Absent some important tax developments, there will be no newsletter next week. I'm off on a camping trip to Wisconsin.
Illinois General Assembly
The House and Senate have adjourned until the fall veto session. The first day of the veto session is scheduled for October 28.
This week I continue my review of newly-passed legislation by diving into the sales and use tax changes in SB 690.
- contains the "Leveling the Playing Field for Illinois Retail Act," an initiative of the Illinois Retail Merchants Association and the Illinois Municipal League. There are also significant changes to the Retailers' Occupation Tax and Use Tax acts in SB 690 to implement this Act.
The ostensible purposes of the Act and the changes to the ROT and UT are to require remote sellers to charge the same rates of tax as bricks and mortar merchants, thus taking away a price advantage for online sellers.
In order to "level the playing field," the legislation was designed to turn remote sellers who are currently Use Tax collectors - charging the 6.25% state use tax - into retailers who are subject to the state and locally-imposed retailers' occupation taxes. These "remote retailers" will be required to determine the actual tax rate to charge their Illinois customers by using destination sourcing - charging the combined state and local retailers' occupation tax rate in effect at the location of the purchaser.
However, because of the way the term "remote retailer" has been defined, many companies without bricks and mortar retail locations in Illinois, that would commonly be thought of as "remote retailers," are not "remote retailers" under definition in this legislation and, as I read this legislation, will continue to collect use tax from their customers at the 6.25% rate. As a result, this legislation will not "level the playing field." I'll get into to the details to explain my conclusion.
The statutory definition of the term "remote retailer" reads as follows: "means a retailer located outside of this State that does not maintain within this State, directly or by a subsidiary, an office, distribution house, sales house, warehouse or other place of business, or any agent or other representative operating within this State under the authority of the retailer or its subsidiary, irrespective of whether such place of business or agent is located here permanently or temporarily or whether such retailer or subsidiary is licensed to do business in this State." (See Page 126 of the enrolled version of SB 690 linked above)
According to the definition, the only remote sellers that are "remote retailers" are sellers that have absolutely no connection with the State of Illinois. It appears that remote sellers who have some sort of Illinois presence, but who do not sell from an Illinois location, will continue to be required to collect Use Tax on their out-of-state sales to Illinois customers.
I would venture a guess that most large internet sellers have some sort of physical connection with the State of Illinois that would allow them to fall outside the definition of "remote retailer." For example, any out-of-state seller that has a warehouse in Illinois is clearly not a "remote retailer" under the statutory definition. Such remote sellers would be required to charge the ROT rate in effect at their warehouse if the sale is fulfilled from a stock of goods maintained at that warehouse (under existing case law and regulations), but all other sales fulfilled from an out-of-state location would remain subject to the 6.25% Use Tax.
An additional complication will occur in the case of a remote seller that is not a "remote retailer," that is a marketplace facilitator that hosts marketplace sellers that are "remote retailers." The remote seller/marketplace facilitator that is not a "remote retailer" will charge and collect the 6.25% Use tax on sales fulfilled from out-of-state warehouses on its own sales. The marketplace facilitator's marketplace sellers who are "remote retailers" will be required to charge state and locally-imposed retailers' occupation taxes based on the tax rate in effect at the location of their purchasers - destination sourcing. A marketplace seller who is not a "remote retailer," but rather is a Illinois retailer who also acts as a marketplace seller (an Illinois retailer who makes internet sales to Illinois customers via the internet platform of the marketplace facilitator), will charge state and local retailers' occupation tax, but the rate rate charged will be the rate in effect at the Illinois retailer/marketplace seller's selling location - origin sourcing.
An Illinois retailer with a bricks and mortar location that also makes internet sales through its own internet platform will be required to continue to charge state and local retailers' occupation tax, based on the location of its bricks and mortar location.
By virtue of the definition of "remote retailer," it would seem to be a simple matter for any seller that is a "remote retailer" to avoid remote retailer status and continue to charge and collect Use Tax, as opposed to being required to be subject to the retailers' occupation tax and be responsible for the ROT rate in effect at the location of the purchaser. The retailer could simply send a representative into the state, or rent a small office, etc. and, as a result, avoid the complication of having to charge and collect retailers' occupation tax based on the location of their purchasers.
This legislation also seems to reopen the door to the practice of establishing presence as a "retailer" in low-sales tax jurisdictions in order to capture a lower combined state and local retailers' occupation tax rate for sales and to keep origin-based sourcing.
Contrary to the assertions of the proponents, I don't see this new legislation as "leveling the playing field." It just adds another level of complexity to an already ridiculously complicated Illinois system of sales taxation.
This legislation does seem like a full employment act for sales tax lawyers and accountants. This legislation will also be good for certified service providers because it gives them a market for their services Illinois to "remote retailers." The legislation will cause implementation headaches for the Department of Revenue. Let's review some of the specifics of the new Act.
The new Act begins with a series of legislative findings. Among the findings, ". . . certified service providers and certified automated systems simplify use and occupation tax compliance for out-of-state sellers, which fosters higher levels of accurate tax collection and remittance and generates administrative savings and new marginal tax revenue for both State and local taxing jurisdictions."
The Act sets up a mechanism for certification of certified service providers and requires the Department of Revenue to provide certification standards by December 31, 2019.
Section 5-20 of the Act requires the establishment of databases by the Department of Revenue:
(1) an electronic, downloadable database of defined product categories that identifies the taxability of each category,
(2) an electronic downloadable database of all retailers' occupation tax rates for the jurisdictions in the state that levy a retailers' occupation tax, and
(3) provide and maintain an electronic, downloadable data base that assigns delivery addresses in this State to the applicable taxing jurisdictions.
Section 5-25 provides that no later than July 1, 2020, the Department of Revenue is required to provide minimum standards that companies wishing to be designated as a certified service provider must meet, as well as minimum standards that certified automated systems must meet. A "certified automated system" is "an automated software system that is certified by the State as meeting all performance and tax calculation standards required by Department rules."
Section 5-30 provides that beginning January 1, 2020, remote retailers using certified providers or certified automated systems providers are relieved from liability to the State for having charged and collected the incorrect amount of use or occupation tax.
The new sales tax legislation in SB 690 is complicated on its own, but it also has to be reconciled with the new sales tax provisions of SB 689 that establish new nexus standards for marketplace sellers and new tax collection obligations for marketplace facilitators on behalf of their marketplace sellers. I briefly discussed the applicable provisions of SB 689 in last week's newsletter.
In this overview, I haven't attempted to dive into the potential legal and constitutional issues that will likely result from converting remote sellers into retailers responsible for charging retailers' occupation tax based on destination sourcing, while continuing to require bricks and mortar sellers to maintain origin sourcing for their internet sales to Illinois residents.
One new case may be of interest:
The Department of Revenue audited Microsoft for the tax years ending June 30, 2015 and June 30, 2016. Microsoft received a Notice of Audit Results advising that Microsoft was entitled to a refund for the tax year ending June 30, 2016 and advising Microsoft of the additional tax due for the tax year ending June 30, 2015. Six days later, Microsoft received a Notice of Deficiency. According to the petition, Microsoft never received a Notice of Proposed Deficiency.
Microsoft is challenging the sufficiency of the Notice of Deficiency, contending that it violates the Taxpayer Bill of Rights.
Microsoft also protests the Department's modification of Microsoft's sales factor by removing certain receipts and recomputing the sales factor denominator.