June 7, 2019
By: David Hughes | [email protected]mblaw.com
As you may be aware, the Illinois legislature recently completed its 2019 legislative session. This session was particularly productive from a tax legislation perspective and we would like to update you on the key state and local tax changes that may affect you or your business.
Please do not hesitate to reach out to any member of the HMB SALT team if you have questions regarding any of these updates.
Retailers Occupation Tax and Use Tax Changes
1. New Rules for Marketplace Sellers and Facilitators
SB 689 adds new rules for marketplace sellers and facilitators that take effect on January 1, 2020. The new rules provide that a “marketplace facilitator” with gross receipts of $100,000 or more from Illinois sales or 200 or more separate transactions for the sale of tangible personal property in Illinois will be the deemed retailer for sales made through the facilitator’s marketplace. The facilitator will be responsible for collecting and remitting all applicable taxes. When these rules initially take effect in January 2020, “all applicable taxes” will mean Illinois use tax plus any taxes specific to the item sold. Beginning July 1, 2020, marketplace facilitators will be required to remit state and local ROT on behalf of their sellers.
Marketplace facilitator is defined broadly to include any person who facilitates sales of tangible personal property through a physical or electronic marketplace. A marketplace facilitator must keep records for sales through its marketplaces and certify to its sellers that it has assumed the responsibilities of a retailer with respect to sales made through its marketplace.
Note that sales made by a marketplace seller through a marketplace are not counted when determining whether the seller has economic nexus with Illinois.
2. New “Leveling the Playing Field for Illinois Retail Act”
SB 690 introduces the Leveling the Playing Field for Illinois Retail Act. This Act has three effects. First, the Department of Revenue is required to establish taxability databases. Second, certified service providers are authorized to perform use and occupation tax functions on behalf of remote retailers. Third, remote retailers are permitted to use certified automated systems to collect and remit state and local use and occupation taxes.
The Act provides that the Department has until July 1, 2020 to provide taxability databases. These databases must (1) be downloadable; (2) contain defined product categories that identify the taxability of each category; (3) contain all applicable ROT rates for all jurisdictions in the state; and (4) assign delivery addresses in Illinois to the applicable taxing jurisdictions. The accuracy of ROT rates and delivery addresses are subject to annual verification by the local taxing jurisdictions.
The Department has until December 31, 2019 to establish standards for certifying service providers and automated systems. Certified service providers will act pursuant to a contract between the State and the provider. The Department will provide uniform minimum standards for companies and automated systems that wish to become certified no later than July 1, 2020.
Certified service providers and operators of certified automated systems will receive 1.75 percent of the tax dollars collected and remitted to the state. Remote retailers using a certified service provider may not claim the vendor’s discount against occupation taxes.
Effective January 1, 2020, remote retailers that use certified service providers or certified automated systems are relieved of liability for charging and collecting incorrect amounts of tax only to the extent that the provider or system relied on erroneous data provided by the State.
Certified service providers and remote retailers using certified automated systems are also protected from class action suits arising from overpayment of ROT if the collector relied on information provided by the Department. However, customers are still entitled to seek refunds from remote retailers.
3. New Sales Tax Sourcing Rules for Remote Retailers
Beginning July 1, 2020, remote retailers that meet economic nexus thresholds ($100,000 in annual Illinois gross receipts or 200 separate sales) will be liable for all applicable state and local Retailer Occupation Tax (ROT) on all retail sales to Illinois purchasers. Previously remote retailers that did not maintain a place of business in Illinois were required to collect the state use tax at a rate of 6.25% on retail sales in Illinois.
Significantly, Illinois is changing from an origin-sourcing to a destination-sourcing rule for remote retailers that exceed the economic nexus threshold. Beginning July 1, 2020, retail sales made by these retailers will be deemed to be made at the Illinois location to which the tangible personal property sold is shipped, delivered, or at which the purchaser takes possession. As a result, remote sellers will not be required to pay state and local ROT taxes on delivery location in Illinois rather than merely the state use tax of 6.25%.
