Supreme Court Decision Could Help Illinois Storefronts, Complicate Online Selling

Jul 13, 2018

Dave Plunk has run Music Makers in Galesburg for more than 15 years, occupying two floors of a three-story building on the town’s main street with rows of guitars, amps and other music equipment.

The store has weathered a lot. The recession in 2008 was the “scariest” time, he said. Four years before, the town’s largest employer, Maytag, packed up and left. Plunk has also had to figure out how to compete with the rise of online shopping.

“It's really hard to compete with online retailers that don't collect sales tax, especially on higher-end items,” he said. Without the tax, prices online are often lower. Occasionally, Plunk will cut deals on guitars or other instruments with customers who are debating walking out of the store to buy those items for less online, tax-free.

A Supreme Court ruling last month allows states to require online retailers to collect sales tax, even if those sellers are based outside the state. The ruling may help businesses like Plunk’s compete with online sellers, and help Illinois and other states bring in hundreds of millions of dollars in additional tax revenue.

"How do you grow that?”

But Plunk has a foot on both sides of the debate over online sales tax that often pits internet sellers against storefronts.

He said he “dabbled” in selling over the internet off and on for ten years. It wasn’t until he hired a full-time employee last year to manage the store’s social media pages, website and his Reverb page, an online selling platform, that online sales became a growing part of this business. Yearly sales have since increased nearly six-fold, he said.

“I think the only real growth, the biggest growth you're going to find is [in online sales], especially in a market like Galesburg, which is 30,000 people, with a lot of cornfields between here and other cities like Peoria and the Quad Cities,” he said. “How do you grow that?”

Guitars on display in the Music Makers store in Galesburg, IL.
Credit Madelyn Beck, Illinois Newsroom

Still, he sees his storefront in the 1890s building as the mainstay of his business. He says the June U.S. Supreme Court decision opening the door for states to collect sales taxes on more online purchase will help.

“The brick and mortar aspect of our business, we'll see the best benefit of collecting (online) sales tax,” he said. “The ecommerce part of it remains to be seen.”

Many states, including Illinois, have already taken steps to collect sales taxes from more online retailers. Illinois lawmakers tacked on a provision to the budget passed in May to collect the 6.25 percent state sales tax from online retailers making more than $100,000 in sales to Illinois residents or more than 200 transactions in the state.

That new rule won’t affect Plunk and his online sales. He’s already collecting taxes on anything purchased by Illinois residents because his store is based here.

Iowa and Indiana are among several states with similar policies. And it’s not surprising states are acting fast. A Government Accountability Office report estimated uncollected taxes on internet sales nationwide could amount to between $8 billion and $13 billion in 2017. Though some analysts say the individual total for Illinois, around $383 million, is an overestimate because Amazon, one of the largest online retailers, has been collecting sales tax for the last several years.

Web of State Tax Laws

Even as more states move to collect sales taxes, Eddie Levine doubts those governments will see the windfalls they expect. Levine runs Wholesale Breakthrough, based in Wauconda, which is an arm of its ecommerce sales business and offers consulting to new and growing online businesses.

He says he’s already collecting sales tax for many other states. But he understands why some retailers may not. Compliance with new tax rules is going to be difficult, he says. States have different tax rates and often don’t tax similar items in the same way. One example given in the Supreme Court decision was that Illinois taxes Snickers as candy, but Twix as food.

“It can be very grueling and very tedious work and can really make a business owner nervous in terms of how they're going to even tackle this issue,” Levine said.

Scott Peterson is the senior vice president for tax policy at Avalara, which offers software for automated tax collection. He echoes these points. He thinks the challenge will come not in figuring out how much to collect but how and when to report it to states.

Peterson offered one way for online sellers to visualize the different rules. He suggested taking a map of the United States, color coding the states where the seller is located and where they sell, and using that to figure out the corresponding tax laws. “Then start planning how you're going to react,” he said.

Simplifying the system is where Congress might come in. Peterson says the next step in the debate could be with federal lawmakers. There are at least two pending pieces of legislation with distinct approaches to online sales tax, though none have gotten the needed support to become law.

For Levine, he would like to see a simpler, more streamlined sales tax system where there is one rate across states and clear rules on what items are taxed. That could help states get more sellers to comply as well, he says.

Meanwhile, back in Galesburg, Plunk says he’s focused on his business and probably won’t pay much attention to the ongoing debate.

“I make sure I'm here every day to open the door, and I just try to do my best to take care of everybody that calls or comes through the store,” Plunk said.