I am joined by Brad Wilhelmson of KPMG and we are making a presentation on recent Illinois legislation to the Chief Tax Officer Roundtable of the Chicago chapter of TEI.
The Chicago Tax Club is presenting a webinar on Transfer pricing issues. Here is link for registration.
September 8: Save the date - Next quarterly meeting of the Tax Institute. The meeting will feature a discussion of unclaimed property issues with Allen Mayer, Chief of Staff for the Illinois Treasurer, Jennifer Waryjas of Jones Day and Troy Wangen of True Partners. email Keith to register
September 30: Illinois Chamber of Commerce Annual meeting. We will be holding our annual meeting at the Palmer House Hilton Chicago from 11:00 - 1:30. Registration is available at this link
October 19-21: First week of the House and Senate fall veto session.
October 26-28: Second week of the House and Senate fall veto session.
August 18, 2021
State and Local Tax
This Week - Special Edition
Joint Committee on Administrative Rules Objects to, and Suspends Enforcement of IDOR Emergency Amendments to the Leveling the Playing Field Rules
At its meeting this morning, the Illinois General Assembly's bipartisan Joint Committee on Administrative Rules objected to, and suspended, the emergency rules recently filed by the Illinois Department of Revenue amending the "Leveling the Playing Field.for Illinois Retail Act" rules. The amendments were published in the July 30 edition of the Illinois Register.
The objections and the suspension of the emergency rules was on a unanimous vote of the committee. In explaining the reasons articulated for the objections and the suspension, the committee adopted the reasoning set forth in a public comment letter I submitted to the Department, the JCAR staff and the committee members.
Section 230.600(b) of the JCAR rules provides:
If the Joint Committee suspends the emergency rule or portion thereof, it shall certify that fact to the agency and the Administrative Code Division. Such certification will be sent to the agency and the Administrative Code Division in the form shown in Exhibit C of this Part within 5 working days after the Joint Committee hearing. The certification shall include a statement of the reasons for the Joint Committee's suspension of the emergency rule or portion thereof. (1 Ill. Adm. Code 230)
A suspension of the emergency rulemaking means the Department may not enforce the amendments contained in the rulemaking. Section 5-125(b) of the Illinois Administrative Procedure Act provides:
The effectiveness of the emergency rule or portion thereof shall be suspended immediately for at least 180 days upon receipt of the certified statement by the Administrative Code Division. The suspension shall be indicated prominently and clearly on the face of the emergency rule or portion thereof by the Administrative Code Division. An emergency rule or portion thereof that is suspended cannot be enforced, or invoked for any reason, by the Agency. (5 ILCS 100/5-125(c))
The emergency amendments made a series of changes to Part 131, the Department's "Leveling the Playing Field" rules. See the link to the emergency rules above for the Department's complete description of the rulemaking.
At this point, if the Department wishes to make another attempt to adopt the changes contained in the emergency rulemaking, they will have to propose permanent rules.
In my comment letter, I raised the following objections to the emergency rules:
I.The Department has not articulated a valid reason for use of Emergency Rulemaking.
The Department has not given a reason for the use of emergency rulemaking that comports with requirements for the use of emergency rulemaking in the Illinois Administrative Procedure Act (the "IAPA").
IAPA Section 5-45(a) defines the term "emergency" as "means the existence of any situation that any agency finds reasonably constitutes a threat to the public interest, safety, or welfare."
The Department's "reason for emergency" states as follows:
Section 5-45 (ll) of the Illinois Administrative Procedure Act (5 ILCS 100/5-45 (ll) provides that emergency rules are authorized to implement the provisions of the Act, and that the adoption of emergency rules is deemed to be necessary for the public interest, safety, and welfare. Changes made in Section 131.107 regarding the MPEA and Chicago Soft Drink Tax must be implemented as soon as possible to allow restaurants and other retailers in Chicago to properly account for their taxes when made over a marketplace (e.g., sales made over food delivery service platforms). Other changes are being made to clarify the regulations in response to inquiries commonly received by the Department in response to the Act that are critical for proper compliance.
The Illinois General Assembly's Joint Committee on Administrative Rules has rules that outline the criteria or reviewing the appropriateness of an emergency rulemaking. (See 1 Ill. Adm. Code 230.400) Subsections 230.400(a)(1)(A) and (B) state,
A) Does a situation exist that reasonably constitutes a threat to the public interest, safety or welfare and that requires adoption of the rule upon fewer days' notice than is required by Section 5-40 of the Act?
B) Has the agency stated clearly and completely, in writing, its reasons for finding that such a situation exists?"
"D) Is the emergency rule limited to those matters that are required to meet the emergency situation?
The Department has not articulated a "threat" to the public interest, safety or welfare that justifies the use of emergency rulemaking. The Department has just explained that they want to get the amended rules in place as quickly as they can.
II.The Department lacks the statutory authority to arbitrarily reverse a valid existing rule by emergency rulemaking.
