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Illinois fixes marketplace law for marketplace sellers

Illinois made marketplace facilitators responsible for collecting and remitting tax on third-party sales starting January 1, 2020. Unfortunately, the state neglected to eliminate a similar tax collection requirement for marketplace sellers based in Illinois, so some marketplace transactions were taxed twice. The recent enactment of Senate Bill 2066 should right that past wrong.

SB 2066 provides a sales tax exemption for marketplace transactions that were double taxed between January 1, 2020, and December 31, 2020. Any marketplace seller that collected and remitted retailers’ occupation tax on transactions for which the marketplace facilitator collected use tax may file a claim for a credit of that tax.  

To qualify for the tax credit, a marketplace seller must:

  • Have properly collected and remitted the tax
  • Have records demonstrating the marketplace facilitator collected and remitted use tax on the same transactions

Note: A marketplace seller won’t be granted the retailers’ occupation tax credit if the marketplace facilitator has already received or filed a claim for use tax credit for the same transaction.

Could the mix-up have been avoided?

Probably. Illinois has an incredibly complicated tax system. While most states have a sales tax and a complementary use tax, Illinois has the following:

  • Retailers’ occupation tax (state and local) on the retail sale of tangible personal property
  • Service occupation tax (state and local) on the retail sale of taxable services
  • Use tax (state only) on tangible personal property
  • Service use tax (state only) on services

Prior to January 1, 2021, remote retailers with a tax collection obligation in Illinois were generally required to collect the state use tax, which is one reason some marketplace sales were taxed twice in 2020: While out-of-state marketplace facilitators collected the use tax, in-state marketplace sellers had to collect the retailers’ occupation tax.

A change that took effect January 1, 2021, helped prevent further double-tax trouble: Remote retailers with an obligation to collect are now generally liable for state and local retailers’ occupation tax. The local portion is usually based on the rate in effect at the point of delivery, though different rules may apply to out-of-state retailers with inventory in Illinois.

The tax structure is so complicated that the Illinois Department of Revenue created a flow chart to help out-of-state retailers — and especially marketplace facilitators and sellers — determine which tax they owe and at what rate. It then had to update the flowchart. You can get more details in this article and this Wacky Tax Wednesday post if you’re interested. If you’re feeling brave, jump to the Department of Revenue’s Level the Playing Field for Illinois Retail Act Flowchart.

Retailers in Illinois are generally permitted to retain any use tax collected from consumers, so long as they’ve remitted the applicable retailers’ occupation tax to the state. Therefore, SB 2066 doesn’t require marketplace sellers to offer a refund to their customers after they receive the tax credit. 

An online auction house is not a marketplace

SB 2066 also clarifies that a “marketplace facilitator” does not include internet auction listing services licensed under the Auction License Act.

The Illinois Department of Revenue has yet to update its website to account for SB 2066. In the meantime, if you’re an out-of-state business unsure of whether you have an obligation to collect Illinois sales and use tax, taking this free sales tax risk assessment can help.

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