Illinois enacted an “Advertising-Nexus” tax law yesterday, triggering some serious negative consequences — while collecting no additional sales taxes. Here’s a quick summary of the law’s impact:

Lost Advertising (and Tax) Revenue: Within hours after the governor signed the bill into law, Amazon and Overstock terminated their advertising relationships with all Illinois web publishers.  Hundreds of other merchants are also expected to do the same (as they have in New York, North Carolina, Rhode Island, and Colorado).  This will shift hundreds of millions of dollars in advertising revenue from Illinois publishers to publishers in other states and offshore, thus shifting tens of millions of dollars of income-tax revenue from Illinois to other states and nations).

Unlike other states, Illinois didn’t assert immediate or retroactive effect, so Amazon and Overstock were able to give publishers a one-month “grace period” before these advertising relationships end.  (As a pessimist, I suspect that dozens of less-ethical merchants will deliberately delay their similar announcements until a few days before the law’s effective date).

Fleeing Businesses: As in other states, larger web publishers are planning their exodus from Illinois in order to avoid the law’s devastating impact.  Today, FatWallet announced that it will move out of Illinois, taking 55 jobs, and Coupon Cabin announced today that it’s exploring moving its offices to Indiana.

Carrion: Wal-Mart, Sears, and Barnes & Noble immediately invited Illinois web publishers to carry their advertising instead of Amazon’s.  But these companies offer lower advertising fees (and draw much lower conversion rates) than Amazon — and their web sites push customers into local stores (for which publishers aren’t paid any advertising fees).

In addition to their skimpy advertising rates, all three of these companies combined offer fewer than half as many products as Amazon, and provide much more limited product information. In my main niche, these three merchants combined offer fewer than 20% of the products which Amazon now advertises on my site.

Why Do I Care? I live and work in California, so the Illinois law doesn’t directly affect me (in fact, it might bring me a tiny slice of the advertising revenue lost by Illinois publishers). However, if California enacts its pending “Advertising-Nexus” bill, I’ll immediately lose the 26% of my total advertising revenue that comes from Amazon.

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Update (August 2, 2011):

Both Coupon Cabin and FatWallet moved their offices and jobs out of Illinois, in order to maintain their advertising relationships with retailers without nexus in Illinois. The State of Illinois forced these companies to choose between staying in Illinois (with reduced revenue and layoffs, forced by the state) or taking all the jobs a few miles to a nearby state (and continuing to grow).

In both cases, the new offices aren’t very far from the old offices: FatWallet’s offices (and 55 jobs) moved about 5 miles from Rockton, IL to Beloit, WI, while Coupon Cabin moved about 15 miles from Chicago IL, to Whiting, IN).

While Illinois has certainly lost payroll taxes and corporate income taxes, employees didn’t have to move their homes: most employees can continue to live in Illinois while working in the other state, if they’re willing to accept both the increased commute cost (probably losing any public-transit options) and the income-tax hassles affecting folks who live in one state while working in another. Of course, employees living in Illinois won’t be allowed to “telecommute” (work from a home on some days), which will likely increase their commute costs further.

Over time, some current employees will move (to reduce commute expenses and tax hassles). When other employees quit, and as new positions are created, those jobs will go to local workers who live near the companies’ new offices in Wisconsin and Indiana.

A related note: As expected, California enacted its own “Advertising Nexus” tax law, and just as they did in Illinois and other states, Amazon and other out-of-state retailers terminated their advertising relationships with California web publishers. I’ve lost more than 26% of my advertising revenue, though I’m working hard to try to recover a small part of that lost revenue from other advertisers (all paying lower rates, and some less ethical).

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