Latest Updates on Sales Tax Problems in Illinois
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Since January 1, 2020, Illinois has required marketplace facilitators who cross the state's economic nexus thresholds to collect retailers’ use tax. However, this has caused serious problems for online sellers, as Amazon has a number of warehouses in the state. With this change, marketplace sellers were expected to pay the retailers’ taxes out of pocket.
Luckily, Illinois is in the process of making some updates to solve these sales tax problems for Amazon sellers. As of January 1, 2021, marketplaces will be required to collect retailers’ occupation tax, rather than marketplace sellers. But what does this mean for remote sellers outside of Illinois?
In this episode of Sales Tax and More, Michael J. Fleming is interviewed by his co-host Ellie Moffat about the sales tax problems in Illinois regarding marketplaces and Amazon sellers. Michael explains the cause of these problems, the current updates, and what the state has been doing to resolve the issues. Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming shares the difference between retailers’ use tax and retailers’ occupation tax in Illinois
Where did the problems with the collection of retailers’ tax in Illinois first begin?
How Illinois has resolved the sales tax problems for Amazon sellers
What remote sellers outside of Illinois need to know about collecting sales tax
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
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Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
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Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is, of course, sales tax. Today, my co-host will be interviewing me about the mess Illinois has made in regards to marketplaces and remote sellers. But before we get started, I'd like to introduce you to Ellie.
[0:51] Ellie: Hi, everyone, Mike, it's great to be here. I'm gonna do a quick introduction for Sales Tax and More, and then I'll jump right in. So Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of consultations, research, sales tax return, sales tax registration, sales tax audits, and like are named states more. So if you have questions about our services, we will give you plenty of ways to reach out and ask us, please don't hesitate to reach out. So Mike, we have some pretty important stuff to discuss today. But before we dive in, could you give us a 10,000 foot overview of some of the concepts that we're going to be talking about?
[1:41] Mike: Yeah, absolutely. And, yeah, this is some important stuff. In Illinois, like in a number of states, they make a difference. Between when you have a physical presence inside the state, like a warehouse inventory in a warehouse, and selling from outside the state, into the state with no physical presence whatsoever. So if you're outside of the state and selling insight into the state, they want you to collect the retailer's use tax. And the retailers use tax is just the state rate. Generally, you're not collecting any of the local rates. It's just a state rate. So outside the state selling into the state retailer's use tax. However, if you have a location in the state, it's the retailer's occupation tax. And that could be inventory in an Amazon warehouse could create this requirement for the retailer's occupation tax. And that's their sales tax. That aligns more with their sales tax, this retailers occupation tax, and it's based upon where the sale originates. So, since you're inside the state, Illinois is one of those states that uses origin based sourcing. So if you're in the state, then you had inventory in a Chicago warehouse, then you would use the rate where that Chicago warehouse is located. So that's what a lot of what we're going to be talking about today is these two taxes to retailers use tax versus the retailer's occupation tax.
[3:34] Ellie: Okay, thank you so much for that, Mike. So now that we have a background, where did these problems begin?
[3:42] Mike: Well, if you want my opinion, these problems began when you've got the Illinois legislature not knowing how to spell sales tax. So either that or they just have totally lost their minds. But that's my opinion. So let's go to some of the facts out there. In October of 2018, the economic nexus thresholds for Illinois became effective. And they said that if you cross $100,000 or 200 transactions, then you had a requirement to collect their retailers' use tax. So they're assuming that you know, you don't have a physical presence, you know, otherwise, you would have to get registered for the retailer's occupation, but remote sellers people selling from outside the state into the state should be collecting the use tax. So far, no problems. That makes sense. That's what all the other states are doing. So we haven't begun to see the problems yet. We don't have to wait long though. Because effective January 1st of 2020. Illinois requires marketplace facilitators who cross the same thresholds, $100,000 or 200 transactions to go ahead and collect the use tax also. Now, this is where I think that Illinois lost their mind. They either didn't remember that Amazon has a bunch of warehouses in Illinois, or they didn't know enough to know that it would be a problem, because they said that Amazon had to collect the use tax, which means that Amazon has locations inside of Illinois, they should have been collecting the retailer's occupation tax. But it gets worse because they say that anyone who has inventory in an Amazon warehouse still has to, to pay the retailers occupation tax.