A portion of the emergency rulemaking consists of a reversal of the Department's current rule at Section 130.107(c)(1) that food delivery services that are marketplace facilitators are not required to collect and remit the special Metropolitan Pier and Exposition Authority ("MPEA") sales tax imposed on businesses selling food, alcoholic beverages and soft drinks within the boundaries of the Metropolitan Pier and Exposition Authority. The emergency rule provides that immediately upon adoption of the emergency rule, these companies are required to collect and remit the MPEA sales tax to the Department of Revenue. (Under the current rule, it appears the restaurants have been responsible for charging and remitting that tax.)
The emergency rule also mandates that food delivery companies are required to collect the Chicago Soft Drink Tax, again reversing the provisions of the existing rule.
The existing rule was validly adopted pursuant to the rulemaking requirements of the Illinois Administrative Procedure Act (“IAPA”), including the review of the rulemaking by JCAR. JCAR conducts a substantive review of all proposed rules. Section 220.900(a) of the JCAR rules governing its review of proposed rulemaking includes the following:
a) The Joint Committee will consider these criteria in its review of proposed rulemakings:
1) Substantive
A) Does the agency have legal authority for the proposed rulemaking?
B) Does the proposed rulemaking comply with the statutory authority and legislative intent on which it is based or that it is implementing or interpreting?
C) Does the proposed rulemaking comply with State and federal constitutions, State and federal law, federal rules and regulations, and case law?
(1 Ill. Adm. Code 220.900)
JCAR reviewed Part 131 of the Department’s rules and certified no objection to Part 131. This certification of no objection to the Department’s rulemaking makes clear that JCAR concluded that the rules in Part 131 were within the Department’s statutory authority.
The emergency rulemaking purports to reverse a portion of the Department’s validly adopted rules to require food service delivery companies that are marketplace facilitators to collect the MPEA tax and the Chicago Soft Drink Tax. The Department has not explained the authority for the reversal of the validly adopted existing rule.
The Department lacks authority to summarily reverse a validly adopted administrative rule because it has changed its mind.
III.The Department lacks the statutory authority to mandate “origin sourcing” in the case of the MPEA tax
The Department's emergency rule mandating that food delivery services collect and remit the MPEA sales tax also mandates that the tax must be collected when the restaurant from which the food is purchased is within the MPEA boundaries. In other words, “origin sourcing” is required for this locally-imposed sales tax. This rule mandating origin sourcing of the MPEA tax is contrary to Section 2-12 of the Retailers’ Occupation Tax Act as incorporated into Section 2-13 of the Metropolitan Pier and Exposition Authority Act.
In addition to being contrary to law, mandating origin sourcing for the MPEA tax is contrary to any other locally-imposed sales taxes imposed on the transaction which are imposed on a destination basis, including the Chicago Soft Drink Tax.
Food delivery services that are considered marketplace facilitators meeting a tax remittance threshold in Section 131.135 of this Part are required to remit the 1% MPEA ROT only if the sale to a purchaser is made by a restaurant located within the MPEA district. The State ROT and local sales taxes (such as the Home Rule Municipal ROT or the Home Rule County or Regional Transportation Authority ROT) are required to be remitted, however, at the rate in effect at the location to which the food or beverages are shipped or delivered or at which possession is taken by the purchaser (destination rate).
The Department also gives the following example:
EXAMPLE 2: Greet N Eat is a food delivery service that is considered a marketplace facilitator required to remit tax under this Part. A customer in Oak Park orders a pizza and a liter bottle of a soft drink over Greet N Eat's application from a pizzeria in Chicago that is subject to the MPEA ROT. Greet N Eat incurs the State ROT tax (6.25%), the Home Rule Municipal ROT in Oak Park, the County Home Rule ROT for Cook County, and the RTA ROT for Cook County on this transaction. It also incurs the 1% MPEA ROT, since the pizzeria is subject to the MPEA ROT. It does not, however, incur the Chicago Soft Drink Tax, because the soft drink is not delivered to a purchaser within the City of Chicago.
According to the emergency rule, food delivery services that are marketplace facilitators are now required to collect the MPEA Tax and the Chicago Soft Drink Tax, when applicable. But, as noted above, in the case of the MPEA tax "when applicable" is determined using origin sourcing, while in the case of the Chicago Soft Drink Tax "when applicable" is determined using destination sourcing - as is the case with any of the other locally-imposed sales taxes administered and collected by the Illinois Department of Revenue.
Section 2-12(7) of the Retailers’ Occupation Tax Act provides:
Beginning January 1, 2021, a marketplace facilitator facilitating sales of tangible personal property that meet or exceed one of the thresholds established in paragraph (1) or (2) of subsection (c) of Section 2 of this Act is deemed to be engaged in the business of selling at the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser when the sale is made by a marketplace seller on the marketplace facilitator's marketplace. 35 ILCS 120/2-12 Location where retailer is deemed to be engaged in the business of selling.
