June 22, 2018

State and Local Tax this week

The June 22 edition of the  Illinois Register did not contain any rulemakings by the Illinois Department of Revenue.  

The Department of Commerce and Economic Opportunity propoosed two rulemakings in today's Illinois Register.

DCEO is amending the rules for the Enterprise Zone and High Impact Business Programs.  The intent of the rulemaking is described as follows:  "The purposes of these rules are two-fold. First, the changes are decided to ensure that companies receiving tax exemptions under the Enterprise Zone or High Impact Business programs are in good standing with the Secretary of State and otherwise generally good corporate citizens. Second, these amendments are meant to further clarify the revocation procedures applicable to these programs and differentiate between businesses facing business setbacks and those whose threatened revocation arise as a result of "bad acts" or other improper actions by the company. "

The second DCEO rulemaking is a repeal rules for the Job Training Partnership Act which was repealed in 1998 by the Workforce Investment Act of 1998.

Court cases

As everyone is aware, yesterday the U.S. Supreme Court issued its decision in  South Dakota v. Wayfair, Inc.  The court overruled the physical presence standard in Quill v. North Dakota.The court upheld a South Dakota law that requires out-of-state sellers to collect and remit sales tax a seller, on an annual basis, delivers more than $100,000 of goods or services into the State or engages in 200 or more separate transactions for the delivery of goods or services into the State.

As explained by the court, the South Dakota law forecloses the retroactive application of the requirement and provided for the law to be stayed until the constitutionality of the law was clearly established.

Illinois Implications

In anticipation of the Supreme Court's decision in Wayfair, as part of the budget implementation bill, the Illinois General Assembly amended the Illinois Use Tax and the Service Use Tax to include language that mirrors the nexus standard established by South Dakota.  P.A. 100-587 (The pertinent amendment begins on Page 457 of the public act.) 

The Illinois law amends the nexus standards of the Use Tax Act and the Service Use Tax Act.  It provides that beginning October 1, 2018, a retailer making sales of tangible personal property to purchasers in Illinois from outside of Illinois will fall within the definition of "retailer maintaining a place of business in this State" and will be required to charge Illinois Use Tax (or service use tax) to its customers if: "(A) the cumulative gross receipts from sales of tangible personal property to purchasers  in Illinois are $100,000 or more, or (B) the retailer enters into 200 or more separate transactions for the sale of tangible personal property to purchasers in Illinois."

The law requires the retailer to determine on a quarterly basis whether he or she meets the criteria of either test for the preceding 12-month period. If so, the retailer is required to collect and remit the tax imposed under the Act and file returns for one year.

At the end of the one-year period, the retailer is to determine whether he or she continued to meet either test.  If he or she met either test, the retailer continues filing returns and charging and remitting tax.  If the retailer didn't meet either test for the one year period, the retailer is not required to continue to file returns and charge and remit tax, but remains required each quarter to make the determine again.

In light of the Wayfair decision, at first blush, this sounds like a bright-line test sanctioned by the U.S. Supreme Court. But, on further reflection it is not a clear bright-line test for Illinois nexus. The physical presence question has been addressed by the supreme court but, a number of other questions remain.

In Wayfair, the court indicated that the South Dakota statute foreclosed retroactive application of the law and provided that the statute was stayed until the constitutionality of the law was clearly established. The Illinois law becomes effective on October 1, so out-of-state retailers without physical presence have nothing to worry about from Illinois until then right?  Well, no.

First, as noted above, the law establishes an "end of the quarter" test for nexus.  October 1, the effective date of the law, is the beginning of a quarter.  Does that mean that a retailer can wait until the end of December to make the determination of whether it has nexus under the new law and doesn't have to begin charging and collecting taxes until January 1?  Or, is the retailer required to make the determination as of the end of September? This is an area in which the Illinois Department of Revenue must provide guidance.

Second, Wayfair overturned the physical presence test.  It did not sanction the South Dakota law as the only valid test of whether an out-of-state retailer has sufficient nexus with a state.  The court cited to the standards set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)  Those standards are:  "The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides. See Complete Auto, supra, at 279. "

There are other provisions in the Illinois definition of "retailer maintaining a place of business in this state" that. while inconsistent with the Quill physical presence requirement, arguably may not be inconsistent with the Complete Auto standards. Items (2), (3) and (7) of the statutory definition deal with advertising directed to Illinois.  None of these provisions require physical presence, but in light of Quill have not been, to my knowledge, have ever been enforced by the Illinois Department of Revenue. Will these provisions now be enforced by the Department of Revenue as nexus standards that comport with the Complete Auto standards?