[6:09] Now, Amazon says, while we can't, you know, allow you to collect the retailer's occupation tax. And it's unclear, you know, the way that it was written, I believe that Amazon was collecting tax on all transactions. But they were just collecting a use tax. So that's a problem. Maybe that's not the way it was. Maybe they were just collecting use tax for the sales made outside the state inside the state. But the state of Illinois came out and said, Yeah, marketplace, sellers. Oh, yeah, you still have to pay the tax. And whenever anyone tried to explain that Amazon's not letting that happen. And can they get a credit for the Amazon taxes? Well, Amazon said, no, we can't credit you.'' The state said, no, we can't credit you for the taxes that Amazon's already collecting. So we've got this big problem here, we've got the sellers, you know, where Amazon should be collecting and remitting the tax on their behalf. Maybe they are, maybe they're not, but then the sellers need to pay the tax anyway. But only they don't have a mechanism to collect the tax. So all the tax is coming out of their pocket, setting up a situation that is just, you know, I think going to, or I thought was going to take them all straight to court, I just don't think that you could have let that go forward. But it looked like they were because they kept coming out to both parties, both Amazon and the state kept coming out and saying, you know, hey, this is what has to be done. So you gotta do it. So that, you know, was pretty bad. It just sounded to me like a class action lawsuit against both Amazon and the state waiting to happen. A lot of our clients, you know, had made the decision that hey, Amazon's supposed to be doing this. And we don't think that Illinois is going to be able to enforce this. And if they do enforce it will get a class action lawsuit against both Amazon and the state of Illinois. So anyway, it was a really bad situation. And you know, the Amazon kept making statements Illinois kept making statements Illinois took the position of so sad, too bad. That's basically the position that Illinois took. So, by the way, that plan, hurt Illinois, probably more than anything else. Because, you know, so if you're selling on Amazon, chances were you had inventory in Illinois. So rather than collect all of this new revenue, you know, you are still in the same old place, some compliance, some not compliant. So it's hurting Illinois the most but Illinois stuck to their guns without you know, they just kept saying, sorry, this is what you got to do. This is what you got to do. So that's what the biggest problem in Illinois is that when they instituted this marketplace, facilitating a collection requirement, they put it on the wrong tax.
[9:44] Ellie: Wow. That sounds like a pretty awful situation for all parties. So we know there's some new news. So has there been a resolution Mike?
[10:01] Mike: Sort of, Illinois in their infinite wisdom, we've got some issues. But the biggest issue that I saw has been taken care of, because effective on January 1 of 2021, which, oh my gosh, that's right around the corner. But January 1 of 2021 marketplaces now have to collect the retailer's occupation tax. So they've gone back and corrected this error. Someone woke up one morning and said, You know what? Yeah, we probably did this backwards. So let's go in and fix this. So as of January 1 2021, there's this problem that should go away for marketplace sellers. Because now that Amazon is collecting and remitting the retailer's occupation tax, they should no longer have a requirement to collect it, or pay it out of their own pocket, as Illinois was telling them up until this point.
[11:12] Ellie: So I think what everyone really wants to know, here is, is everything all good now,
[11:18] Mike: Well we're dealing with Illinois, my response is not really because as of July 1 of this year, they said that all remote sellers need to start collecting the retailer's occupation tax rather than collect the use tax. So they said this, because they wanted to level the playing field, you know, they didn't want the sellers outside of Illinois getting a benefit over the sellers inside of Illinois. Now, the benefit would be sellers outside of Illinois only have to collect the state level tax, if they're collecting the use tax. So they wanted them to be collecting all the local-level taxes. Now, remember, we said that if you have a physical presence in Illinois, the way that you collected the retailer's occupation tax, was that you would use origin-based rates, origin-based sourcing, this means that there's just one rate that these in-state companies have to remember, or maybe they have a couple of locations. But you don't have to, you know, use destination-based sourcing, which means that every time you deliver something, use the rate from the delivery address. Now, this new requirement for these remote sellers is that they have to use destination-based sourcing. So that's a problem because it's the same tax. The retailer occupation tax now, but Amazon and the other marketplaces, they need to use destination-based sourcing for some of their sales, from sales that come from inventory inside of Illinois, they have to use origin-based sourcing. If you have a retailer who's you know, got a physical location inside of Illinois, they have to use this origin-based sourcing. And, you know, these, it's more work for these retailers who are outside the state. Now, the reason that this is a problem is because it's basically discriminating against interstate commerce. You can't make something tougher for a seller who's located outside the state and make it easy for a seller inside the state that discriminates against interstate commerce. And it's actually one of the four prongs of a test developed by the United States Supreme Court to determine if a tax is constitutional or not. This was the Complete Auto Transit versus Brady case in 1977. And the third prong is whether or not the tax discriminates against interstate income. And I think this one does. So in summary, Illinois has corrected the worst issue one had of this mess that it's made, but in trying to correct that issue, it looks like they've made another mess because I think that this sets them up for the first constitutional challenge the first lawsuit that may go to the Supreme Court about their economic nexus, you know, so the states have been walking on eggshells not to get this back in the court. But because of the way Illinois has done this, I think they're throwing a softball to any attorney out there who's looking to choose the state to challenge the Wayfair ruling on or at least, you know, the thought is not challenge it, because we're not going to get Wayfair overturned. But the individual state’s version of economic nexus has resulted in the Wayfair case, we may see individual states be challenged. And I think that Illinois is one of those states that, unfortunately, set themselves up unless they fix it for a challenge to their economic Nexus.
[16:02] Ellie: Well, Mike, we did it again. We talked about everyone's favorite topic here: sales tax. And I just want to close out here by saying that if you have sales tax needs, Sales Tax and More again, we offer many solutions and services, you can reach out to me directly at emoffat@salestaxandmore.com or visit our website at www.salestaxandmore.com. We also have a lot of resources out there for everyone to utilize as well. And, Mike, do you want to close out and say anything else?
[16:48] Mike: Well, we appreciate everyone joining us today, and we hope to see and hear you on the next episode of the Sales Tax and More Podcast.
[17:00] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.