(35 ILCS 120/2-12)
The MPEA tax is imposed under the authority of Section 13 of the Metropolitan Pier and Exposition Authority Act. Section 13 provides that the tax is administered and collected by the Illinois Department of Revenue and incorporates the following sections of the Retailers’ Occupation Tax:
The tax imposed under this subsection and all civil penalties that may be assessed as an incident to that tax shall be collected and enforced by the Illinois Department of Revenue. The Department shall have full power to administer and enforce this subsection, to collect all taxes and penalties so collected in the manner provided in this subsection, and to determine all rights to credit memoranda arising on account of the erroneous payment of tax or penalty under this subsection. In the administration of and compliance with this subsection, the Department and persons who are subject to this subsection shall have the same rights, remedies, privileges, immunities, powers, and duties, shall be subject to the same conditions, restrictions, limitations, penalties, exclusions, exemptions, and definitions of terms, and shall employ the same modes of procedure applicable to this Retailers' Occupation Tax as are prescribed in Sections 1, 2 through 2-65 (in respect to all provisions of those Sections other than the State rate of taxes), 2c, 2h, 2i, 3 (except as to the disposition of taxes and penalties collected), 4, 5, 5a, 5b, 5c, 5d, 5e, 5f, 5g, 5i, 5j, 6, 6a, 6b, 6c, 7, 8, 9, 10, 11, 12, 13, and, until January 1, 1994, 13.5 of the Retailers' Occupation Tax Act, and, on and after January 1, 1994, all applicable provisions of the Uniform Penalty and Interest Act that are not inconsistent with this Act, as fully as if provisions contained in those Sections of the Retailers' Occupation Tax Act were set forth in this subsection. (Emphasis added)
(70 ILCS 210/13)
As highlighted above, ROT Section 2-12, which as quoted above, requires destination sourcing in the case of sales by marketplace facilitators is incorporated by reference into the Metropolitan Pier and Exposition Authority Act. Therefore, the Department has no statutory authority to adopt an emergency rule that mandates “origin sourcing” for the MPEA tax.
To add to the potential confusion for food delivery services, this emergency rulemaking overrules a Compliance Alert issued by the Department in February that specifically instructed that the MPEA tax was to be collected and remitted by restaurants within the MPEA tax boundaries, even when food delivery services that are marketplace facilitators were utilized.
IV.The use of emergency rulemaking required affected retailers to make immediate changes to their tax systems without sufficient notice of the changes.
It should be noted that the emergency rules became effective when filed with the Secretary of State - July 13, 2021. The rules were not published in the Illinois Register until July 30. The Department did "publish" the rules on their website on or about July 13. However, restaurants and food delivery services within the MPEA boundaries had little time to adjust their practices to conform to the Department's changes. In addition, as I note above, there is no statutory authority for the Department mandating "origin sourcing" for the MPEA tax.
V. The emergency rulemaking contains amendments included in legislation that has not been signed by the Governor and enacted into law.
The emergency amendment makes changes that would be required by SB 2066. The problem is that SB 2066, as of August 10, has not been signed by the Governor. I suspect it will be signed by the Governor at some point, but there is certainly no "emergency" in the case of changes to the rules mandated by SB 2066 at this point.
VI. The emergency rulemaking is not limited to those matters that are required to meet an emergency situation
Even assuming for the sake of argument that the Department can justify the use of emergency rulemaking in this instance for a portion of the rulemaking, the emergency rulemaking also makes a series of changes that are not required by any threat to the public interest safety or welfare. Section 230.400 of the JCAR rules explaining the criteria for review of emergency rules and rulemaking provides at subsection (a)(1)(d), “Is the emergency rule limited to those matters that are required to meet the emergency situation.”
Among other things, the Department explains that "Section 131.120 is being amended to specify that, for remote retailers, occasional sales are excluded from consideration when calculating tax remittance thresholds. However, Section 131.145, governing marketplace facilitators, is amended to provide that occasional sales must be included when calculating tax remittance thresholds." The reference to Section 131.145 appears to be a typo. It is actually, new Section 131.140(b)(3) that states that "occasional sales are included when calculating whether a marketplace facilitator is a "retailer engaged in the occupation of selling at retail in Illinois" for purposes of the Retailers' Occupation Tax Act. I'm a bit perplexed as to the inconsistent treatment of occasional sales in determining tax remittance thresholds. In any event, this change, or clarification, of Department policy isn't an emergency under the IAPA.
An amendment to Section 131.130(c) also appears to be a reversal of a current rule via emergency rulemaking. Currently, this rule provides that sales of tangible personal property that are required to be titled or registered with an agency of the State of Illinois - think motor vehicles, boats, aircraft and trailers - are not subject to the Leveling the Playing Field rules contained in Part 131. The emergency rulemaking eliminates the word "not" so such sales would now be subject to Part 131. Again, that may or may not be the better answer, but this shouldn't be done via an emergency rule without an explanation of the rationale for the change and the opportunity for public notice and comment.
