Illinois is poised to change their sourcing rules again, trying to find their way in a world where states apply their sales tax compliance requirements equally to both in-state and remote sellers. With this tweak, they will effectively equalize the responsibilities of remote sellers with no in-state presence, to those that have an Illinois location. The question remains, will this be sufficient to beat back a court case currently sitting with the Illinois Tax Tribunal alleging that Illinois tax law is both discriminatory and unduly burdensome.
What Does the New Law Say
Senate Bill 3362, currently sitting on Governor JB Pritzker’s desk, amends the Retailers’ Occupation Tax such that a retailer with a place of business in Illinois that makes retail sales to Illinois customers from a location outside of Illinois is “engaged in the business of selling” at the Illinois location where the item is shipped or delivered, or where the purchaser takes possession. This change to the rules would take effect on January 1, 2025.
Expanding the types of sellers compelled to collect Retailers’ Occupation Tax, versus sellers use tax, is particularly meaningful in states like Illinois where localities, (cities, counties, and districts), have not had widespread adoption of local use taxes. In this way, Illinois is following states like Colorado, Arizona, and New Mexico, who also do not have widespread local use tax and have likewise amended their laws to compel most sellers to collect state and local sales tax.
What Does the New Illinois Sales Tax Nexus Law Mean
The relative sales tax compliance obligations of in-state sellers, fully remote sellers, and remote sellers with an in-state presence are “clarified” in the “Leveling the Playing Field” flowchart devised by the Illinois Department of Revenue. If you follow the relevant paths laid out in this chart, you will learn:
- A seller that has a physical presence in Illinois will collect and remit state and local Retailers’ Occupation Tax based on their (origin) location when the selling activity, with respect to that sale taxes, takes place in Illinois.
- A seller that has a physical presence in Illinois will collect state, (not local) use tax based on the (destination) location of their customer for any sale where no selling activity occurs in Illinois.
- A seller with only economic presence in Illinois, ($100,000 in annual sales or 200 separate transactions), will collect state and local Retailers’ Occupation Tax based on the (destination) location of their customer.
Under these rules, sellers have different tax compliance obligations based upon whether they have an Illinois business location, even though that location is not in any way involved in the sale. Some would call this disparate treatment unconstitutionally discriminatory.
Why is Illinois Doing This?
A few months ago, PetMeds Express, an online seller of pet food, medication, dietary supplements, and other pet-related items filed a court case in the Illinois Independent Tax Tribunal. The basics of that case are outlined in an earlier blog found here. In short, PetMeds argues that the Illinois “Leveling the Playing Field” rules discriminate against interstate commerce and are unduly burdensome for remote sellers. Part of their discrimination argument rests upon the fact that in-state retailers selling from out-of-state only need to collect and report the 6.25% state-level use tax while out-of-state retailers, like PetMeds, must also report and remit local Retailers’ Occupation Tax based on the location of their customer.
This proposed new law would change that. On or after January 1, 2025, sellers with an in-state presence who ship products from out-of-state into Illinois, would need to collect and remit state and local tax, just like their fully remote brethren, thereby eliminating the discriminatory nature of the law.
Will This be Enough?
It’s quite possible that the Illinois legislature was inspired by Louisiana who, in 2023, enacted a bill that amended their economic nexus rules by eliminating the 200-transaction count threshold. In so doing, they rendered moot, litigation instigated by a company called Halstead Bead which made a similar constitutional challenge.
As described in my earlier blog, PetMeds Express makes a variety of constitutional arguments beyond the disparate treatment remedied by SB 3362. Even after this change, Illinois compliance will continue to be challenging for remote sellers, but aside from some unique reporting complexities, it won’t be materially more challenging than other states like Arizona, California, Missouri, Ohio, Tennessee, Utah and Virginia, all of whom likewise apply origin-based sourcing for in-state sellers while enforcing destination-based rules on remote sellers.
Illinois’ sales tax nexus could have gone further in simplifying the rules for remote sellers and in so doing more decisively shielded themselves from Constitutional challenges. In Texas, for example, fully remote sellers can request to charge tax at the “single local use tax rate” of 1.75%, thereby eliminating the need to account for and track specific local taxes. The state of Alabama offers a similar simplification and in so doing shields remote sellers from complex filing requirements. Illinois is a particularly complex state for filing, and this bill does not address filing complexities. Illinois could have addressed both the filing complexity and discriminatory treatment by holding that all remote sales were subject to state use tax only, but that sort of change significantly reduces tax revenue.
Concluding Thoughts
Without question, this proposed change ends a materially discriminatory element of the existing Illinois tax system but falls far short in making compliance simple for remote sellers. Only time will tell if these steps will be sufficient to shield Illinois from legal intervention that might call for even more radical changes in the future.
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