Illinois’ Incomprehensible Sales Tax Law
A post-Wayfair fix for leveling the playing field between online and brick-and-mortar retailers has made Illinois sales tax more unbalanced.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
During the spring legislative session, the Illinois General Assembly accomplished the
seemingly impossible, it passed substantial legislation—SB 689 (P.A. 101-0009) and SB 690
(P.A. 101-0031)—that makes Illinois sales tax law even more confusing and incomprehensible.
HOW DID THIS HAPPEN?
Here’s some background and context to help us decode this. The Retailers’ Occupation
Tax (ROT) is imposed on Illinois sellers of tangible personal property. The state tax rate is
6.25 percent, and the law authorizes additional locally imposed ROTs. Currently, the
applicable tax rate is the combination of state and locally imposed taxes in effect at the
selling location—origin sourcing. A Use Tax (UT) is imposed on purchasers of tangible
personal property at a rate of 6.25 percent. The UT is either paid by a purchaser to a retailer,
or if a purchase is made from a retailer who is not required to collect tax (out-of-state
retailers without nexus), the purchaser is required to pay the tax directly to the Illinois
Department of Revenue (IDOR). There are no locally imposed UTs with the exception of the
City of Chicago use tax.
Last year, in Wayfair v. South Dakota
, the U.S. Supreme Court changed the rules on sales
tax nexus. Prior to Wayfair
, the U.S. Supreme Court ruled in Quill v. North Dakota
retailer was required to have a physical presence in a state for that state to require the
retailer to collect that state’s sales taxes from customers. In its Wayfair
decision, the U.S.
Supreme Court eliminated the physical presence requirement of Quill
and upheld a South
Dakota law establishing nexus over retailers with certain levels of economic presence in
the form of sales in the state, even absent a physical presence.
Anticipating elimination of the physical nexus requirement, Illinois enacted legislation
effective Oct. 1, 2018 mirroring South Dakota’s nexus standards—any out-of-state seller with
more than $100,000 in sales or more than 200 separate sales transactions into the state
over the course of a year has nexus with Illinois and is required to charge the state’s 6.25
A LEVEL PLAYING FIELD?
One of the arguments for eliminating the Quill
physical presence nexus requirement was
that it would “level the playing field” between brick-and-mortar retailers and their online
competitors. Prior to Wayfair
, online retailers without physical presence in Illinois that were
not required to charge Illinois sales tax to their Illinois customers had a significant price
advantage over brick-and-mortar retailers.
However, Illinois’ move to eliminate the physical presence requirement and establish an
economic nexus test lessened, but did not eliminate, the pricing advantage enjoyed by online
retailers. For example, if an online retailer meets the economic nexus test under the 2018
Illinois law, that retailer is now required to charge the 6.25 percent UT on sales into Illinois.
The same sale at a local brick-and-mortar retailer would have to
charge the 6.25 percent UT plus all locally imposed taxes, or 9.75
percent currently in Springfield. What’s more, online purchases
from small sellers—those below the $100,000 or 200 transactions
thresholds—remained sales-tax free at the time of the sale.
Purchasers remain required to self-assess and pay the UT but as a
practical matter most individuals do not comply with this requirement.
IDOR didn’t wait long to address the lack of tax on sales by certain
small retailers. During the spring 2019 legislative session, IDOR
proposed legislation as a portion of SB 689 to establish nexus
at the marketplace facilitator level (e.g. Amazon, eBay, or Etsy)
rather than based on the sales of each individual seller utilizing
such online marketplaces. SB 689 provides that if the aggregate
sales on the marketplace facilitator’s platform exceed the statutory
nexus threshold—$100,000 in sales or 200 transactions—all sellers
on that marketplace platform are required to charge and collect
Illinois sales tax.
While SB 689’s changes expand Illinois UT collections on sales,
they fail to completely level the playing field between online and
brick-and-mortar retailers. The same item that I buy from a small
online marketplace seller will be subject to only a 6.25 percent UT
versus my local 9.75 percent sales tax rate.
Enter SB 690 containing the Level the Playing Field for Illinois Retail
Act. This legislation as enacted over the opposition of IDOR is flawed,
does not “level the playing field,” is inconsistent with SB 689, is likely
not administrable by IDOR, and is likely unconstitutional.