4. Revived and Expanded Manufacturing Machinery & Equipment Sales Tax Exemption
SB 689 improves on the former Manufacturing Production Credit regime by reviving benefits without the accompanying administrative burden. Effective July 1, 2019, production-related tangible personal property is added to the list of tangible personal property that is exempt from sales and use taxes. The definition of production related tangible personal property is also expanded to include “supplies and consumables used in a manufacturing facility including fuels, coolants, solvents, oils, lubricants, and adhesives, hand tools, protective apparel, and fire and safety equipment used or consumed within a manufacturing facility”. The bill provides that the Department shall adopt rules for administering this exemption, so more detailed regulations will be forthcoming.
5. Trade-in Credit for Certain Motor Vehicles Capped at $10,000
Except for certain purchases by motor vehicle lessors, Illinois’ current law generally excludes from gross receipts subject to ROT the entire value of tangible personal property that is traded in for property of like kind and character. SB 690 alters this rule for motor vehicles that are designed to carry 10 or fewer persons. Beginning January 1, 2020, the trade-in credit for such vehicles will be capped at $10,000. Any trade-in value in excess of that amount will be included in the selling price of the replacement property and subject to ROT or Use Tax, whichever is applicable.
Income Tax Changes
1. New FDII Add-back
The 2017 Tax Cuts and Jobs Act introduced a federal deduction of 37.5% of foreign derived intangible income (FDII). Illinois did not implement this deduction, creating discrepancies between taxable income for federal and Illinois purposes.
SB 689 remedies this discrepancy by requiring an add-back to a corporation’s taxable income in the amount of the FDII deduction permitted under IRC §250.
2. New Rules for Income Taxes on Non-Residents Working in Illinois
SB 1515 amends Illinois’ “base of operations” rule for tax years ending on or after December 31, 2020.
Previously, Illinois employed a “base of operations” rule to determine whether a non-resident was subject to Illinois income tax. If the non-resident’s base of operations was outside of Illinois, then Illinois considered all the non-resident’s income to have been earned outside of the state and would not tax compensation for services performed in Illinois.
The new amendment does away with the base of operations rule and instead provides that Illinois non-residents that spend more than 30 days working in Illinois during a year are now considered to earn compensation in Illinois and are subject to Illinois income tax. A day is worked “in Illinois” if the employee performs duties on behalf of his or her employer within Illinois for more time during the day than he or she spends performing duties outside of Illinois. Time spent traveling in Illinois constitutes performance of a duty for purposes of this calculation. Employees that perform services in Illinois in response to a disaster or emergency are not subject to the 30-day threshold.
Employers with nonresident employees that perform services in Illinois are required to either maintain records of the number of days each nonresident employee spent performing services in Illinois, or, at the beginning of each taxable year, obtain a written statement from each nonresident employee that contains the number of days reasonably expected to be spent performing services in Illinois during the taxable year.
Note that this new rule also affects the “foreign” tax credit available to Illinois residents. That credit no longer depends on whether an Illinois resident has a base of operations outside the state. Instead, the credit depends on whether the resident has compensation subject to tax in another state.
3. Possible New Graduated Income Tax Rates
Implementing graduated income tax rates was a foundational part of Governor Pritzker’s campaign platform, but the Illinois Constitution only permits a flat income tax. Establishing graduated income tax rates therefore requires two bills: a proposal to put amending the constitution on the election ballot and a new income tax statute containing the graduated rates.
SJRCA 0001 places on the November 2020 ballot a proposal to amend the Illinois Constitution to allow a graduated income tax. This proposed amendment requires the approval of either 60% of those voting on the amendment or a majority of those voting in the election.
SB 687 sets out the graduated income tax rates that will be imposed effective January 1, 2021 if the voters approve the proposed constitutional amendment. Should this happen, the corporate income tax rate will increase from 7 percent to 7.99 percent. Individual rates will be based on income and filing status and will range from 4.75% of net income to 7.99% of net income.
1. Franchise Tax to be Phased Out
SB 689 phases out the Franchise Tax from 2020 to 2024.
