October 12, 2018

State and Local Tax this week

The October 19 edition of the Illinois Register  did not contain any new rulemakings by the Illinois Department of Commerce and Economic Opportunity. The Department of Revenue proposed one new rulemaking and adopted four rulemakings in today's edition of the Illinois Register. The details of the IDOR rulemaking activities are set forth below.

The Treasurer held a public hearing on his recent rulemaking implementing the Revised Uniform Unclaimed Property Act on Thursday October 18.  I testified and in my testimony highlighted problems that we have identified with the proposed rules. I also provided a the representatives of the Treasurer's office with written public comments on the proposed rulemaking.  I have linked a copy of the public comments.  The public comment period for the rulemaking will remain open for at least another two weeks.  If you have additional comments that you think should be submitted to the Treasurer please let me know and I can supplement my comments.  (Please note that the comments must limited to rulemaking.  Criticisms of the underlying statute are not appropriate during the public comment period during the formal rulemaking process.)

The new IDOR rulemaking consists of amendments to the Retailers' Occupation Tax rules and is described by the Department as follows:  

"130.120, Nontaxable Transactions, to extend the exemption for coal and aggregate exploration, mining, offhighway hauling, processing, maintenance, and reclamation equipment until July 1, 2023, pursuant to PA 100-594 (see 86 Ill. Adm. Code 130.120(cc)) and to clarify that the exemption for fuel and petroleum products used or consumed on international flights existed prior to the enactment of Section 2-70 of the Retailers' Occupation Tax Act and will not sunset;

130.321, Fuel Used by Air Common Carriers in Flights Engaged in Foreign Trade or Engaged in Trade Between the United States and any of its possessions, to clarify that the exemption for fuel and petroleum products used or consumed on international flights existed prior to the enactment of Section 2-70 of the Retailers' Occupation Tax Act and will not sunset;

130.350, Coal Exploration, Mining, Off Highway Hauling, Processing, Maintenance and Reclamation Equipment, to extend the exemption for this type of equipment until July 1, 2023, pursuant to PA 100-594; and

130.351, Aggregate Exploration, Mining, Off Highway Hauling, Processing, Maintenance and Reclamation Equipment, to extend the exemption for this type of equipment until July 1, 2023, pursuant to PA 100-594."

IDOR adopted amendments to the Service Occupation Tax rules and provided the following description:

"The rulemaking incorporates several amendments to the Service Occupation Tax Act contained in PA 100-303.  On and after January 1, 2018, servicemen whose annual gross receipts average $20,000 or more must file electronically all returns required to be filed pursuant to the Service Occupation Tax Act.  Servicemen who demonstrate that they do not have access to the Internet or demonstrate hardship in filing electronically may petition the Department to waive the electronic filing requirement.  The Act currently allows servicemen a discount of 1.75% or $5 per calendar year, whichever is greater, to reimburse servicemen for the expenses incurred in keeping records, preparing and filing returns, remitting the tax and supplying data to the Department on request.  The discount is not allowed in any case in which tax is paid late, whether or not a return was filed.  PA 100-303 also disallows the discount when returns that are not filed in the manner prescribed in the Act, for example, are not filed electronically by retailers or servicemen with gross receipts that average $20,000 or more."

IDOR completed the repeal of the Cannabis and Controlled Substances Tax Act.  The Act was held unconstitutional by the Illinois Supreme Court in Wilson v. Department of Revenue, 169 Ill.2d 306, 662 N.E.2d 415, 214 Ill. Dec. 849 (1996). 

IDOR adopted amendments to the Telecommunication Excise Tax rules that make the following amendments:  " Section 495.100 is amended to remove out-of-date and obsolete language.  Section 495.120 is amended to explain that a customer's place of primary use as defined in the Mobile Telecommunications Sourcing Conformity Act applies when the service address of a customer is not a defined location."

IDOR adopted amendments to its rules governing electronic filing of returns and other documents that make the following changes:   

"The rulemaking incorporates several amendments contained in PA 100-303.  On and after January 1, 2018, retailers and servicemen whose annual gross receipts average $20,000 or more must file electronically all returns required to be filed pursuant to the Retailers' Occupation Tax Act and Service Occupation Tax Act.  Retailers and servicemen who demonstrate that they do not have access to the Internet or demonstrate hardship in filing electronically may petition the Department to waive the electronic filing requirement.  The Retailers' Occupation Tax Act and the Service Occupation Tax Act currently allow retailers and servicemen, respectively, a discount of 1.75% or $5 per calendar year, whichever is greater, to reimburse retailers and servicemen for the expenses incurred in keeping records, preparing and filing returns, remitting the tax and supplying data to the Department on request.  The discount is not allowed in any case in which tax is paid late, whether or not a return was filed.  PA 100303 also disallows the discount when returns that are not filed in the manner prescribed in the Act, for example, are not filed electronically by retailers or servicemen with gross receipts that average $20,000 or more." 

Tax Tribunal 

No new decisions were issued this week by the Tribunal.  

One new case filed with the Tribunal this week may be of interest. 

Joseph Tutera v. Illinois Department of Revenue is a protest of a income tax notice of deficiency.  Tutera was a resident of Kansas who was the sole member of Tutera Investments, a Subchapter S corporation.  Tutera Investments was engaged in two separate businesses, operation of retirement facilities and investment-related activity unrelated to the retirement facilities business.  Tutera Investments was not commercially domiciled in Illinois.  

During the tax year at issue, Tutera Investments' income included in part interest from the investment of excess cash that was not part of its working capital.  During the tax year at issue Tutera Investments received a dividend from an unrelated insurance company.

Tutera Investments reported the dividend as business income and the interest income as non-business income on its IL-1120-S return for the tax year.

The petitioner, a Kansas resident, did not pay Illinois income tax on distributions related to either the interest income or dividend income, treating them both as nonbusiness income.

The Department audited Tutera Investments and the petitioner and treated everything as business income. Tutera Investments requested a review by the Informal Conference Board.

During the course of the ICB proceeding both Tutera Investments and the petitioner filed amended returns reporting the dividend as non-business income and some of the interest income as business income.  The ICB decision ratified the auditor's assertion that both the dividend and interest income were business income.

In the petition, the petitioner explains why the Department's assertion that the dividend is business income is incorrect as a factual and legal matter.because: 1)  Tutera Investments and the Company are not engaged in a unitary business; and 2) Tutera Investments' ownership of the Company served an investment rather than an operational purpose.  The petitioner then states that it is a not subject to Illinois income tax on the distributions relating to the dividend because he is a nonresident of Illinois and the dividend is nonbusiness income not allocable to Illinois.

The petition also explains why the interest income is nonbusiness income that is not allocable to Illinois.

The petitioner is represented by David Hughes and Samantha Breslow of Illinois Chamber of Commerce Tax Institute member law firm Horwood Marcus & Berk.