This post originally appeared on McDermott’s Inside SALT blog, which is dedicated to in-depth coverage of issues surrounding state and local tax.
In June 2018, just before the US Supreme Court ruling in Wayfair, Illinois enacted an economic nexus standard modeled after South Dakota’s law (see our prior coverage). The new Illinois standard takes effect on October 1, 2018. On September 11, the Illinois Department of Revenue (Department) issued an emergency rule (Regulation 150.803), together with other guidance found on its website, intended to assist remote retailers with compliance with the new law.
The Regulation was effective immediately. Retailers should note the following key features of the Regulation.
- No retroactivity: The Regulation explicitly states that the economic nexus standard will not have retroactive effect. For time periods prior to October 1, the Regulation provides that “remote retailers must have a physical presence in Illinois before they can be required to collect Use Tax.” It goes on to clarify that the types of activities constituting a physical presence will be those set for in Section 2 of the Use Tax Act’s definition of “retailer maintaining a place of business” in Illinois (see 35 ILCS 105/2), as modified by Scripto, National Bellas Hess and Quill. 86 Ill. Admin. Code § 150.803(a)(1).
- One invoice/one sale rule: The Regulation provides that, in computing whether it has exceeded the remote sales economic threshold, a retailer should count each invoice as a separate “sale,” regardless of the number of items sold on that invoice. Id. § 150.803(c)(3)(D).
- Sales counted towards the threshold: Sales for resale, occasional sales and motor vehicle sales are excluded from the threshold, as are sales made by remote retailers that are subject to Retailers’ Occupation Tax (for example, certain sales made at an Illinois trade show). Id. § 150.803(c)(3)(E)(i)-(iv). However, all other sales, including those exempt from tax, must be counted towards the threshold. Id. § 150.803(c)(3)(E)(v).
- Methodology for determining threshold: To determine whether it has an Illinois tax collection obligation effective October 1 based on the new economic nexus standard, a remote retailer must examine its Illinois sales for the period September 1, 2017, through August 31, 2018. A retailer with sales in excess of the threshold (200 sales or $100,000 in gross receipts) must collect and remit Use Tax effective October 1, 2018 and for the following year. Id. § 150.803(b)(2), (d)(1). At the end of the year, the retailer can cease collection if it did not meet the threshold for the preceding 12-month period.
- Quarterly Re-determination for Non-Qualifying Remote Retailers: Remote retailers whose Illinois sales do not meet the economic nexus threshold must reexamine whether they meet the threshold each subsequent calendar quarter, based on the prior year’s data. Id. § 150.803(b)(2)(B), (d)(3)(C), (e).
Key Observations:
- In recent public presentations regarding the Regulation, the Department has emphasized that the Regulation is intended to be “taxpayer friendly.” Among other issues, the Department has indicated that it may be willing to reconsider the quarterly re-determination requirement, which is, as of the date of this publication, unique to Illinois.
- The Department’s website contains a regularly updated Q&A for taxpayers together with a detailed matrix identifying the taxability of, and rates applicable to, certain products and common transactions.
- Illinois’ pre-existing, complex set of statutes and regulations related to physical presence nexus are still in effect. Retailers must now determine whether they have nexus under any of the physical presence or economic presence nexus standards, and should keep in mind that physical presence nexus triggers an obligation of tax collection even if the economic nexus threshold is not met. In recent public statements, the Department has indicated that it is considering whether to suggest amendments to its physical presence nexus standards in order to simplify and streamline its state sales tax regime.
- Remote retailers should not assume that if they meet the economic nexus standard for Use Tax, they have a local tax collection obligation. Local sales tax collection is determined by a retailer’s “sales related activities” in the local tax jurisdiction. See, e.g., 86 Ill. Admin. Code § 200.155(b) for an example of the Department’s standard definition of “sales related activities.”