Chicago Sues E-commerce Sites Over Sales Tax

Stephen Yagielowicz
CHICAGO — While California's proposed 25 percent porn tax is causing the most buzz amongst adult website operators, other states, and even cities, are pursuing their own tax initiatives against all e-commerce websites — not just adult ones.

One recent example involves a lawsuit against online retail giant eBay and its StubHub subsidiary by the city of Chicago over allegations that StubHub failed to collect required amusement taxes imposed by the city on all concert and sporting event ticket sales.

The 8 percent city sales tax applies to Internet retailers as well as physical outlets, but eBay denies the local ordinance's applicability to its operation.

The city, however, is now demanding that eBay and StubHub provide records of tickets sales made to Illinois residents.

At stake is an estimated $16 million in annual taxes lost to Internet-based sales by ticket resellers.

"Sixteen million dollars can pay for a lot of police officers here," Alderman Edward Burke said.

Although StubHub maintains an office in Chicago, eBay disputes that it constitutes a "physical presence" for the company in that city.

But having a physical presence within the city does not seem to be a prerequisite to incurring local sales tax obligations, as Chicago is also pursing other e-commerce operators, such as discount travel sites that book hotel rooms within the city, over unremitted sales tax issues.

The National Conference of State Legislatures claims that billions of dollars in state tax revenues are being lost each year to out-of-state Internet retailers, and cites unfair competition for local merchants as another revenue drain.

The U.S. Supreme Court, however, has ruled that states could not require companies to collect sales taxes unless they have a physical presence in the state.

If upheld, such local taxation could pose endless problems for adult websites which are often run by smaller companies that might not endure the financial and logistical burdens of dealing with the countless municipalities that are out for a slice of the e-commerce pie.