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Jamie C. Yesnowitz
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Under Illinois legislation enacted in 2019, remote retailers and marketplace facilitators that meet certain thresholds must register to collect and remit state and local retailers’ occupation tax (ROT) for sales of tangible personal property beginning Jan. 1, 2021.1
The Illinois Department of Revenue recently adopted extensive regulations and released administrative guidance to implement these new registration and collection requirements.2
In addition, the city of Chicago issued guidance on Jan. 21, 2021, that analyzes nexus in light of South Dakota v. Wayfair, Inc.
along with a safe harbor that the city will use for its amusement tax and personal property lease transaction tax.4
Remote retailers and marketplace facilitators
The history of the tax collection and remittance responsibilities of remote retailers and marketplace facilitators in Illinois is complex. In 2018, Illinois enacted legislation in response to Wayfair
that imposes use tax collection requirements on out-of-state retailers and service providers.5
Effective Oct. 1, 2018, out-of-state retailers and service providers are required to collect and remit the use tax (UT) and/or the service use tax (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.6
Beginning Jan. 1, 2020, marketplace facilitators are required to collect and remit the UT and SUT if the marketplace facilitator and marketplace seller cumulatively met either of these economic nexus thresholds.7
Illinois enacted legislation in 2019 that made major changes to the out-of-state retailer and marketplace facilitator tax collection and remittance requirements.8
Beginning Jan. 1, 2021, the obligation for out-of-state retailers and marketplace facilitators was changed from the UT to state and local ROT. Specifically, an ROT collection and remittance obligation applies to remote retailers and marketplace facilitators exceeding the $100,000 or 200 separate transaction thresholds.9
Destination sourcing is used to determine the applicable tax rate for sales made by remote retailers and marketplace facilitators on behalf of marketplace sellers.10
Also, the legislation enacted the Leveling the Playing Field for Illinois Retail Act,11
designed to assist remote retailers with their state and local tax compliance by providing a certified service provider (CSP) or certified automated system (CAS) without charge.12
Origin sourcing is retained for all transactions by retailers maintaining a physical presence in Illinois.13
Leveling the playing field regulations
Effective Jan. 1, 2021, the Department has adopted a series of 18 new regulations to implement the 2019 legislation discussed above.14
As summarized in the first new regulation, the legislative changes were intended to “level the playing field” between Illinois-based retailers and remote retailers by uniformly imposing state and local ROTs on Illinois retailers, remote retailers and marketplace facilitators.15
The regulations implement the new state and local ROT collection and remittance requirements for remote retailers and marketplace facilitators. Also, the regulations explain the requirements for a CSP and CAS that may be used by remote retailers. The regulations provide numerous examples that should assist taxpayers in interpreting and applying the statutes and regulations.
A regulation discusses the different types of retailers as well as the scope of the new regulations.16
Due to differing tax obligations, the regulation clarifies that retailers should examine their selling activities to determine their specific tax liabilities. This is especially important for retailers that engage in multichannel retailing.17
The regulation clarifies that out-of-state retailers with a physical presence in Illinois incur a UT collection obligation for sales made outside Illinois and shipped or delivered to Illinois purchasers. These same retailers also may incur state and local ROT liability using origin sourcing for any sales made in Illinois.
Four of the new regulations specifically discuss remote retailers.18
A regulation discusses the factors used by remote retailers in determining if the economic nexus thresholds are satisfied.19
For purposes of the thresholds, “gross receipts” means all the consideration actually received for a sale. “Separate transactions” means sales transactions documented on separate invoices, regardless of the manner in which the tangible personal property is delivered. When making a threshold determination, a remote retailer must exclude sales for resale, sales through a marketplace facilitator if the remote retailer has received certification that the marketplace facilitator is responsible for paying the tax, and sales of tangible personal property required to be titled or registered with the state (including motor vehicles, watercraft, aircraft and trailers). All other sales of tangible personal property, even if they are exempt from tax, must be included in the thresholds.
