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Illinois demands taxes from Net retailers

In a new tactic aimed at making Americans pay sales taxes on Net purchases, the state accuses 62 online retailers of failing to collect taxes for purchases made over the Web.

In a new tactic aimed at making Americans pay sales taxes on Internet purchases, the state of Illinois has accused 62 online retailers of failing to collect taxes for purchases made over the Web.

Illinois joined a private lawsuit already under way against the companies, including Gateway, Blockbuster and Barnes & Noble, alleging that their Web sites and physical retailers are not legally distinct corporate entities. If they are not separate companies, under U.S. law, the online retailer may be obligated to charge sales taxes.

"In a time of soaring budget deficits and fiscal crisis in Illinois, precious tax dollars are being lost with a simple click of a mouse," Illinois Attorney General Lisa Madigan said in a statement last week. "It's time for this cyber tax evasion to end."

Illinois' move marks the latest front in the ongoing political strife over whether Americans will have to pay sales taxes for many online purchases. The debate began in the late 1990s between dot-com companies and state and local governments and shows no signs of ending soon. In 2000, a high-level commission created by Congress could not reach a consensus and deadlocked.

Led by the National Governors Association, about three dozen states have been trying to simplify their tax laws--a project called the Streamlined Sales Tax Project--in hopes of persuading Congress to permit them to tax all Internet purchases. But that effort has stalled on Capitol Hill this year.

In response, states are turning to using existing laws. In the Illinois suit, the attorney general claims that the 62 online retailers have a physical presence or other substantial connection with the state, which if true would entitle the government to tax sales they make to Illinois residents.

A physical presence or other "nexus" is required under a 1992 decision by the U.S. Supreme Court in a case called Quill v. North Dakota. For an out-of-state retailer to be required to collect sales taxes, the justices said there must be a "substantial nexus with that state as required by the commerce clause" to the U.S. Constitution.

Gateway and Blockbuster did not immediately respond to a request for comment Monday.

In February, some large retailers began voluntarily collecting sales taxes on Internet purchases. Amazon.com, which has partnerships with Target.com, MarshallFields.com and Mervyns.com to sell items online, posted a notification at the time that said customers in "all states other than Alaska, Hawaii and Vermont" would be required to pay sales taxes.

Americans are supposed to pay taxes voluntarily on items they order from Web sites and mail-order companies that are located outside the state in which they live. But relatively few people do.

Last week, the U.S. House of Representatives approved a proposal that would continue to prohibit states from taxing Internet access such as digital subscriber line, cable, satellite or dial-up services. But that bill does not cover sales taxes.