physical location in the state, effectively granting e-commerce sites a significant tax loophole.

According to the Illinois Department of Revenue, this law could help the state earn as much as $170 million in previously uncollected sales tax revenue, which should help deal with some of the state’s projected $4.9 billion budget shortfall for the 2012 fiscal year.

“Illinois’ main street businesses are critical to ensuring our long-term economic stability, which is why they must be able to compete with every company doing business online in Illinois,” said Governor Quinn in a statement. “This law will put Illinois-based businesses on a level playing field, protect and create jobs and help us continue to grow in the global marketplace.”

Amazon (Stock Quote: AMZN) in particular, has used the tax loophole to its advantage by shaving off the sales tax amount (6.5% in Illinois) from the final price tag to be more competitive. While Amazon is not technically based in any one state, the site is known to team up with thousands of smaller websites that are. These local websites promote and direct users to products sold on Amazon, and under the new law, these partnerships would be reason enough for Amazon to institute a sales tax.

North Carolina, Colorado and Rhode Island have each passed similar bills, and other states are considering doing so, including California, where many Web companies are based.

Not surprisingly, Wal-Mart (Stock Quote: WMT), the world’s largest brick and mortar retailer, was one of the first to praise the law in a statement for “leveling the playing field” between online and offline companies.

But the main downside to this bill is that it could end up hurting local businesses that sell their products online. Each time a state imposes this kind of law, Amazon terminates its partnerships with local websites to skirt the sales tax requirements. This in turn removes a valuable revenue stream from thousands of homegrown businesses that depend on Amazon for the promotion of their goods. Amazon has already threatened to drop local partners based in Illinois.

That said, if this law eventually spreads to the majority of states, or if it is ever instituted on a national level, it would become increasingly costly for websites like Amazon to pull this stunt, as they would effectively have to sever ties with every local business in America.

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