Marketplace facilitators and sellers
Illinois has adopted five new regulations that address marketplace facilitators and marketplace sellers.20
A regulation clarifies that affiliates of a marketplace seller are not “marketplace sellers.” As a result, the marketplace facilitator is not considered to be the retailer and is not liable for tax on sales made to Illinois purchasers by affiliates selling over its marketplace.21
The same definitions for “gross receipts” and “separate transactions” applicable to remote retailers also apply to marketplace facilitators.22
Also, marketplace facilitators apply similar provisions as remote retailers for determining whether a transaction should be included in making a threshold determination. A marketplace facilitator must certify to each marketplace seller that the marketplace facilitator (i) assumes the rights and duties of a retailer under the ROT and all applicable local ROTs administered by the Department with respect to sales made by the marketplace seller through the marketplace; and (ii) will remit these taxes.23
Tax sourcing provisions
A regulation details the applicable tax sourcing provisions.24
The type of tax liability incurred by a retailer and the manner in which the liability is sourced depends on the manner in which a retailer conducts its selling activities, as well as the type of nexus the retailer has with Illinois. Remote retailers meeting either of the nexus thresholds are deemed to be selling at the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser (destination sourcing). Marketplace facilitators meeting either nexus threshold use destination sourcing for sales made on behalf of a marketplace seller. However, marketplace facilitators that make their own sales to Illinois purchasers may use either destination sourcing or origin sourcing in certain circumstances. Origin sourcing is used when a marketplace facilitator makes a sale to an Illinois purchaser that is fulfilled from inventory located in Illinois or for which selling activities otherwise occur in Illinois. When a marketplace facilitator makes a sale to an Illinois purchaser that is fulfilled from inventory located outside Illinois and for which selling activities otherwise occur outside Illinois, destination sourcing is used. Out-of-state retailers with a physical presence in Illinois are not remote retailers. As a result, they incur only a UT collection obligation on sales made to Illinois purchasers from locations outside Illinois. If sales are made to Illinois purchasers from locations in Illinois, the state and local ROT rate is determined using origin sourcing.
Certified service providers and certified automated systems
A CSP is an agent of a remote retailer that performs all of the retailer’s sales tax functions, as outlined in the contract between the Department and the CSP.25
The Department will send all notices, assessments and other communications regarding the remote retailer’s tax functions to the CSP. After a CSP is certified by the Department, it enters into a contractual relationship and electronically registers with the Department. A CSP must file a separate return for each remote retailer with whom it has an agreement and is entitled to compensation of 1.75% of the tax that is timely remitted. A CSP is not liable for any state or local ROTs administered by the Department if the remote retailer does not provide the CSP with the tax and information to correctly remit all taxes due, or if an incorrect amount of tax is remitted when relying on erroneous data provided by the Department at the time of the sale.
A CAS is software that is designed for or by a remote retailer that wants to use certified tax collection software but keep the responsibility for filing returns and remitting tax in-house.26
Before a CAS can be used by a remote retailer, the CAS must be certified by the Department. A remote retailer using a CAS must file its own returns and make payment of tax by electronic means. If a remote retailer uses a CAS, the retailer is entitled to a retailers’ discount of 1.75% of the tax that is remitted with a return that is timely and properly filed. Remote retailers using a CAS and their CAS providers are relieved of liability to the Department for having remitted the incorrect amount of tax resulting from reliance, at the time of the sale, on erroneous data provided by the Department.
In September 2020, prior to adopting the final regulations, the Department released ROT guidance for remote retailers and marketplace facilitators.27
The guidance generally is consistent with the regulations discussed above. However, unlike the regulations, the guidance provides that remote retailers must exclude occasional sales when making the threshold determination. In December 2020, the Department issued additional guidance to clarify what sales are excluded from the threshold determination for marketplace facilitators.28
This guidance is consistent with the regulations discussed above, but it also addresses occasional sales. While a remote retailer may engage in occasional sales, a marketplace facilitator is considered to habitually engage in selling tangible personal property and cannot exclude its own sales as occasional for purposes of the threshold calculation. In February 2021, the Department released two alerts that provide guidance on specific compliance issues related to non-sales taxes for remote retailers, marketplace sellers, and marketplace facilitators, including businesses selling food and beverages in Chicago.29
Chicago nexus and safe harbor
The city of Chicago has issued an information bulletin that provides a summary of nexus in response to Wayfair
as well as a safe harbor for certain transactions in the city.30
, the U.S. Supreme Court upheld a South Dakota statute that required out-of-state sellers who had at least $100,000 in sales to South Dakota customers or 200 sales to South Dakota customers to collect and remit use tax on these sales. The city of Chicago focused on the Court’s qualitative analysis in Wayfair
, in which determining whether nexus to require a collection duty on an out-of-state seller hinges upon whether the seller purposely avails itself of the privilege of doing business in the taxing jurisdiction.
