Tuesday, December 14, 2010

Is this even legal?

Is this even legal?

The State of Illinois is trying to get residents to pay back taxes on all online purchases made over the last six years. Um, what?!

I know the state is in dire financial straits but is this even technically legal? I seem to remember other states trying a similar approach to bolstering revenue by targeting online businesses like Amazon but that's still an unresolved issue. So now it looks like Illinois (and New York) have just decided to go after the consumer instead? OK then, write a law to that effect and go ahead and do just that. But going after folks for past purchases seems at the least to be pretty dodgy and at its worst pretty damn close to extortion.


twg said...

Here, here.

Seitz said...

There is a law. Bare with me, because this is exactly what I do for a living.

See, there's a "sales tax" and a "use tax". Technically, you owe tax on just about everything you buy. In most cases, the vendor collects that tax from you and pays it to the state. But if they don't, you are still liable for the tax. So if you buy something from Amazon, and they don't charge you tax, you technically owe 6.25% tax on that to Illinois (and 1% to Chicago if you live in the city). They call it sales tax in the article, but really, it's use tax. The way interstate commerce laws are set up, I can sell and send stuff to you from a different state, but if I don't have sufficient nexus with Illinois, they can't force me to collect the tax. Which means it's your responsibility.

Now, from a practical standpoint, the state probably isn't going to come after you for the $9 CD that you didn't pay tax on because it's not worth it to them. But if you make big purchases, like a few flat screen TVs, maybe a computer, and the state finds out, they can hit you for the tax, interest, and penalty. There are some timing issues there that I won't get into.

This is a chance to "come clean" that very few people will take advantage of. The state just doesn't have the resources to come after you or me. But I help companies, who make millions of dollars in purchases from out of state vendors every year, defend these types of audits.

Typically the statute of limitations in Illinois is only three years, but they can go back as far as they want if you've not filed a return (which probably none of us have).

Tankboy said...

Seitz, thanks so much for taking the time to break it down for me (and anyone else reading!

Seitz said...

No problem. When you think about it, there are really only a few types of purchases they would really go after. The first are things like vehicles, like if you bought a car in Montana and drove it back. But they already nail you for that when you register it in Illinois.

The other is, believe it or not, things like works of art or jewelry that people bring back from overseas. Customs can tip off the people at the state, and that $800k painting you just bought is going to get taxed to the tune of about $60k in Chicago.