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Illinois enacts fix to post-Wayfair nexus law

Chicago hikes lease transaction tax rate Increase

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On Dec. 13, 2019, Illinois Gov. J.B. Pritzker signed S.B. 119 into law, which is intended to fix technical flaws in Illinois’s remote seller and marketplace facilitator laws enacted earlier in the year during the regular legislative session.1 Further, the Illinois Department of Revenue issued guidance for marketplace facilitators and marketplace sellers to assist in the implementation of use tax collection effective Jan. 1, 2020.2

In addition to these state tax developments, the city of Chicago passed its 2020 Budget and Revenue Ordinance, effective Jan. 1, 2020.3 The Chicago Revenue Ordinance is designed to fill a large gap in the city’s budget and does so through the implementation of new fees and tax increases.4 Perhaps the most significant change is the increase in the Personal Property Lease Transaction Tax (“Lease Transaction Tax”) on nonpossessory computer leases, which impacts businesses that buy and sell cloud computing used in Chicago.5

Illinois changes for remote retailers and marketplace facilitators In 2018, Illinois enacted legislation in response to South Dakota v. Wayfair, Inc.6 that imposes use tax collection requirements on out-of-state retailers and service providers subject to the retailers’ occupation tax (ROT), service occupation tax (SOT), use tax (UT) and/or the service use tax (SUT).7 Effective Oct. 1, 2018, out-of-state retailers and service providers are required to collect and remit the UT and/or the SUT 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.8 Out-of-state sellers and marketplace facilitators currently collect and remit UT and/or SUT at the rate of 6.25%.9

Effective Jan. 1, 2020, marketplace facilitators are required to collect and remit the UT and SUT if the marketplace facilitator and marketplace seller cumulatively meet either of these economic nexus thresholds.10 S.B. 119 expanded the definition of a “marketplace seller” to include “a person that sells or offers to sell tangible personal property through a marketplace operated by an unrelated third-party marketplace facilitator.”11 Pursuant to a Department publication, all sales of tangible personal property must be included in calculating the thresholds except: (i) sales for resale; (ii) sales of tangible personal property that must be registered with an Illinois agency, including motor vehicles, watercraft, etc., when these sales are made from locations outside the state to Illinois purchasers; and (iii) sales made through the marketplace that are subject to the ROT.12 The sales that a retailer makes through a marketplace facilitator are not included in determining whether the retailer meets the economic thresholds provided the retailer has received a certification from the marketplace facilitator.13 Retailers that no longer meet the thresholds due to the exclusion of marketplace sales may cancel their registration.14

S.B. 690, enacted during Illinois’s 2019 regular legislative session, changed the out-of-state retailer collection and remittance obligation from the UT to the ROT effective July 1, 2020.15 However, S.B. 119, enacted during the veto session and recently signed by Governor Pritzker, moves the effective date back six months to Jan. 1, 2021.16 The law continues to provide that destination sourcing will be used for remote retailers that meet the economic nexus thresholds.17 S.B. 119 added a destination sourcing provision for sales made by marketplace sellers, which was previously absent from the prior version of the law.18 Origin sourcing is retained for all transactions by retailers maintaining a physical presence in Illinois.19 S.B. 119 also reinstates click-through and affiliate nexus, which provisions were previously removed from the version of the law that was enacted earlier in 2019.20

Chicago budget and revenue ordinance Chicago budget overview Chicago has been facing an $838 million budget deficit, and has been forced to contemplate numerous revenue measures to try and bridge the budget gap.21 The city projects local tax revenue to increase by $47.5 million in 2020.22 The largest portion of the increase in local tax revenue is expected to result from an increase in the Lease Transaction Tax.23

Chicago’s first budget under Mayor Lori Lightfoot includes significant tax and fee increases for some taxpayers. This is largely a result of the city’s growing pension liabilities, as well as some of its current need for increasing services. The budget has particularly significant impact on the legalized recreational cannabis market, ridesharing companies and their customers, and cloud computing services.24 The city will continue to spend the largest share of its budget on personnel, with the next largest portions going to benefits and pensions.25

