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June 8, 2018
State and Local Tax this week
Illinois General Assembly
The Governor signed the budget this week. The budget implementation bill, HB 3342 was signed into law as P.A. 100-587. The appropriations bill, HB 109, is P.A. 100-586.
The General Assembly returns to Springfield for the fall veto session on November 13. The House and Senate are scheduled to be in session November 13 through 15 and November 27 through 29.
Additional legislation that passed both chambers:
SB 2641 - This legislation seeks to apply the same statutory and regulatory obligations on non-traditional car rental companies (defined in the bill as personal car facilitation) as traditional car rental companies such as liability, loss or injury and the ability for the state and local units of government to apply a rental service tax on vehicles.
SB 2641 amends the definition of "renting" under the Automobile Renting Occupation and Use Tax to provide that renting includes personal car facilitation. There appears to be an unintended consequence of this legislation. I
t appears that by including these vehicles in the definition of renting, they fall within the scope of the following exemption from 2-55 of the Retailers' Occupation Tax Act:
"(5) A motor vehicle that is used for automobile renting, as defined in the Automobile Renting Occupation and Use Tax Act. This paragraph is exempt from the provisions of Section 2-70."
In other words, a purchaser would be exempt from sales tax on an automobile purchase if the purchaser rents the automobile in a car facilitation transaction. I don't think that was intended, but it looks like the effect. It could lead to some interesting tax planning - buy a car, rent it out at least once, and avoid sales tax. My guess is that there will be legislation in the veto session to attempt to address this issue.
SB 2921 - In the last 3 days of the legislative session, the Treasurer was successful in seeking legislation to authorize his purchase of a building across the street from the Illinois Department of Revenue in Springfield. The funds for the purchase and renovation of the building will come from
moneys diverted from the State Pensions Fund. The source of these funds are collections under the Revised Uniform Unclaimed Property Act.
Other legislation of note that did not pass:
The following bill didn't end up passing both houses of the General Assembly by the May 31 deadline. It is likely this bill, or the subject of this bill, will be considered during the fall veto session.
SB 482 - This bill was amended in House in November 2017, but stayed dormant throughout the spring session until the final days. As amended, the bill creates the State Aviation Program Fund, the Local Government Aviation Trust Fund, and the Aviation Fuel Sales Tax Refund Fund and provides that moneys in the State Aviation Program Fund shall be used by the Department of Transportation for the purposes of administering a State Aviation Program. The bill provides that the State Aviation Program shall include grants to units of local government for airport-related purposes, including noise mitigation and in-home air quality testing and provides that moneys in the Local Government Aviation Trust Fund shall be used by units of local government for airport-related purposes. The bill also amends the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, and the Retailers' Occupation Tax Act to provide that moneys received from the tax paid on aviation fuel shall be deposited into those Funds. Amends the Motor Fuel Tax Law and provides that aviation fuel sold or used on or after December 1, 2017 shall be deposited into the State Aviation Program Fund.
SB 482 as amended was called for a vote in the House in the waning days of the legislative session by the House sponsor, Representative Zalewski. The bill passed out of committee last November over objections that the allocation formula proposed to distribute the aviation tax revenues to local airports was skewed in favor of Chicago because it provided that the tax revenues were to be divided based on "enplanements" of passengers. As a result, the overwhelming majority of the funds would go to the Chicago airports - O'Hare and Midway. The formula was also criticized because it didn't take into account activities at airports by cargo companies. For example, there are airports outside of O'Hare and Midway, that have a substantial amount of flights attributable to cargo planes.
After questions from the Republican side of the aisle, Representative Zalewski pulled the bill from debate. The bill was subsequently amended to delete the allocation formula based on enplanements. As amended, the proceeds from the tax revenues would, in the words of Representative Zalewski be "placed in a lockbox" and negotiations were to occur over the summer to develop a satisfactory allocation formula. The bill passed out of the House with this amendment and went to the Senate for concurrence. However, the Senate did not take up the bill on concurrence before the end of the spring session.
