Online Sales and Unpaid Illinois Sales and Use Tax

              Online Sales and Unpaid Illinois Sales and Use Tax
Online sales can erode sales tax revenue because out-of-state sellers are not legally required to collect sales tax if the buyer resides in a state where the seller has no substantial physical presence, or nexus.1 In such cases, the buyer is required by law to remit the applicable use tax to the state. Unfortunately, use tax enforcement against individual consumers is extremely difficult (as opposed to, for example, use tax enforcement against sellers with nexus). A result of this low compliance from individuals is significant unpaid use tax.
In what follows, we estimate the unpaid use tax from online sales to Illinois households and businesses for calendar years 2005 through 2010, and for Illinois state fiscal years 2006 through 2010.
We estimate that the State of Illinois’ General Fund is losing a theoretical maximum of some $153 million in unpaid tax on online sales. While not insignificant, this estimate is only 2.2 percent of current General Fund sales tax collections, and even if legislation requiring collection of use tax was signed into law, we would not expect 100 percent compliance. It should be noted that the numbers presented below are significantly lower than the $497 million to $778 million from the much cited 2004 Bruce and Fox study.2
Summary results are in Table 1 below. Tables 2 and 3 present detailed results for online retail sales and online wholesale sales, respectively.
1 See the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). http://supct.law.cornell.edu/supct/html/91-0194.ZO.html
2 Bruce, D and W Fox. State and Local Sales Tax Revenue Losses from E-Commerce: Estimates as of July 2004. Center for Business and Economic Research, University of Tennessee. In the Bruce and Fox Study, the sales tax rate attributed to the state of Illinois is 6.25 percent. For comparison purposes we reduce the tax rate to 5 percent - the amount retained by state government.
Table 1 – Unpaid Tax On Online Sales to Illinois Households and Businesses ($ millions)
Calendar Year
2005
2006
2007
2008
2009
2010
Unpaid tax on online sales to IL households and businesses
$103
$121
$138
$147
$158
$169
a. IL household share
$57
$68
$81
$86
$92
$99
b. IL business share
$47
$53
$57
$61
$66
$70
Fiscal Year
FY06
FY07
FY08
FY09
FY10
Unpaid tax on online sales to IL households and businesses
$112
$130
$143
$153
$163
a. IL household share
$62
$74
$83
$89
$95
b. IL business share
$50
$55
$59
$63
$68