Intelligence Report: Judge takes Illinois' Internet sales tax offline

April 25, 2012 (CHICAGO) (WLS) -- In this Intelligence Report: A court decision Wednesday is a victory for Internet merchants in Illinois and the shoppers who buy from them, but it amounts to a loss for state lawmakers and the crippled state budget.

Thirteen months ago, Governor Pat Quinn signed the law that required online retailers in Illinois to pay sales tax. Now, a Cook County judge has effectively taken that tax offline, ruling the law unconstitutional.

An Internet trade association brought suit against the state, challenging the law that went into effect last July.

"We've built a home here for seven years," said Lauren Boukas of CouponCabin.com. "The last thing we want to do is leave Chicago. "We're all Chicagoans and love living here, but we have to do what's best for the business."

But leave they did. Internet retailer Coupon Cabin moved to northwest Indiana after the online sales tax law passed.

The legislation even required giants Amazon and Overstock.com to collect Illinois sales tax if they partnered with Illinois-based companies. At the time, Amazon, for one, said it would simply cut ties with Illinois firms.

On Wednesday, Cook County Circuit Court Judge Robert Lopez Cepero ruled in favor of the Performance Marketing Association that filed this lawsuit challenging the law. Judge Cepero ruled that the law violates commerce clause of the U.S. Constitution because the stature does not establish "nexus," or legal jurisdiction for the tax; and he said the law is premature because Congress has a moratorium on Internet taxes.

While online retailers may hail the ruling, brick and mortar retailers such as Sears and Walmart have viewed the competition from untaxed Internet sales as a severe competitive disadvantage. While the court arbitrates the skirmish, it is the state of Illinois that stands to lose millions in tax revenue, according to backers of the law.

"We respectfully disagree with the Court's ruling and are reviewing our appeal options with the Attorney General's office," a Department of Revenue statement said. "We need to protect 'brick and mortar' stores from an unlevel playing field and we need to recoup some of the estimated $153 million that was not paid by on-line merchants prior to the law being implemented. The law was a bipartisan initiative that passed both houses of the General Assembly with overwhelming support and was signed by Governor Quinn on March 10, 2011."

A spokesman for Illinois Senate President John Cullerton of Chicago says they have just learned of the court ruling and are looking at it. The I-Team has not heard back from Governor Quinn about whether the state will challenge the decision.

The trade group that brought suit says Wednesday's victory paves the way for Internet marketing affiliates to get back in business in Illinois.

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