Chicago revenue ordinance The new Revenue Ordinance includes numerous changes affecting: taxicab fees, public way fees, permit and development review fees, parking fees, public utility fees, the Intergovernmental Agreement with the Board of Education, the Lease Transaction Tax, the Ground Transportation Tax, the Motor Vehicle Lessor Tax, refuse collection fees, and the Cannabis Tax.26 The Ordinance also provides for the dissolution of the Chicago Infrastructure Trust and the transfer of its funds back to the city.27

The most significant increase in Chicago’s revenue is expected to come from the increased Lease Transaction Tax on cloud computing. Effective Jan. 1, 2020, the tax is increased from 5.25% to 7.25 percent for all transactions involving the nonpossessory lease of a computer for the purpose of allowing the customer to use the provider's computer and software to input, modify or retrieve data or information supplied by the customer.28 The 9% rate remains in effect for all other leases.

Another potentially significant source of revenue may be obtained from changes in the Ground Transportation Tax, which impacts ride-sharing companies. The ordinance increases the tax on solo trips into and out of Chicago’s “Downtown Zone” from $0.60 to $1.13 per ride and $2.88 per ride for rides occurring between 6 a.m. and 10 p.m. on weekdays.29 The tax on shared rides is $0.53 and $1.13 for rides going into or out of the Downtown Zone between 6 a.m. and 10 p.m. on weekdays.30 The tax on solo and shared rides to and from O'Hare Airport, Midway Airport, Navy Pier, and McCormick Place is an additional $5.00. However, the Revenue Ordinance also eases the difficulties faced by some cab drivers, by lowering the bi-annual renewal fees from $1,000 to $500.31
  
Commentary The state of Illinois and its largest city, Chicago, are facing parallel fiscal crises with large budget deficits and mounting obligations. While none of the above measures will ultimately be sufficient to plug those gaps, they are indicative of the steps that Illinois and Chicago may need to take in order to achieve fiscal stability. In particular, the growing prevalence of taxes on online transactions such as online sales and cloud computing transactions represents not only a fairly new revenue stream and a way of taxing a changing economy but also a new reality for retailers and service providers who previously did not have to account for these taxes.
 
While Chicago already taxed cloud-based transactions, the new higher rate means that both consumers and providers will have to deal with higher total costs. This could be increasingly problematic as more software services are migrated to the Software as a Service (“SaaS”) model and become recurring costs as compared to one-time charges. Vendors selling SaaS to customers in Chicago should confirm that Lease Transaction Tax rates are updated effective Jan. 1, 2020. Likewise, businesses located in Chicago should review software purchases to confirm the correct tax is charged by vendors. Otherwise, they have a responsibility to self-assess the tax.

Illinois’s remote retailer and marketplace facilitator laws are still likely to face constitutional challenges. The law now applies destination sourcing to all sales made by remote retailers and marketplace sellers. However, origin sourcing is retained for sellers with physical presence in Illinois. It should be noted that if a marketplace facilitator is making its own sale fulfilled within the state, the sale is sourced based on origin. These disparate sourcing rules may result in inconsistent taxation of products sold by in-state and out-of-state retailers, with different tax rates for products shipped to the same jurisdiction. For example, a sale by an in-state retailer located in a low-tax Illinois jurisdiction to a resident of a higher tax Illinois jurisdiction would result in a tax rate at the lower rate imposed by the location in which the sale originated, while a sale by a remote retailer would result in a tax at the higher destination-based rate. This could result in Commerce Clause challenges based on discrimination between Illinois and remote retailers. The Illinois legislature may have anticipated some constitutional challenges on this basis and included a severability provision that would reinstitute the use tax requirement should a court challenge be successful.

The Illinois “fix-it bill” also added language to the definition of a “marketplace seller” to indicate that sales must be made through an unrelated third-party marketplace facilitator. In other words, a facilitator would not be required to report the sales of a marketplace seller that is an affiliate of the marketplace facilitator.

As both Illinois and Chicago attempt to meet their mounting obligations, there will be both increases on existing taxes such as the Chicago Lease Transaction Tax, and the application of taxes to new goods and services. Similarly, Illinois’s decision to apply the ROT rather than the lower UT rate to remote retailers is another example of the state’s efforts to increase revenue.



