A Wayfair 2.0 case is brewing in Illinois. How level can the playing field be?

Illinois created the Leveling the Playing Field for Illinois Retail Act in 2019 with the intention of making the state’s sales and use tax requirements fair for Illinois-based retailers, remote retailers, and marketplace facilitators alike.

What is colloquially known as “Illinois sales tax” is actually four distinct taxes in Illinois:

• Retailers’ occupation tax on tangible personal property
• Service occupation tax 
• Service use tax 
• Use tax on tangible personal property

The use tax rates include a percentage allocated to local governments, so retailers that collect use tax don’t have to calculate additional local taxes. The Leveling the Playing Field Act didn’t change the four tax types, but it did specify who has to collect which tax and at what rate.

The law created new types of retailers with different sales and use tax obligations, effective January 1, 2021. The type of seller determines the sales tax sourcing rules and the tax type.

• In-state sellers (aka, Illinois retailers) are based in Illinois and their selling activity occurs in Illinois. In-state sellers charge customers state and local retailers’ occupation tax at the rate in effect at the seller’s location. This is known as “origin sourcing.” The buyer’s address usually doesn’t come into play, even when sales are for delivery.

• Out-of-state sellers have a physical presence in Illinois but also ship goods to Illinois customers from locations outside the state. Out-of-state sellers can have two different types of liability, depending on the nature of their presence in Illinois.

An out-of-state seller that has inventory in Illinois and uses it for direct sales has physical presence in Illinois so is considered an in-state seller. When filling orders for Illinois customers from inventory located in the state, these businesses owe the state and local retailers’ occupation tax based on the ship-from address or location of other business activity in the state (origin sourcing).

However, if an out-of-state seller fills orders for Illinois customers from inventory located in another state, the order is subject to the state use tax; no separate local taxes apply.

Effective January 1, 2021, marketplace inventory used solely to fulfill orders through a registered marketplace facilitator does not create physical presence for a remote marketplace seller because the marketplace facilitator is considered the retailer responsible for sales tax.

For out-of-state sellers with another type of physical presence in Illinois (i.e., not inventory), different rules may apply.

• Remote sellers do not have a physical presence in Illinois and always ship goods to Illinois customers from out of state. Remote sellers charge customers state and local retailers’ occupation tax at the rate in effect at the delivery address. This is known as “destination sourcing.”

The Leveling the Playing Field Act also requires marketplace facilitators to remit state and local retailers’ occupation taxes for all sales made through the platform effective July 1, 2021. Sourcing requirements for marketplaces are similar to those described above. 

When fulfilling orders from inventory located in Illinois, marketplaces should use the origin sourcing model and collect state and local retailers’ occupation tax at the rate in effect at the location of the inventory, or the rate where selling activities otherwise occur in Illinois (for example, the location where the order was taken). When filling orders from outside Illinois, marketplace facilitators must use destination sourcing and remit the state and local retailers’ occupation tax at the rate in effect at the point of delivery. 

Does all that make sense? 

If you find it confusing, you’re not alone. It’s no wonder the Illinois Department of Revenue created a Leveling the Playing Field for Illinois Retail Act Flowchart and an Illinois (In-State) Retailer’s Sales Tax Responsibilities Flowchart to help taxpayers understand their obligations. The department has also published additional guidance in the form of ST-23-0035-GIL, an Illinois Sales & Use Tax Matrix, and a Leveling the Playing Field for Illinois Retail Act Resource Page.

There may be a better way, Illinois. And at least some Illinois lawmakers think Senate Bill 3362 may create it.

SB 3362 applies destination sourcing rules for out-of-state sellers — retailers with a presence in Illinois that ship tangible personal property to Illinois customers from locations outside the state. Per the bill, out-of-state sellers are liable for state and local retailers’ occupation taxes at the rate in effect at the delivery address when shipping goods from locations outside Illinois. 

The legislation will make it so remote retailers and out-of-state sellers shipping from outside the state are subject to the same sourcing rules effective January 1, 2025. Instead of applying the single Illinois use tax rate to transactions shipped from outside Illinois, as they do today, out-of-state sellers will use destination sourcing like remote retailers. 

When shipping goods from inventory located in Illinois, these out-of-state sellers will continue to collect state and local retailers’ occupation taxes at the rate in effect at the origin of the sale (origin sourcing). Sales tax requirements for in-state (Illinois) retailers also will not change.

The Illinois Department of Revenue supports the legislation. Yet others worry that instead of easing the sales tax compliance burden for out-of-state sellers, SB 3362 will make sales tax compliance more complex for out-of-state sellers. 

“Under the current Leveling the Playing Field law in Illinois, remote sellers face an incredible burden in efforts to comply with the collection responsibilities,” says Diane Yetter, founder of Sales Tax Institute. “Assuming SB 3362 is signed by the governor, this undue burden will apply to any seller that is located outside of Illinois or delivers goods from outside of Illinois. Not only is the retailer required to figure out which jurisdictions a certain address lies in, but they then need to look up the Illinois ‘location code.’ Once they have the location code, they will then be required to consolidate all sales that are in the same location code. Then they will need to complete form ST-2 detailing all the locations and associated sales. Not an easy exercise at all! Today, out-of-state sellers are only required to collect the state 6.25% on all sales originating from outside the state and only file the ST-1 as out-of-state sales. The effort to file all the locations on the ST-2 is significant.”

Scott Peterson, VP of Government Relations at Avalara, notes there aren’t many choices for the Illinois Legislature if the courts agree with the plaintiffs in the PetMeds or Coast to Coast case. 

“Other states chose either to eliminate origin sourcing so that every retailer uses destination sourcing (Colorado, Kansas, and Washington), or create a single statewide rate for remote sellers (Alabama and Texas),” Peterson explains. “The first option equalizes the burden by exposing everyone to the burden. Where this was done it wasn’t popular. The second option makes things very simple for remote sellers (it’s hard to know how that would work for out-of-state sellers as defined in Illinois), but then requires the state to create a rate that approximates the effective state and local tax rate in the state. There is still rate differential risk with the second option and over time, the locals distrust the distribution formula for the local portion of the statewide rate. It is hard to see Illinois ever doing this without losing a court case.” 

Governor JB Pritzker signed SB 3362 into law on August 9, 2024. However, Illinois sales tax compliance will continue to challenge many retailers after the legislation takes effect on January 1, 2025.

Avalara can help. An Illinois Department of Revenue certified service provider, Avalara software automates sales and use tax calculation, collection, and remittance, improving accuracy and reducing the cost of compliance for businesses. Find out how.