SB 690 provides for three categories of retailers: (1) “Remote
retailers” who have no physical presence but have economic nexus
under the post-Wayfair
Illinois nexus standard; (2) out-of-state
retailers who do not have brick-and-mortar locations in Illinois but
have some sort of pre-Wayfair
“physical presence” nexus within the
state; and (3) retailers with a brick-and-mortar presence in Illinois
who may also have an online presence.
Under SB 690, remote retailers are subject to state and local ROTs
on their sales to Illinois customers. This is a bizarre concept since
these sellers are, by definition, not located in Illinois and have no
Illinois brick-and-mortar presence—the fundamental requirement of
being subject to the ROT prior to this legislation. In addition, remote
retailers are required to determine the tax rate on sales to their
Illinois customers based on the combined state and local tax rate
at their customers’ locations, or more simply, destination sourcing.
The use of destination sourcing is contrary to the treatment of brick-and-
mortar sellers who are required to use origin-based
sourcing—the combined state and local tax rate in effect at the
location of the sale.
The second category of sellers—out-of-state sellers without Illinois
brick-and-mortar locations who have traditional physical presence
nexus—continue to charge and collect the state’s 6.25 percent UT
on sales to their Illinois customers, except when the sales are
fulfilled from inventory in a warehouse in Illinois, in which case they
charge the combined state and local ROT rate in effect at the
location of the warehouse. For example, if I buy an item from
Amazon and it ships from their Kenosha, Wis. warehouse, I am
charged 6.25 percent, but if the same item ships from their Joliet,
Ill. warehouse, I am charged the tax rate in effect in Joliet. This tax
treatment is the same as current law.
The third category of sellers—retailers with a brick-and-mortar
presence in Illinois who may also have an online presence—charge
the combined state and local tax rate in effect at their brick-and-mortar
location. They use origin-based sourcing and continue
to do so if selling online on their own platform or through a
Combining SB 689 and SB 690 results in several different tax
treatments of a sale. Let’s say I decide to purchase a new printer
for my office:
1. If the purchase is made from an online seller without a physical
connection to Illinois through a marketplace like Amazon, I am
charged Illinois’ 6.25 percent UT.
2. If the purchase is made from an online seller without a physical
connection to Illinois that also doesn’t meet the $100,000 or 200
transactions nexus, I am not charged any Illinois sales tax.
3. If the purchase is made from an online seller without a physical
connection to Illinois but exceeds the $100,000 or 200
transactions nexus test, and I have the printer delivered to my
home, I am charged the ROT of 7.25 percent in effect at my
home in suburban Springfield. If the same purchase is delivered
to my Springfield office, the tax rate increases to 9.75 percent.
4. If the purchase is made online from a retailer with a physical
connection to Illinois but who doesn’t have a brick-and-mortar
store and doesn’t ship the printer from an Illinois warehouse, I
am charged Illinois’ 6.25 percent UT.
5. If the purchase is made online from the same retailer as in
example 4, but in this instance the printer is shipped from a
warehouse in Joliet, I am charged the 8.75 percent ROT in
effect in Joliet.
6. If the purchase is made over the counter at a retailer in
Springfield, I am charged Springfield’s 9.75 percent tax rate.
7. If the purchase is made online from a brick-and-mortar retailer
located in the City of Chicago, I am charged Chicago’s 10.25
percent tax rate.
That was a long-winded way of saying the enacted legislation does
little to level the playing field. It just makes Illinois’ historically
convoluted and confusing tax system even more convoluted and
confusing. It will also encourage strategic tax planning by both
retailers and consumers. Here are two obvious examples:
First, any remote retailer would be wise to establish some type of
physical connection to Illinois to eliminate its remote retailer status
and convert its tax collection status from ROT to UT. According to
the nexus definition in the legislation, remote retailer status can be
changed by simply sending an agent into Illinois periodically, thus
establishing physical presence for sales tax purposes.
Second, purchasers located in high sales tax rate jurisdictions will
be wise to not make purchases from remote retailers to minimize
the amount of taxes due on purchases.
Finally, I haven’t even attempted to address what appear to be
constitutional problems with the legislation. The uniformity clause
in Article IX, Section 2 of the Illinois Constitution provides that “in
any law classifying the subject or objects of non-property taxes or
fees, the classes shall be reasonable and the subjects and objects
within each class shall be taxed uniformly.” I don’t see how this
legislation withstands a constitutional challenge.
I’ve heard there will be an attempt to “fix” this legislation in the fall
veto session. All I know at this juncture is that there is no easy fix.