The phase-out operates by exempting increasing amounts of a taxpayer’s franchise tax liability as follows:
For Tax Years Beginning Amount of Tax Exempt
On/after January 1, 2020 and prior to January 1, 2021 $30
On/after January 1, 2021 and prior to January 1, 2022 $1,000
On/after January 1, 2022 and prior to January 1, 2023 $10,000
On/after January 1, 2023 and prior to January 1, 2024 $100,000
On/after January 1, 2024 No Franchise Tax due
1. New Department of Revenue Tax Amnesty
SB 689 introduces a new tax amnesty program that will cover all taxes administered by the Department of Revenue. The amnesty period runs from October 1, 2019 through and including November 15, 2019 and covers the taxable period after June 30, 2011 and prior to July 1, 2018. Participating taxpayers will have penalties and interest abated and the Department will not pursue any civil or criminal prosecution related to the taxes paid. Our interpretation of the new legislation is that, unlike prior amnesty programs, double interest and double penalties will not apply to taxpayers that decline to participate and are later assessed a deficiency.
Please note that the most recent amnesty program covered the taxable period after June 30, 2002 and prior to July 1, 2009. The upcoming amnesty period covers periods beginning July 1, 2011. This means that tax liabilities accruing between July 1, 2009 and June 30, 2011 are not covered by an amnesty program.
2. New Franchise Tax Amnesty
SB 689 also introduces a Franchise Tax amnesty program that covers any outstanding franchise tax liabilities or license fees. The amnesty period will run from October 1, 2019 through and including November 15, 2019. The program will cover all taxable periods after March 15, 2008 through and including June 30, 2019. Participating taxpayers have penalties and interest abated and the Secretary of State will not pursue any civil or criminal prosecution relating to the taxes and fees paid.
Note that the end date of the covered taxable period may be a trap for the unwary as businesses whose anniversary year is after June 30 should have already filed their reports.
Credits and Incentives
1. Expanded Blue Collar Jobs Act
SB 689 introduces four new or expanded income tax credits targeting different levels of investment. These credits are available beginning January 1, 2021. Each of the credits has a five-year carryforward and will flow through to the owners of pass-through entities.
The High Impact Business construction jobs credit is available to designated High-Impact Businesses that undertake and commission projects to build new structures, buildings or make improvements of any kind to real property. The credit is calculated as either (1) 50% of incremental income tax from High-Impact Business construction job employees or (2) 75% of incremental income tax from High-Impact Business construction job employees for projects in underserved areas. The credit is capped at $20 million per Illinois fiscal year.
The Enterprise Zones construction jobs credit is available to business entities in certified Enterprise Zones that make capital investments of at least $10 million in Enterprise Zone construction projects. The credit is calculated as either (1) 50% of the incremental income tax attributable to Enterprise Zone construction jobs employees employed in the course of completing an Enterprise Zone construction project; or (2) 75% of that amount if the project is in an underserved area. The credit is capped at $20 million per Illinois fiscal year.
The Economic Development for a Growing Economy (EDGE) tax credit is expanded to include New Construction EDGE Agreements. This credit is available for projects that construct new structures, buildings, or make improvements to real property beyond routine maintenance, operation, or repair. The credit is calculated as either (1) up to 50% of the incremental income tax from New Construction EDGE employees at the approved project or (2) up to 75% of such tax if the approved project is in an underserved area.
The River Edge Redevelopment Zone credit is renewed for taxpayers that make a capital investment of at least $1 million in a qualified rehabilitation plan for a qualified historic structure located in a River Edge Redevelopment Zone. As during the prior credit period, the credit is calculated as 25% of qualified expenditures incurred by the taxpayer during the qualified rehabilitation project. The credit is only available for taxable years beginning on or after January 1, 2021 and ending prior to January 1, 2022.
2. New Data Centers Legislation
SB 690 introduces both exemption certificates for qualifying data centers and an employment tax credit.
The exemption certificates exempt qualified tangible personal property used in the construction or operation of the data center from all state and local occupation taxes, state use taxes, the Chicago non-titled Use Tax, and the Electricity Excise Tax. The certificates also provide a credit certification against net income taxes for taxable years beginning on or after January 1, 2019. The certificates are available from the Department of Commerce and Economic Opportunity and will be valid for a period of up to 20 years.
