August 3, 2018

State and Local Tax this week

The August 3 edition of the  Illinois Register did not contain any rulemakings by the Illinois Department of Revenue or t he Department of Commerce and Economic Opportunity. 

Publications

The Illinois General Assembly Commission on Government Forecasting and Accountability issued its Monthly Briefing for the Month Ended: July 2018 .

Tax Tribunal 

No new decisions were issued by the Tribunal this week. Three new cases recently filed with the Tax Tribunal may be of interest.  

Fred Marcus and Christopher Lutz of Tax Institute member law firm represent Sears Roebuck & Co in  Sears Roebuck & Co. v. Department of Revenue.  This case is a protest of a Notice Tax Liability in which the Department assessed sales taxes.  The Department disputes the position of Sears that it acts as a construction contractor in certain instances in which sales of appliances and other items require installation.  According to the petition, in such instances Sears enters into construction contracts whereby it engages third party contractors to build the property into purchasers' homes.

As explained in the petition, in the instances in which Sears acted as a construction contractor, it paid use tax on the cost price of the appliances and other items incorporated into realty.

According to the petition, the Department took the position on audit that Sears was acting as a retailer and should have charged and collected Retailers' Occupation Tax from its customers on the retailer purchase price of the tangible personal property.

The Department of Revenue issued a  Compliance Alert on this subject about three years ago.  In the Alert, the Department asserted "Most retailers will not act as a construction contractor. If a customer that is the end user of the tangible personal property comes in and makes a retail purchase and enters into a separate agreement for installation, the sale is an over-the-counter transaction subject to ROT."  I will follow this case and see if the Department is succeeds in enforcing this position.  

Martin Equipment of Illinois v. Department of Revenue is a protest of a sales tax audit.  At issue is whether a credit received from John Deere, a manufacturer of the equipment sold by Martin, constitutes additional gross receipts subject to tax.  The Department assessed a deficiency contending that the dealer's gross receipts should have included the credits received from John Deere in addition to the payment made by the purchasers of the equipment. (I would note that petition contains a number of citations to Section 130.401, that should actually cite Section 130.2125)

Target National Bank v. Department of Revenue is a protest of an income tax audit.  The Department issued Notices of Deficiency totaling over $16,000,000.  Target is represented by Fred Marcus and Christopher Lutz of Tax Institute member law firm Horwood Marcus & Berk.

According to the petition, during the tax years at issue, Target Credit Corporation (TCC) Corporation Sarl, a limited liability company organized under the laws of Luxembourg ("TCC-Sarl"), is deemed to have made dividend payments to Target Capital Corporation ("TCC"), a member of TNB's unitary business group, which were includible in TCC's Federal taxable income as Subpart F income pursuant to Sections 951 through 954 of the Internal Revenue Code of 1986, as amended ("IRC").

As noted in the petition, dividends deemed paid pursuant to IRC Sections 951 through 954, which are includible in Federal taxable income, are excludible from Illinois base income pursuant to the subtraction modification found at IITA Section 203(b )(2)(0).  

As explained in the petition, the Department believes that TCC-Sarl fails the 80/20 test found at IITA Section 1501(a)(27) and that, as a result, the IITA Section 203(b)(2)(O) foreign dividend subtraction modification is unavailable. 

Because TCC-Sarl filed a Federal Form 1120-F on which it reported no Federal taxable income, the Department further believes that the allowance of an IITA Section 203(b )(2)(0) foreign dividend subtraction modification results in a prohibited IITA Section 203(g) "double deduction", once as a foreign dividend and once as Federal taxable income which should have been, but was not, reported on its Federal Form 1120-F.

Illinois Department of Revenue Rulings

The Department recently posted a sales tax private letter ruling of interest.   ST 18-0003-PLR

The ruling deals with determining whether a transfer of software qualifies as a non-taxable license of software under  Section 130.1935(a)(1) of the Department's regulations. (Note that the summary of the PLR mistakenly references Section 130.1945(a)(1)).

The taxpayer requested a ruling on whether the company's signed order form and accompanying licensing agreement satisfied the signature requirement of Section 130.1935(a)(1)(A) of the Department's rules.

This ruling is notable in that it specifically modifies the position taken in an earlier private letter ruling,  ST 06-0005-PLR.  The most recent ruling states in pertinent part:

"The Department has previously held that an electronic signature does not comply with the requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a written agreement signed by the licensor and the customer.  ST 06-0005-PLR (December 16, 2006).  However, the Department has now decided an electronic license agreement in which the customer accepts the license by means of a signature in electronic form that is attached to or is part of the license, is verifiable, and can be authenticated will comply with the requirement of a written agreement signed by the licensor and customer.  A license agreement in which the customer electronically accepts the terms by clicking "I agree" remains unacceptable." 

However, the Department did not rule that the particular license at issue was non-taxable.  The Department indicated that it will look at the order form an any documents incorporated by reference into the order form to determine if the requirements for a nontaxable license are met.  

But, the Department declined to rule that the particular documents at issue in the ruling request constituted an nontaxable license stating, "The information provided in your letter regarding the nature of the electronic signature does not provide the Department sufficient information to determine whether or not the order form and subscription agreement meet the requirements of Section 130.1935(a)(1)." 

What we do know from the ruling,is that the Department will accept an electronic signature "that can be authenticated."  However, the Department hasn't provided any guidance as to what they mean by a signature that "can be authenticated.  

I would note that Section 1.15 of the Statute on Statutes, 5 ILCS 70/1.15 provides that " when the written signature of any person is required by law on any official or public writing or bond, required by law, it shall be (1) the proper handwriting of such person or, in case he is unable to write, his proper mark or (2) an electronic signature as defined in the Electronic Commerce Security Act, except as otherwise provided by law."

The Electronic Commerce Security Act,  5 ILCS 175/ contains definitions of "digital signature," "electronic signature," and "signed or signature."  From the Department's ruling, it appears that it may not accept any "electronic signature," given the Department's suggestion that it will only accept signatures that "can be authenticated."  

The Department needs to provide additional guidance as to the types of electronic signatures that will satisfy its "authentication" requirement. The Department's position on the definition of what is an acceptable signature, in my estimation falls squarely within the definition of a "rule" as that term is defined in Section 1-170 of the Illinois Administrative Procedure Act,  5 ILCS 100/, and should be adopted as a rule. Otherwise, this will continue to be another "gotcha" situation for taxpayers.