Dec 7, 2020
To create a level playing field between in-state and out-of-state retailers, Illinois is changing its sales tax laws. Beginning January 1, 2021, most remote retailers with an obligation to collect sales tax in Illinois will have to collect local tax in addition to state tax. Collection requirements for marketplace facilitators are also changing.
Illinois has an extremely complex sales and use tax system. In fact, “sales tax” in Illinois “actually refers to several tax acts”:
Retailers’ occupation tax (applies to tangible personal property)
Service occupation tax (applies to services)
Service use tax (applies to services)
Use tax (applies to tangible personal property)
In addition to these, the Illinois Department of Revenue administers more than 10 local taxes, including the Business District Tax, County School Facility Tax, and Home Rule or Non-home rule county or municipal taxes. Sales may also be subject to one or more locally administered taxes.
Currently, remote retailers and marketplace facilitators that have economic nexus with Illinois (i.e., at least $100,000 in sales or 200 transactions in the state in the preceding 12 months) generally collect the state use tax on sales delivered into the state. However, if “the selling activities take place in Illinois,” (e.g., the inventory is in Illinois at the time of sale), the retailer or marketplace must collect state and applicable local retailers’ occupation tax.
The difference between the two tax types is more than semantic.
The use tax rate is 6.25% for general merchandise and 1% for qualifying food, drugs, and medical appliances. According to Scott Peterson, vice president of Government Relations at Avalara, “The state use tax includes a percentage that is allocated to local governments.” Because of this, retailers that collect use tax don’t have to calculate local taxes.
With retailers’ occupation tax, retailers must collect the state rate plus the local tax rate in effect at the location of the sale. If destination sourcing governs the transaction, that’s the rate in effect at the point of delivery. If origin sourcing rules apply, it’s the rate in effect at the point of sale or where the order is fulfilled. See Sales tax sourcing: How to find the right rule for every transaction to learn more about sales tax sourcing.
New sales tax collection requirements for remote retailers
Starting January 1, 2021, out-of-state retailers that don’t sell through marketplaces and have no physical presence in Illinois must collect the state and local retailers’ occupation tax in effect at the point of delivery (destination sourcing) if they have economic nexus with Illinois.
Sales and use tax compliance will be more complicated for out-of-state sellers that have a physical presence in Illinois, such as a warehouse. For them, the rate will depend on where selling occurs.
If the sale occurs in Illinois – for example, the order is filled from inventory located in Illinois – the seller must collect the state and local retailers’ occupation tax rate in effect at the location where the order is filled (origin sourcing).
However, if selling occurs outside Illinois, only the 6.25% state use tax applies. No local taxes apply.
As of now, retailers selling through marketplaces won’t need to collect the tax on marketplace transactions: The marketplace facilitator will continue to be the retailer responsible for tax on marketplace sales.
New sales tax collection requirements for marketplace facilitators
For marketplace facilitators with distribution or fulfillment centers in Illinois, sales tax compliance will be even more complex. All sales made through the marketplace will be subject to state and local retailers’ occupation tax starting January 1, 2021 – but some sales will be subject to origin sourcing rules and some to destination sourcing rules.
Destination sourcing will govern all marketplace (i.e., third-party) sales, no matter where the marketplace seller is based (i.e., in Illinois or another state). Destination sourcing will also govern any of the marketplace facilitator’s direct sales shipped from out of state. For these transactions, the marketplace facilitator must collect and remit the combined state and local retailers’ occupation tax rate in effect at the point of delivery.
However, origin sourcing will govern any of the marketplace facilitator’s direct sales that are fulfilled in or shipped from a location in Illinois. The marketplace must collect the combined state and local retailers’ occupation tax (ROT) rate in effect where the selling occurs.
There are three possible scenarios:
If sales are fulfilled from inventory in Illinois but no other selling activities occur in Illinois, ROT is based on the rate in effect at the location of the Illinois inventory.
If sales are fulfilled from inventory in Illinois and selling activities also occur in Illinois, ROT is based on the rate in effect at the location of the selling activities (e.g., where the order was taken).
If sales are not fulfilled from inventory in Illinois and selling activities don’t occur in Illinois, ROT is based on the rate in effect at the point of delivery.
Affiliates of a marketplace facilitator aren’t considered marketplace sellers, so they follow sales tax sourcing rules for retailers (see previous section).
To help retailers and marketplace facilitators figure out their collection obligations, the Illinois Department of Revenue has created a nifty flow chart.
Retailers and marketplace facilitators will likely find this new system confusing. They’re unlikely to be alone.
Consumers may be confused
Consumers shopping through an online marketplace may also wonder why different tax rates apply to different sales.
Imagine a customer purchases five items through a marketplace and has them delivered to their home in Paw Paw. Three items are sold by a third-party vendor, and two are direct sales sold by the marketplace itself; all five are shipped from the marketplace facilitator’s fulfillment center in Joliet, Illinois. The three items sold by the marketplace seller are taxed at the rate in effect in Paw Paw, while the two items sold by the marketplace facilitator are taxed at the rate in effect in Joliet.
The Illinois Department of Revenue provides numerous examples to help taxpayers understand their new obligations at Registration Examples for Marketplace Facilitators and Remote Retailers. Additional information can be found on this resource page.
It’s complicated, but it’s complicated for a reason. As Illinois works to revise its tax system, it must ensure existing revenue streams aren’t overly impacted. Scott Peterson explains, “The state use tax includes a percentage that is allocated to local governments. One of the state’s complexities is minimizing who stops paying the use tax, as local governments that get that money today expect to get it tomorrow.”
Easing the burden of compliance
The Illinois Department of Revenue encourages remote retailers to ease the burden of compliance by using a certified service provider (CSP) to collect and remit sales and use tax on their behalf. Alternatively, retailers can use a certified automated system (CAS) to help them calculate the proper retailers’ occupation tax rate.
Learn how Avalara AvaTax can reduce the pain of tax compliance in Illinois and other states at avalara.com.
*Physical presence also triggers sales tax nexus in all states with a sales tax.