1 P.A. 101-0604 (S.B. 119), Laws 2019. For further discussion of the legislation enacted earlier in 2019, see GT SALT Alert: Illinois Enacts Major Tax Reform Legislation
2 Info. Bulletin No. FY 2020-18, Ill. Dept. of Rev., Dec. 20, 2019.
3 Chicago Rev. Ordinance 2020, O2019-8357 (Nov. 13, 2019).
4 Chicago City 2020 Budget Forecast. 
5 Id. 
6 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
7 P.A. 100-0587 (H.B. 3342), Laws 2018. 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 Department. 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. For further discussion of this legislation, see GT SALT Alert: Illinois Enacts Use Tax Collection Requirements for Remote Retailers and Service Providers.
8 35 ILL. COMP. STAT. 105/2, 110/2.
9 35 ILL. COMP. STAT. 105/3-10, 110/3-102.
10 35 ILL. COMP. STAT. 105/2d, 110/2d. For purposes of use tax, a “marketplace facilitator” is a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by that marketplace seller. A person facilitates a sale by, directly or indirectly through one or more affiliates, doing both of the following: (i) listing or otherwise making available for sale the tangible personal property of the marketplace seller through a marketplace owned or operated by the marketplace facilitator; and (ii) processing sales or payments for marketplace sellers. A “marketplace seller” is a person that sells or offers to sell tangible personal property through a marketplace. A “marketplace” is a physical or electronic place, forum, platform, application or other method by which a marketplace seller sells or offers to sell items.  
11 35 ILL. COMP. STAT. 105/2d(a) (emphasis added).
12 Info. Bulletin No. FY 2020-18, Ill. Dept. of Rev., Dec. 20, 2019.
13 35 ILL. COMP. STAT. 105/2, 110/2.
14 Id.
15 35 ILL. COMP. STAT. 105/2, 120/2(b).
16 35 ILL. COMP. STAT. 120/2-12(6).
17 Id.
18 35 ILL. COMP. STAT. 120/2-12(7).
19 Id. 
20 35 ILL. COMP. STAT. 105/2, expanding the definition of “Retailer maintaining a place of business in this State" in (1.1) and (1.2).
21 Chicago City 2020 Budget Forecast (Nov. 2019).  
22 Id.
23 Id.
24 Chicago Rev. Ordinance 2020, O2019-8357 (Nov. 13, 2019).
25 Chicago City 2020 Budget Forecast (Nov. 2019).  
26 Chicago Rev. Ordinance 2020, O2019-8357, Art. I-XI (Nov. 13, 2019).
27 Chicago Rev. Ordinance 2020, O2019-8357, Art. XII (Nov. 13, 2019).
28 Chicago Rev. Ordinance 2020, O2019-8357, pg. 21 (Nov. 13, 2019); Chicago Mun. Code (Ill.) § 3-32-050.
29 Chicago Rev. Ordinance 2020, O2019-8357, pg. 23 (Nov. 13, 2019); Chicago Mun. Code (Ill.) § 3-46-020. The provision defines the "Downtown Zone" as “the entire portion of the City, excluding Navy Pier, bounded as follows: beginning at the intersection of the shoreline of Lake Michigan and North 22 Boulevard extended to the shoreline of Lake Michigan; thence west on and including the north side of North Boulevard extended to the shoreline of Lake Michigan to North Avenue; thence west on and including the north side of North Avenue to the North Branch of the Chicago River; thence southeasterly along the North Branch Canal of the Chicago River to the North Branch of the Chicago River; thence southeasterly along the North Branch of the Chicago River to Grand Avenue; thence west on and including the north side of Grand Avenue to Ashland Avenue: thence south on and including the west side of Ashland Avenue to Van Buren Street: thence east on and including the south side of Van Buren Street to Desplaines Street: thence south on and including the west side of Desplaines Street to Roosevelt Road: thence east on and including the south side of Roosevelt Road extended to the shoreline of Lake Michigan; thence north along the shoreline of Lake Michigan to the place of the beginning.” The term "Downtown Zone" does not include Navy Pier.
30 Chicago Rev. Ordinance 2020, O2019-8357, pg. 24 (Nov. 13, 2019); Chicago Mun. Code (Ill.) § 3-46-020.
31 Chicago Rev. Ordinance 2020, O2019-8357, pg. 1 (Nov. 13, 2019); Chicago Mun. Code (Ill.) § 9-112-150. 




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