Why is this issue important? A federal rules change provides that, with certain exceptions, sales taxes on aviation fuel can only be used for "airport purposes." The State of Illinois received a waiver from the federal government in order to have additional time to adopt conforming legislation. But, time is running out. If the state does not comply, other federal grant funding will be jeopardized. This will likely be an issue during the fall veto.
The June 8 edition of the Illinois Register contains an amendment of the Department of Revenue income tax rules to add a new Section 100.9715 which provides a definition of the term "transportation company." As you may recall, the scope of this definition has been a somewhat contentious issue. I will review this proposal carefully. Please forward your comments and concerns about this proposed definition.
The June 8 edition of the Illinois Register also contains the new rules of the State Treasurer for the conduct of administrative hearings.
The June 1 edition of the Illinois Register contained a number of rulemakings by the Illinois Department of Revenue and repeals of rules by the Department of Commerce and Economic Opportunity.
The Department of Revenue proposed amendment of Part 100, the income tax rules, to amend Section 100.3420 to reflect a 2012 statutory amendment, P.A. 97-507 which amended IITA Section 304(b)(2) to allow reinsurance companies to elect one of three methods of incorporating reinsurance premiums into the apportionment factor computation.
The Department has proposed repeal of the "Cannabis and Controlled Substances Tax Act" regulations. The Illinois Supreme Court held underlying public act unconstitutional in 1996 and the Department has not enforced the act.
The Department is updating the Cigarette Tax Act and Cigarette Use Tax Act rules to reflect that statutory change in 2012 that raised the cigarette tax at that time and reflect statutory procedures for he destruction of forfeited packages of cigarettes that were enacted in 2008.
The Hotel Operators Occupation Tax rules are amended to eliminate obsolete language.
The Department of Commerce and Economic Opportunity proposed the repeal of 4 different sets of rules for programs for which the underlying statutory authority was repealed over the past few years.
Publications
The Illinois General Assembly Commission on Government Forecasting and Accountability issued its
Monthly Briefing for the Month ended: May 2018.
Tax Tribunal
No new decisions were issued by the Tribunal this week.
David Kupiec and Natalie Martin of Illinois Chamber Tax Institute member law firm Kupiec and Martin has filed a new case with the Tribunal this week that raises interesting issues.
At issue in T-Systems North America Inc. v. Illinois Department of Revenue is a protest of an income tax audit. T-Systems challenges the Department's use of the "throw-out" rule to eliminate from the denominator of the apportionment factor certain sales of services to customers located in foreign countries. The sales were exempted from foreign tax because they are subject to tax treaties. The Department invoked the "throw-out"rule to eliminate these sales from the denominator of the apportionment formula.
T-Systems contends that the Department's use of the "throw-out" rule to eliminate these sales is contrary to IITA Section 303(f) which provides that a taxpayer is taxable in another state if "that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not." (IITA Section 1501(a)(22) provides that the term "state" includes foreign countries.)
T-Systems challenges the validity of Section 100.3200(a)(2)(C) of the Department's regulations as an impermissible narrowing of IITA Section 303(f), as violative of the foreign commerce clause, and as failing the external consistency test. In addition, T-Systems submits that the due process, equal protection and uniformity provisions of the U.S. and Illinois constitutions prohibit the Department from excluding the sales of services at issue from the sales factor. T-Systems also contends that certain income attributed to Illinois by the auditor should not be included because the majority of the income-producing activities for such transactions were performed outside of Illinois.
Tax Institute Second Quarter Meeting
June 12 from 2:00-4:00 - Featured speaker Representative Mike Zalewski Chairman of the House Revenue committee. One hour of ethics training to be presented by Horwood Marcus & Berk. The meeting is hosted by BDO at the offices of McDermott Will & Emery, 444 W. Lake Street, Suite 4000, Chicago. Please RSVP to me at [email protected]
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