Chicago closes loophole, taxes remote DTC wine sales starting July 2020
Updated July 21, 2020
As of July 1, 2020, wineries are required to collect Chicago liquor tax on sales made directly to consumers with a Chicago address. This is a significant departure from previous policy: Chicago liquor tax applied only to sales made physically in the city through June 30, 2020.
The change to the Chicago liquor tax policy only affects wineries and other wine sellers, because breweries and distilleries aren’t permitted to ship directly to consumers (DTC) in Illinois. Yet it will affect a lot of wineries — over one third of all DTC wine sales in Illinois are shipped to a Chicago address, according to Avalara data.
Closing a loophole
The policy change is due to Ordinance O2020-801, which was introduced by Chicago Mayor Lori Lightfoot at the request of City Comptroller Reshma Soni and unanimously approved by the City Council on April 24. Ordinance O2020-801 extends the Chicago liquor tax to businesses located outside Chicago that make DTC sales in Chicago.
Soni wanted to close a loophole: “It shouldn’t be that you go to the liquor store near your house and you pay the tax, but you get liquor shipped to your house and you don’t.” That loophole was closed for many other sales on October 1, 2018, when Illinois began requiring out-of-state sellers doing a certain amount of business in the state to collect and remit applicable state and local sales taxes under its economic nexus law.
Nonetheless, it’s unusual for a city to require out-of-city sellers to collect local excise tax. In most cities, local excise taxes apply only to sales by businesses with a physical presence in the locality.
The city’s move is also unusual in that it’s requiring all remote wine sellers shipping DTC into Chicago to collect and remit Chicago liquor tax. Most state economic nexus laws provide an exception for small remote sellers, requiring them to register only if their sales into the state exceed a certain threshold (e.g., $100,000 in sales or 200 transactions). But according to the Chicago ordinance, the liquor tax applies to “any person who engages in the business of retail sale of alcoholic beverages in the City of Chicago or to purchasers in the City.”
Registration requirements for out-of-state wine sellers
All wineries selling DTC in Illinois are required to register with the Illinois Department of Revenue and obtain an Illinois Winery Shipper’s License prior to making sales to consumers in the Land of Lincoln. Wineries are permitted to ship up to 12 cases of wine for personal consumption per adult resident (aged 21 or over) per year. The cost of the license depends on the volume of wine produced annually; see the Illinois Liquor Control Commission for more details.
Generally, businesses are required to register with a tax authority prior to making any sales into a district. Interestingly, wineries with no physical presence in Chicago are required to register with the Chicago Department of Finance for a Chicago liquor tax account for direct wine shippers only after making a sale and shipment into Chicago. Wine Institute has confirmed: “Winery shipper’s licensees outside of Chicago are advised to wait to submit a new account registration application until after they have made a sale to a consumer in Chicago.”
However, businesses that were making DTC wine sales in Chicago prior to July 1, 2020, are required to register with the Chicago Department of Finance and collect the Chicago liquor tax as of July 1.
Collection requirements for remote wine sellers
Rates for the Chicago liquor tax vary by alcohol content. The rates for wine are as follows:
- $0.36 per gallon of liquor containing 14% or less alcohol by volume
- $0.89 per gallon for liquor containing more than 14% and less than 20% of alcohol by volume
Illinois provides a self-distribution exception for certain wineries that self-distribute their product to Illinois retailers. To qualify for the exception, wineries must produce no more than 25,000 gallons per year and sell no more than 5,000 gallons of wine to retail licensees. Wine sellers with a self-distribution exemption are required to pay the city liquor tax on sales to Chicago retailer licensees.
Class 1 brewers can also apply for a self-distribution exemption, provided they don’t hold a brew pub license; the exemption allows them to sell no more than 232,500 gallons (7,500 barrels) of their beer to retailers annually. Self-distributing brewers must pay the tax on sales to Chicago retailer customers starting July 1.
Filing requirements for remote wine sellers
Remote wineries are not required to submit a return to the City of Chicago for any month in which no sales into Chicago were made. In other words, zero returns are not required.
For months during which sales were made, returns and payments must be submitted through the Chicago Business Direct portal. Returns and payments for July sales are due August 15, 2020.
Avalara will be ready to meet the August 15 due date for customers who confirm they have Chicago Liquor tax obligations. Indeed, Avalara for Beverage Alcohol can help businesses manage beverage alcohol tax compliance challenges in all states and local jurisdictions.
The 2021 sales tax changes report: midyear update
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