As discussed above, Illinois has enacted legislation that adopts the dollar and transaction thresholds in the South Dakota statute upheld in Wayfair
for state use tax purposes,31
but this law does not apply to Chicago local taxes because the city is a home-rule unit. As a result, the law does not limit the analysis of what constitutes nexus for city tax purposes. In performing its analysis, the city will consider whether an out-of-state entity meets the state thresholds, but this will not necessarily be determinative unless a relatively limited safe harbor as discussed below applies. If the safe harbor does not apply, the city may consider other factors such as: (i) agreements that the entity has with other businesses in Chicago; (ii) activities that the entity’s employees or other agents perform on the entity’s behalf in Chicago; (iii) any physical presence that the entity has in Chicago; (iv) advertising directed at Chicago customers; and (v) any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago.
Beginning July 1, 2021, Chicago is establishing a safe harbor for certain transactions under the city’s amusement tax and personal property lease transaction tax. An out-of-state entity that received under $100,000 in revenue during the four most recent consecutive quarters will not need to collect the following taxes from its Chicago customers during the current calendar quarter: (i) amusement tax,32
as applied to amusements that are delivered electronically, such as video and audio streaming and online games; and (ii) personal property lease transaction tax,33
as applied to nonpossessory computer leases.
The safe harbor is extended with certain conditions and qualifications. The city clarifies that the safe harbor applies only to an entity with no other significant contacts with Chicago. Because the safe harbor applies on a prospective basis, no refunds or credits will be granted for taxes paid or remitted before July 1, 2021. If an out-of-state entity initially qualified for the safe harbor but no longer does, it must: (i) register with the city within 60 days; (ii) begin collecting Chicago taxes within 90 days; and (iii) continue collecting Chicago taxes for at least 12 months. Finally, the safe harbor does not affect the issue of whether a customer has a duty to pay the taxes.
Determination of tax collection responsibility
Unless the safe harbor applies, Chicago expects companies doing business in the city to comply with its tax ordinances. The determination of whether the city has the authority to require a business to collect its taxes is a combined question of law (which is provided by federal and state cases) and fact (which will be analyzed on a case-by-case basis).
Due to the complexity of the remote retailer and marketplace facilitator provisions in Illinois, the new comprehensive regulations should be very useful for taxpayers when applying the relevant statutes. As explained in the regulations, it is imperative that retailers closely examine their selling activities to determine their specific tax liabilities. The regulations provide helpful clarity in interpreting the statutes and include many examples and a detailed flowchart that should further assist taxpayers. In particular, the regulations addressing the items that should be considered by remote retailers and marketplace facilitators in making threshold determinations provide welcome guidance. Also, the regulations provide useful details concerning the CSP and CAS requirements and operations.
The disparity in the treatment of occasional sales for purposes of determining whether the quantitative nexus thresholds is curious. The Department issued guidance in September providing that remote retailers exclude occasional sales when making economic nexus threshold determinations. In December, the Department supplemented this guidance to clarify that marketplace facilitators do not have occasional sales that can be excluded from the threshold determination. However, the new regulations do not address the treatment of occasional sales at all for threshold purposes.
A new regulation clarifies tax sourcing provisions and whether destination sourcing or origin sourcing should be used. However, the state’s sourcing methodology is likely to face constitutional challenges. Destination sourcing applies to remote retailers and sales made by marketplace facilitators on behalf of marketplace sellers. Out-of-state retailers with a physical presence in Illinois and in-state retailers use origin sourcing. Marketplace facilitators may use destination or origin sourcing for their own sales depending on the location of their inventory or selling activities within or outside Illinois. 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. Given this difference, there are possible Commerce Clause challenges based on discrimination between Illinois and remote sellers.
The nexus guidance provided by the city of Chicago is noteworthy because the city is not required to follow the state economic nexus thresholds for its local taxes. The city is one of the first large municipalities that has directly explained its treatment of nexus issues post-Wayfair
. The city’s guidance includes a list of factors that the city will consider in making nexus determinations on a case-by-case basis. The city’s decision to offer a safe harbor beginning July 1, 2021, should promote some certainty regarding the duty to collect taxes on specified transactions under the amusement tax and personal property lease transaction tax. This safe harbor provides a bright-line threshold for the duty to collect amusement tax on items delivered electronically and the personal property lease transaction tax on nonpossessory computer leases. Taxpayers should note that the safe harbor applies only on a prospective basis and is limited to the issue of whether a provider has a duty to collect taxes from its customers. Therefore, customers may still have a duty to pay these taxes.
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