Illinois enacts use tax collection requirements for remote retailers and service providers


Paul Bogdanski
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Michelle DiVita
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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On June 4, 2018, Illinois enacted budget legislation that includes a requirement for remote retailers and service providers to collect and remit use tax and service use tax when they have a specified amount of sales or number of transactions within the state.1 The sales thresholds for economic nexus mimic the thresholds of the South Dakota legislation that recently was considered by the U.S. Supreme Court in South Dakota v. Wayfair, Inc. 2 Also, the budget legislation adds a new income tax credit for adoptions and changes the sunset dates for the hospital and natural disaster tax credits. 

Use tax economic nexus thresholds Effective Oct. 1, 2018, retailers and service providers with no physical presence in Illinois are considered to be maintaining a place of business in Illinois, and will be liable for collecting use tax and service use tax if one of two economic thresholds is met for a 12-month period: (i) the sales of tangible personal property or services to customers in Illinois are $100,000 or more; or (ii) the retailer or service provider enters into 200 or more separate transactions for sales of tangible personal property or services to Illinois customers.3 These thresholds are in addition to other activities that establish sales tax nexus in Illinois such as maintaining an office or warehouse in the state.

Retailers and service providers must determine each quarter whether they meet at least one of the thresholds for the preceding 12-month period.4 If the retailer or service provider meets either threshold, the retailer or service provider must: (i) collect and remit tax along with filing regular returns for one year; and (ii) review its Illinois sales each year to see whether the thresholds are met. If a year lapses and the retailer or service provider does not meet either threshold, the retailer or service provider must return to reviewing sales on a quarterly basis.

Income tax credits In addition to establishing the sales thresholds for economic nexus that are discussed above, the legislation also: (i) enacts an individual income tax credit for families adopting children;5 (ii) provides a sunset date for tax credits to taxpayers owning hospitals licensed under the Hospital Licensing Act;6 and (iii) extends the natural disaster tax credit to taxable years beginning prior to Jan. 1, 2019.7 Prior to amendment, the natural disaster tax credit was limited to tax yeas beginning prior to Jan. 1, 2018.

Commentary Illinois’ adoption of economic nexus legislation coincided with an interesting accomplishment – the passage by the Illinois legislature of a budget bill by the May 31 deadline for the first time in several years. Given the economic pressures in Illinois, the attempt to take advantage of a potential sales and use tax windfall comes as no surprise. Collecting tax on remote retailers expands the state’s tax base without placing an additional tax burden directly on Illinois residents and businesses.

The Illinois economic nexus legislation was enacted while Wayfair was pending before the U.S. Supreme Court. In fact, the Illinois economic nexus thresholds are virtually the same as the thresholds contained in the South Dakota statute at issue, and ultimately endorsed in Wayfair. The Court overturned the physical presence requirement for substantial nexus. According to the Court, the conclusion that the South Dakota statute satisfied the Commerce Clause was supported by factors such as (i) no retroactive application of the statute; (ii) a safe harbor for limited sales; and (iii) South Dakota’s adherence to the Streamlined Sales and Use Tax Agreement. However, it is not clear whether states are required to satisfy all three of these factors under the Commerce Clause standards. Because it is not a member of the Streamlined Sales and Use Tax Agreement, Illinois only has two of the three factors mentioned by the Court. Also, the Court remanded the case to consider whether the South Dakota statute could be challenged on an alternative basis under the Commerce Clause. Thus, the constitutionality of the South Dakota legislation has not been finally determined. A significant number of other states have enacted economic nexus statutes that are similar to the challenged South Dakota statute. As discussed above, the Illinois legislation is effective Oct. 1, 2018.

Retailers and service providers will need to remain cognizant of their activities in states that may create a collection and remittance responsibility via the application of the economic nexus thresholds, and carefully monitor and consider their out-of-state sales.

As far as the state’s overall fiscal situation is concerned, Moody’s Investors Services has already weighed in, noting that the fiscal 2019 budget includes “positive” moves for the relatively low-rated state.8 The positive developments include a voluntary pension buyout plan that expects to save the state $423 million. However, realized savings will entirely depend on the percentage of workers opting in to the buyout plan, meaning the actual dollar amount could substantially vary from budgeted projections. It should be noted that S&P Global Ratings has criticized the budget as not doing enough to address Illinois’ ongoing financial problems. 9 

1 P.A. 100-0587 (H.B. 3342), Laws 2018. Illinois has a unique sales and use tax system comprised of four different taxes: (i) retailers’ occupation tax; (ii) service occupation tax; (iii) service use tax; and (iv) use tax. Occupation taxes are imposed on sellers’ receipts and use taxes are imposed on amounts paid by purchasers. Generally, if an out-of-state business does not charge Illinois sales tax, the purchaser must pay use tax to the Illinois Department of Revenue. Under the legislation, out-of-state sellers or service providers meeting certain sales thresholds are required to collect use tax from the purchaser and remit it to the state.
2 U.S. Supreme Court No. 17-494, June 21, 2018. For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
3 35 ILL. COMP. STAT. 105/2, 110/2.
4 Id.
5 35 ILL. COMP. STAT. 5/227.
6 35 ILL. COMP. STAT. 5/223. The hospital credit only is available for tax years ending on or before December 31, 2022.
7 35 ILL. COMP. STAT. 5/226(a).
8 Karen Pierog and Matthew Lewis, Moody’s Cites “Positive” Moves in New Illinois Budget, REUTERS, June 11, 2018.

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