Data centers that qualify for the certificates are new or existing data centers located in Illinois in which the owner and tenants have collectively made a $250 million capital investment over a sixty-month period. The data center must also create at least 20 new jobs earning at least 120% of the median wage paid to full-time employees in the county where the data center is located; and the building itself must be either carbon neutral or a certified green building.
Effective immediately, an income tax credit is awarded to certified data centers and provides an income tax credit equal to 20 percent of the wages paid to construction contractor employees for data centers in impoverished areas.
This income tax credit flows through to the owners of pass-through entities and has a five-year carryforward period. Credits are applied to liabilities on a FIFO basis. If the Department revokes its certification of the data center, then any credits earned during that taxable year will also be revoked.
1. New Parking Excise Tax
SB 690 implements a new state-level parking excise tax.
Beginning January 1, 2020, parking area or garage operators are required to collect and remit to the Department of Revenue an excise tax of 6% on the purchase price of parking spaces paid for on an hourly, daily, or weekly basis and 9% on the purchase price of parking spaces paid for on a monthly or annual basis.
The excise tax does not apply to (1) federal government parking areas or garages; (2) residential off-street parking if the parking arrangement is provided for in a lease, condominium agreement, or other writing between tenant and the landlord; (3) parking spaces owned and operated by a hospital for use by hospital employees; and (4) parking areas or garages with no more than 3 parking spaces.
2. Casinos Expanded and Sports Gambling Introduced
SB 690 introduces the Sports Wagering Act, which permits the establishment of six new casinos, allows sports wagering for individuals physically located in Illinois, allows slots at tracks, and increases the video gaming tax. This Act is extremely detailed so we will just focus on the salient tax aspects.
The Act establishes a surcharge on the gain from the sale or exchange of assets used in, or related to, gaming. The surcharge is equal to the amount of the federal income tax liability attributable to the sale or exchange. The Act also provides that any winnings from an Illinois gaming establishment will be sourced to Illinois and subject to withholding at the rate applicable to individuals. Currently this is 4.95%, but this rate may rise in 2021 for certain taxpayers if the constitutional amendment to permit a graduated income tax is approved by voters in November 2020.
3. Motor Fuel Taxes Increase
SB 1939 increases the Motor Fuel Tax and additional Diesel Tax. Beginning July 1, 2019, the Motor Fuel Tax will rise from 19 cents per gallon to 38 cents per gallon. The additional Diesel Tax will also increase from 2.5 cents per gallon to 7.5 cents per gallon. These rates are indexed to inflation and will be adjusted accordingly every July 1.
New local-level motor fuel taxes are also authorized. Municipalities in counties of more than 3 million inhabitants may now impose an additional local motor fuel tax of up to 3 cents per gallon. Additionally, Lake and Will counties join DuPage, Kane, and McHenry counties as counties permitted to impose an additional county motor fuel tax of up to 8 cents per gallon. The county-level tax may be adjusted for annual inflation.
4. Recreational Cannabis Permitted
HB 1438 legalizes recreational cannabis in Illinois. Regulation issues aside, this bill creates a substantial new multi-level excise tax regime based on gross receipts. This is a departure from the norm of other states with legalized recreational cannabis, which have generally imposed tax on the weight of cannabis product sold.
Cannabis excise taxes are authorized at the municipal, county, and state levels. Municipalities may impose an excise tax of up to 3 percent of the purchase price. Counties may impose an excise tax of up to 3 percent of the purchase price in incorporated areas and up to 3.75 percent in unincorporated areas. There are also two state-level excise taxes. First, a 7 percent tax on a cultivator’s gross receipts from sales to dispensing organizations. Next, a tax is imposed on the retail sale of cannabis and cannabis-infused products, the rate of which is determined by the adjusted delta-9-tetrahydrocannabinol level of the cannabis sold. These rates range from 10 percent to 25 percent for cannabis and are a flat 20 percent for cannabis-infused products.
Keep in mind that each of these excise taxes are imposed in addition to the applicable ROT.
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.