Another Attempt at ‘Leveling’ Illinois’ Sales Tax

In the wake of the U.S. Supreme Court’s 2019 decision in South Dakota v. Wayfair, the Illinois General Assembly passed the Leveling the Playing Field for Illinois Retail Act, which was enacted as Public Act (P.A.) 101-0031. The legislation was designed to “level the playing field” between brick-and-mortar retailers and online retailers, particularly out-of-state retailers.

Following its enactment, litigation arose to challenge the law’s constitutionality. As a result, the Illinois Department of Revenue (IDOR) sought to correct and fix one of the issues being challenged, which was enacted as P.A. 103-983 during the spring 2024 legislative session and will become effective Jan. 1, 2025.

While I have my own opinions as to the overall constitutionality of the Leveling the Playing Field law, I’ll save that discussion for another day. For now, I’ll decode whether P.A. 103-983 may be successful at mitigating some of the original law’s challenges—hint, don’t hold your breath.

SOME HISTORY

Let’s first look at some history. Prior to the effective date of P.A. 103-983, there are two types of out-of-state sellers with Illinois nexus, both with differing sales tax treatments. For ease, I’ll be referring to these groups as “physical presence” and “Wayfair nexus” sellers.

• Physical Presence Sellers: These out-of-state sellers make sales from outside of Illinois but have some physical presence in Illinois. For example, these sellers may send salespeople into Illinois, or have a location in Illinois, but do their “selling” from outside of Illinois.
• Wayfair Nexus Sellers: These out-of-state sellers don’t have a physical presence in Illinois. They have economic nexus by virtue of making sales that cumulatively exceed $100,000 or 200 or more sales transactions in Illinois on an annual basis. The Wayfair decision ended the requirement of a physical presence for sales tax nexus, ruling that economic presence in a state by virtue of sales dollar volume or the number of sales transactions in a state could be sufficient to establish sales tax nexus with a state. (IDOR has detailed rules as to how these calculations are made.)

Following the Wayfair decision, Illinois and other states that have a sales tax amended their laws to establish requirements for nexus based on an economic presence. Illinois’ Leveling the Playing Field law provides that an out-of-state seller with Wayfair nexus is required to charge tax to its Illinois customers. Specifically, the law provides that an out-of-state seller must charge the combined state and local Retailers’ Occupation Taxes (ROTs) in effect at the purchaser’s location.

For example, if I buy running shoes on a website of a seller located in San Diego who has Wayfair nexus with Illinois, and my shoes are delivered to my house in Westmont, Ill., I’ll be charged tax at the combined state and local tax rate in effect in Westmont. Similarly, if I decide it’s more convenient to have the shoes delivered to my office in Chicago, I’ll be charged tax at the combined state and local ROT in effect in Chicago.

However, the sales tax calculation is handled differently for an out-of-state seller that has a physical presence in Illinois. For example, if I buy the same pair of running shoes from a company that has a retail location in Illinois but makes their internet sales from San Diego and ships the shoes to me from a warehouse outside of Illinois, there’s a different tax result. In this instance, under the law prior to the effective date of P.A. 103-983, I’ll only be charged the 6.25% Illinois Use Tax, not the combined state and local ROT rate in effect at my location.

A FLAW IN THE EXISTING LEVELING THE PLAYING FIELD LAW

The amount of tax charged for identical items varies by whether an out-of-state seller has a physical presence in Illinois. Article IX, Section 2 of the Illinois Constitution is known as the Uniformity Clause. It provides, “[I]n any law classifying the subjects 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. Exemptions, deductions, credits, refunds, and other allowances shall be reasonable.”

In my opinion, it’s difficult to argue that there’s a reasonable basis under the Uniformity Clause of the Illinois Constitution for taxing out-of-state sellers differently depending on whether they have physical presence or Wayfair nexus. Apparently, IDOR also saw this as a problem because P.A. 103-983 eliminated this disparity. (I’ve heard that IDOR recently settled at least one case at the Tax Tribunal that raised this constitutional challenge.)

THE P.A. 103-983 ‘FIX’

P.A. 103-983 eliminates the different tax treatment of sellers with physical presence or Wayfair nexus. Once in effect, retailers with physical presence nexus making sales and shipping the product from out of state will be required to charge the combined state and local ROT rate in effect at the purchaser’s location.

PROBLEMS REMAIN WITH THE LEVELING PLAYING FIELD LAW

So, has a second attempt to level the sales tax field worked? Overall, I’d say no. Despite the fix enacted by P.A. 103-983, there are still problems that exist because of the differing sourcing requirements for Illinois brick-and-mortar sellers and out-of-state sellers, among other reasons. Brick-and-mortar sellers are required to use “origin” sourcing—the combined state and local tax rate—but that’s a discussion for another day.