Internet Retailer Not Liable for Use Tax in Illinois

In a substantial win for taxpayers in the class action lawsuit nightmares, an Illinois court held that a Nevada-based online retailer that sells cosmetics online and through catalogs did not have substantial nexus with Illinois and was therefore not required to collect sales tax in Illinois. The online retailer licensed the brand. A brick-and-mortar company also licensed the brand and sold the cosmetics at its retail stores. The online retailer mailed catalogs into Illinois several times a year. The catalogs were also available at stores owned by the brick-and-mortar company. In Illinois, a retailer has substantial nexus and is required to collect and remit Illinois sales tax if the retailer solicits orders by mail and benefits from marketing activities in Illinois.

The court held that the online retailer did not have a physical presence in Illinois, and the brick-and-mortar company did not act as an agent of the online retailer or act on behalf of the online retailer even though it had the online retailer’s catalogs in its stores. The online retailer and brick-and-mortar company were separate entities, maintained separate merchandise and employed separate marketing schemes. In fact, the two companies competed for business. The two companies had separate financial records and income tax returns. Further, the brick-and-mortar company did not accept returns of merchandise purchased from the online retailer. As a result, the online retailer did not benefit from the brick-and-mortar company’s marketing activities.

The court also held that the online retailer did not knowingly fail to pay an Illinois tax obligation under the False Claims Act. The online retailer had consulted with tax advisors about its potential tax liability in Illinois and was informed that it did not have nexus in Illinois. The online retailer did not collect sales tax in Illinois until it changed its business operations and determined it had nexus in-state. (State of Illinois v. Lush Internet Inc., Appellate Court of Illinois, First District, No. 1-16-1601, September 25, 2017)

Posted on October 23, 2017