There may be a better way, Illinois – Wacky Tax Wednesday

Most states levy a sales tax upon taxable retail sales, and when a retailer isn’t required to collect and remit the sales tax, consumers are generally required to remit the associated use tax directly to the state or local tax authority. In some states, like California, retailers may also collect and remit use tax under some circumstances.

Sales tax in Illinois “is a combination of ‘occupation’ taxes that are imposed on sellers’ receipts and ‘use’ taxes that are imposed on amounts paid by purchasers. Sellers owe the occupation tax to the department; they reimburse themselves for this liability by collecting use tax from the buyers.” So actually, there are four distinct sales taxes:

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

Here’s the kicker: Occupation taxes include applicable local taxes; use taxes do not.

Whether a retailer is required to collect occupation tax or use tax depends on certain circumstances, including whether it:

• Has a physical presence in Illinois
• Has economic nexus in Illinois (i.e., $100K in gross receipts from Illinois purchasers or 200 or more separate transactions to Illinois purchasers in the preceding 12 months)
• Has inventory in Illinois
• Has other sales activities in Illinois
• Sells through a marketplace facilitator

For an out-of-state retailer, these circumstances determine whether the retailer is responsible for collecting and remitting tax in Illinois, what type of tax (ROT or use tax), and how to source the sale (by origin or destination). Thus, the flowchart.

According to one little box in the chart, an out-of-state retailer “may have two types of liability”:

• If selling activities occur in Illinois (e.g., sales are filled from inventory in Illinois or selling activities otherwise occur in Illinois), state and local ROT is due at the rate in effect at the origin of the sale
• If selling activities occur outside Illinois, the state 6.25% use tax (no local tax) must be collected

According to another box, marketplace facilitators are required to collect state and local ROT at the destination rate (the location of the purchaser) for third-party sales. For direct sales fulfilled from inventory in the state, they must collect state and local ROT at the rate in effect at the location of the inventory — unless “selling activities otherwise occur,” in which case state and local ROT is due at the rate in effect of those selling activities.

If a marketplace facilitator’s direct sales are filled from inventory located outside of Illinois and no other selling activities occur in Illinois, it must collect state and local ROT at the destination rate, as with third-party sales.

The inherently confusing nature of sales and use tax in Illinois may have confused lawmakers in the state and caused some marketplace sales to be double taxed in 2020. For a time, the Illinois tax code inadvertently required both marketplace facilitators and marketplace sellers to collect tax on the same transaction. Oops.

Illinois Senate Bill 2066 seeks to rectify any past double taxation errors. If enacted, it would exempt “sales of tangible personal property made by a marketplace seller over a marketplace for which tax is due under this Act but for which use tax has been collected and remitted to the Department by a marketplace facilitator” for the period January 1, 2020, through December 31, 2020. Update: SB 2066 became law on August 27, 2021.

Marketplace sellers that can prove they properly remitted tax on such sales may file a claim for a credit with the Department of Revenue. However, if the marketplace facilitator already obtained a credit or refund for such taxes, or is seeking a credit or a refund, the marketplace seller cannot claim the credit.

A marketplace seller that obtains the credit must “maintain books and records demonstrating that the use tax on such sales has been collected and remitted by a marketplace facilitator.” 

I did catch that ferry in Igoumenitsa, by the way, marveling that no cars collided and none of the passengers who jumped out to walk on were hit (we were glad we followed their lead, as cars were packed so tightly the passenger doors wouldn’t open). The ferry workers clearly knew what they were doing. Still, we couldn’t help but think updating the process could improve the overall experience for travelers.

The folks at the Illinois Department of Revenue know what they’re doing, too, and I suppose they’re making the best of the laws they have. But I wonder, could Illinois be better served by updating its sales and use tax laws, instead?

Learn more about state sales and use tax requirements for out-of-state retailers and marketplaces in our seller’s guide to nexus laws.