Oops, They Did It Again

Legislation making Illinois sales taxation more complex and unlevel than before passes during the fall veto session.

During the last week of the recently concluded fall veto session, the Illinois General passed additional sales tax legislation modifying and delaying until Jan. 1, 2021 the so-called Leveling the Playing Field for Illinois Retail Act (“the Act”). Unfortunately, the legislation does not correct the fundamental flaws of the Act, which was passed last spring and detailed in my fall column. In fact, it just modifies the tilt of the playing field—and not in a good way.

As you might recall, the Act (Public Act 101-0031) modified the Illinois Retailers’ Occupation Tax and the Use Tax in the guise of addressing the tax rate differential between out-of-state sellers subject to use tax and brick-and-mortar sellers subject to state and local retailers’ occupation taxes (ROT). The Act attempted to accomplish this goal by, among other things, establishing a category of out-of-state sellers known as “remote retailers” and converting these sellers from use tax collectors into retailers subject to state and local ROT. The conversion occurs even though such sellers have no brick-and-mortar locations or physical presence in Illinois.

The Act was originally passed in opposition of the Illinois Department of Revenue (IDOR). IDOR correctly pointed out numerous problems with the Act that would make it impossible to administer, including the fact that the initial time frame for implementation (July 1, 2020) was too short, and the Act is fatally flawed as a constitutional matter.

IDOR has since negotiated modifying the Act with its architects—the Illinois Retail Merchants Association and Illinois Municipal League. The result was the passage of Senate Bill 119 during the fall veto session.

SB 119 contains amendments suggested by IDOR to address technical concerns related to administering the sales tax changes in SB 690, like delaying the effective date of the of the Act until Jan. 1, 2021 and adding back some Use Tax nexus language that will allow Use Tax collection if the Act is deemed unconstitutional.

Additional amendments account for changes proposed by the Illinois Retail Merchants Association and the Illinois Municipal League with the avowed goal of further leveling the playing field between online sellers and brick-and-mortar sellers. However, these changes do not level the playing field or eliminate the Act’s constitutional infirmities. Indeed, it is arguable that the Act is now perhaps more flawed. Unfortunately, IDOR was unsuccessful in convincing the General Assembly of this.

Consider this: SB 119 grants operators of marketplace platforms who are also sellers, and their related companies, a significant sales tax rate advantage over unrelated Illinois sellers on marketplace platforms. Effective Jan. 1, 2021, sellers on marketplace platforms are subject to state and local ROT based on destination sourcing, unless the seller is also the marketplace operator or a related company.

The concept of “related company” and “unrelated company” is introduced in SB 119, but there isn’t a definition for “related company.” There is a definition for “affiliate” that was included in the original version of the Act, which has a 5 percent ownership requirement. The definitions of marketplace facilitator and marketplace seller use the term “unrelated third party,” a different and undefined term from “affiliate.” As a matter of statutory construction, it appears clear that a “related company” was meant by the General Assembly to be different than an affiliate. However, without a definition, “related company” could include any company to which the marketplace operator is related in any way. Thus, Illinois sales tax law could encourage companies to become “related” to owners of marketplace platforms to avoid becoming subject to ROT and the destination sourcing requirement for marketplace sellers.

So, under SB 119, here is how Illinois consumers buying products on a marketplace platform will be treated:

Let’s revisit my fall column example where I decided to buy a printer—this time from a marketplace seller like Walmart or Amazon.

When the sale is not made by the marketplace operator or one of its “related companies,” the sale is by a marketplace seller. In such instances, the transaction will be subject to ROT without regard to whether the marketplace seller has a brick-and-mortar location in Illinois. The local ROT rate (state plus local sales tax) will be based on my delivery location (i.e., 10.25 percent in Chicago and 9.75 percent in Springfield).

When the sale is by the marketplace operator or any of its “related companies,” the sale is not a sale by a marketplace seller. Therefore, if the printer is delivered to me from a location in Illinois (shipped from either the related company’s Illinois location or from an Illinois-based fulfillment center) the local ROT rate is based on the origin of the sale.

When the printer is purchased from the marketplace operator or one of its Illinois “related companies” and is shipped to me from out of state, only Illinois Use Tax at the rate of 6.25 percent is due because the sale will not be deemed made by a marketplace seller subject to ROT.

In summary, the sales tax rate charged to me when identical products are purchased through a marketplace platform will vary based on who makes the sale and, in the case of marketplace operators and their related companies, whether the sale is fulfilled from an Illinois-based or an out-of-state warehouse. This means marketplace operators and their related companies that fulfill sales from out-of-state inventories will have a price advantage over other sellers on their platforms.

Further, SB 119 also modified the tax treatment of brick-and-mortar retailers who also sell through marketplaces operated by unrelated third parties. According to SB 690, an Illinois brick-and-mortar retailer that sells items through its own website or through a third-party marketplace is responsible for charging the state and local sales tax rate in effect at its selling location (generally the location of its brick-and-mortar location, or origin sourcing). Thanks to SB 119, effective Jan. 1, 2021, such sales remain subject to ROT, but the tax rate is no longer based on the seller’s selling location but the buyer’s location.

As you can see, the more complex Illinois sales taxation becomes, the more unlevel the playing field grows.