Take item (7), for example, which provides that "a retailer, pursuant to a contract with a cable television operator located in this State, soliciting orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in this State."  Virtually, every time I turn on my television I see commercials for Overstock and Wayfair.  Could the Illinois Department of Revenue take the position that Overstock and Wayfair should immediately register with Illinois and begin collecting Illinois Use Tax from Illinois customers in light of this provision, even prior to October 1?

I haven't surveyed the other states recently, but it is my recollection that Illinois is likely not the only state that has similar laws on the books.

Next, what will happen to "market place" sellers on sites such as Amazon, and Etsy?  Who will be the "retailer" for purposes of the Illinois nexus test?  Will it be the individual market place seller, or will it be Amazon and Etsy. 

In addition, what about item (8) of the definition which provides a seller has nexus if it is "a retailer engaging in activities in Illinois, which activities in the state in which the retail business engaging in such activities is located would constitute maintaining a place of business in that state." In the past, enforcement of this provision was constrained by the  Quill physical presence requirement.  What if a retailer is "located" (assuming we can agree on a definition of "located") in a state that adopts a stricter standard than Illinois, of say $50,000 in annual sales and/or 100 or more separate transactions?  Could Illinois invoke item (8)?  The Supreme Court in Wayfair didn't come up with a bright line test for nexus.  It overruled the Quill physical presence standard. 

Absent clarifying legislation that addresses the scope of the provisions of the current definition of "retailer maintaining a place of business in this State," I can also foresee a new round of lawsuits under the Illinois False Claims Act in which the relator asserts that various provisions of the current definition bestow nexus on sellers even in situations in which the seller hasn't reached the $100,000 in sales or 200 transactions targets in the new Illinois law.

At a minimum, the Illinois Department of Revenue should immediately promulgate emergency regulations to address these questions and other questions that I haven't yet thought of.

Finally, the  Wayfair decision doesn't bring complete tax parity in Illinois between Internet sellers and bricks and mortar sellers because of the manner in which Illinois law deals with locally-imposed sales taxes.  Locally-imposed sales taxes are, with certain exceptions (the Chicago non-titled Use Tax and the various locally-imposed use taxes on titled property), are retailers' occupation taxes. Those taxes are required to be charged and collected by Illinois retailers.  There are no corresponding locally-imposed use taxes. The local taxes are paid by purchasers in normal retail transactions because the locally-imposed taxes allow retailers to have a right of reimbursement for the local taxes from purchasers.

After the Wayfair decision, internet retailers like Wayfair will be required to charge and collect the 6.25% Illinois Use Tax on sales to Illinois customers. If, as a resident of Springfield, I decide to buy a sofa from Wayfair, I will pay 6.25% tax.  If I buy the same sofa from a local retailer, I will pay either 8.5% or 9.5% depending on the location of the retailer in Springfield.  That is still a rather large differential on big-ticket purchases.

Another, and related, issue involves the current Illinois statutory system for distributing a portion of sales tax revenues to local governments. Local governments are not going to see a sudden influx of additional sales tax dollars as a result of  Wayfair. 

The locally-imposed retailers' occupation taxes go to the local jurisdiction imposing the tax. In addition, 1.25% of the 6.25% Illinois Use Tax is distributed to local governments, but is distributed on the basis of population. There remains a common misconception many members of the public that the local share of use tax dollars is distributed to location of the purchaser. Some local governments will expect an influx of sales tax dollars and there will be consternation when that doesn't materialize.

Bottom line - we now know the answer to the physical presence requirement of Quill - it has been eliminated.  However, as the foregoing indicates there remain many difficult and likely vexing questions that will need to be addressed in light of Wayfair.

Tax Tribunal 

No new decisions were issued by the Tribunal this week. None of the new cases filed with the Tax Tribunal this week raise any unique issues.

EDIE Award Nominations Are Now Open

The Illinois Chamber of Commerce is now accepting nominations for the 10th Annual Economic Development in Illinois Awards - the Edies. The Edies honor outstanding economic development projects completed in the calendar year of 2017 that imagine, design, invest, build and bring jobs, growth and prosperity to Illinois communities. More information can be found at the  Edie homepage.

 

Nominations are being accepted now until 5 p.m. June 29, 2018. For additional questions, please contact Katie Stonewater at [email protected].