Illinois to tax out-of-state sellers starting October 2018

Update 9.21.2018: The Illinois Department of Revenue has issued guidance on Public Act 100-587; it requires remote sellers with no physical presence in the state to register to collect and remit the state's use tax on sales of tangible personal property made on or after October 1, 2018, if in the immediately preceding 12-month period, they have cumulative gross receipts from Illinois sales of tangible personal property of $100,000 or more, or 200 or more separate Illinois transactions. 

Sales of the following should not be included when determining the threshold:

• Sales for resale (see 86 Ill. Adm. Code 130.201)
• Sales of tangible personal property that must be registered with a state agency, including motor vehicles, watercraft, aircraft, and trailers, when these sales are made from locations outside Illinois to Illinois purchasers
• Occasional sales (see 86 Ill. Adm. Code 130.110)

All other sales, even if they're exempt, must be included when calculating the threshold. See the department's Use Tax Guide for Remote Sellers for additional details.

Once a threshold has been met, remote retailers must colllect and remit Illinois use tax for a one-year period. Non-collecting remote sellers are required to determine, on a quarterly basis, whether they've met one or both of the thresholds and established a tax collection obligation. If one has been established, the retailer must register with the state and begin collecting sales tax on the first day of the following quarter and collect tax for a period of one year, at the end of which it must reassess if a threshold has been met. For example, if a retailer determines it's met one of the thresholds on March 31, 2019, it must register and collect tax for a one-year period starting April 1, 2019. On March 31, 2020, the retailer must reassess whether one of the thresholds has been met during the preceding 12-month period.

Remote retailers meeting one of the thresholds are not required to register with the state if their sales to Illinois customers are "exclusively nontaxable" (i.e., "100% sales for resale or 100% exempt sales").

The Illinois Legislature included an economic nexus provision in its FY 2019 budget, which Governor Bruce Rauner signed June 4, 2018. Beginning October 1, 2018, out-of-state sellers that make retail sales of tangible personal property or services in Illinois and meet one of the de minimus thresholds will be required to collect and remit tax on their Illinois sales.

An out-of-state retailer must assume tax collection responsibilities if it meets either the gross receipts threshold or the sales transaction threshold in the preceding 12 months. The retailer must:  

• Have cumulative gross receipts from sales of tangible personal property in Illinois of $100,000 or more; or
• Make 200 or more separate sales transactions of tangible personal property to purchasers in Illinois.

A retailer must determine quarterly, on the last day of the quarter, whether one of the criteria has been met. If so, the retailer must register with the state and collect and remit the tax for a period of one year, after which the retailer must again assess whether the criteria have been met.

If, after one year of collecting and remitting taxes, the retailer determines that it no longer meets one of the thresholds, it must resume quarterly review of its Illinois sales.

Learn more about economic nexus.

What will the Supreme Court say?

The Supreme Court of the United States is unlikely to say much about Illinois’ new law at this point, since it isn’t on its docket. However, Illinois’ economic nexus threshold of $100,000 or 200 sales is the same as South Dakota’s economic nexus threshold, which is currently under review in the Supreme Court. (The laws also have their differences. For example, South Dakota specifies, “No obligation to remit the sales tax required by this Act may be applied retroactively.” The Illinois measure includes no such provision).

Precedent holds that a state may not impose a tax collection obligation on a business that doesn’t have a physical presence in the state. Taxing a business that lacks physical presence nexus contradicts the Supreme Court’s ruling in Quill Corp. v. North Dakota (1992).

South Dakota’s economic nexus law is a direct challenge to Quill. It states, “Given the urgent need for the Supreme Court of the United States to reconsider this doctrine [Quill], it is necessary for this state to pass this law clarifying its immediate intent to require collection of sales taxes by remote sellers, and permitting the most expeditious possible review of the constitutionality of this law.” The state’s tactic worked: The court heard oral arguments for South Dakota v. Wayfair, Inc. on April 17, 2018.

Depending on how the court rules, South Dakota could be granted the authority to enforce its law, or prohibited from enforcing it, or something else altogether. No one will know until the court issues its decision, which is expected sometime in June.

Learn more about South Dakota v. Wayfair, Inc. and state efforts to tax remote sales.