Current through Register Vol. 48, No. 12, March 22, 2024
a) Background. The concept of nexus in
Illinois has evolved as a result of several court cases and legislation enacted
over time. This Section
150.803 specifically describes
economic nexus without any physical presence in Illinois and Use Tax collection
and remittance obligations associated with that nexus beginning on October 1,
2018. However, beginning January 1, 2021, Public Acts 101-0031 and 101-0604
implemented a series of structural changes to the Illinois sales tax laws
requiring remote retailers without physical presence in Illinois who meet a tax
remittance threshold in subsection (b)(1) to register with the Department and
remit all applicable State and local retailers' occupation taxes administered
by the Department, in addition to their existing requirement to collect and
remit Use Tax as provided in this Section. As a result, beginning January 1,
2021, these remote retailers' primary tax obligation is Retailers' Occupation
Tax. For more information on tax remittance obligations based on economic nexus
without physical presence on and after January 1, 2021, see the administrative
rules implementing the Leveling the Playing Field for Illinois Retail Act at 86
Ill. Adm. Code 131.
b) An
out-of-State retailer making sales to Illinois purchasers from locations
outside Illinois is required to register with the Department and collect and
remit Use Tax on those sales if it falls within the definition of a "retailer
maintaining a place of business in this State" in Section 2 of the Use Tax Act
[35 ILCS
105 ]. The Department is authorized to require these
retailers to act as tax collectors because they have established sufficient
contacts, or nexus, with Illinois. There are two groups of out-of-State
retailers that must collect Use Tax on sales to Illinois purchasers:
1) Out-of-State Retailers With a Physical
Presence in Illinois. Prior to October 1, 2018, out-of-State retailers must
have a physical presence in Illinois before they can be required to collect Use
Tax. The types of activities constituting a physical presence, as limited by
the series of court cases described in this subsection (b)(1), are found in
Section 2 of the Use Tax Act's definition of a "retailer maintaining a place of
business in this State". (See
35 ILCS
105/2). The physical presence requirement was
established in a series of United States Supreme Court decisions. See, for
example, Scripto v. Carson, 362 U.S. 207 (1960); National
Bellas Hess v. Department of Revenue of the State of Illinois,
386 U.S.
753 (1967); Quill Corporation v. North
Dakota, 504 U.S.
298 (1992). In 1996, the Illinois Supreme
Court ruled that remote retailers need only "more than the slightest" physical
presence to be required to collect Use Tax. See Brown's Furniture v. Wagner,
171 Ill. 2d 410 (1996). Any out-of-State retailer that has a physical presence
in Illinois will continue to be required to act as a Use Tax collector.
Regulations describing these types of retailers are found at 86 Ill. Adm. Code
150.801 and
150.802.
2) Beginning October 1, 2018, Out-of-State
Retailers Without a Physical Presence in Illinois. In South Dakota v. Wayfair,
Inc., No. 17-494 (U.S. June 21, 2018), the U.S. Supreme Court upheld a South
Dakota statute that imposed tax collection obligations on out-of-State
retailers that met specific selling thresholds but had no physical presence in
the state. This decision abrogated the longstanding physical presence
requirement of Quill, deeming it "unsound and incorrect". Illinois P.A.
100-0587 enacted nexus standards, effective October 1, 2018, that are virtually
identical to those upheld in Wayfair. This Section explains the requirements
for "Wayfair nexus" in Illinois.
NOTE: The provisions of this Section do not apply to
out-of-State retailers with a physical presence in Illinois. However, if an
out-of-State retailer loses physical presence nexus, it must evaluate whether
it has Wayfair nexus pursuant to subsection (c).
c) Wayfair Nexus. P.A. 100-0587 requires
out-of-State retailers with no physical presence in Illinois to register and to
collect and remit Use Tax, as provided in this subsection (c):
1)
Beginning October 1, 2018, a
retailer making sales of tangible personal property to purchasers in Illinois
from outside of Illinois must register with the Department and collect and
remit Use Tax if:A)
The
cumulative gross receipts from sales of tangible personal property to
purchasers in Illinois are $100,000 or more; or
B)
The retailer enters into 200 or
more separate transactions for the sale of tangible personal property to
purchasers in Illinois.
2)
A retailer shall determine on a
quarterly basis, ending on the last day of March, June, September, and
December, whether he or she meets either of the criteria of subsection
(c)(1)
for the preceding 12-month period. If the retailer meets either
of the criteria of subsection (c)(1)
for a 12-month period, he
or she is considered a retailer maintaining a place of business in Illinois and
is required to collect and remit the Use Tax and file returns for one
year.A)
At the end of that
one-year period, the retailer shall determine whether he or she met either of
the criteria of subsection (c)(1) during the preceding
12-month period. If the retailer met either of the criteria in
subsection (c)(1) for the preceding 12-month period, he or she is
considered a retailer maintaining a place of business in Illinois and is
required to collect and remit Use Tax and file returns for the subsequent
year.
B)
If, at
the end of a one-year period, a retailer that was required to collect and remit
the Use Tax determines that he or she did not meet either of the criteria
in subsection (c)(1) during the preceding 12-month period, the
retailer shall subsequently determine on a quarterly basis, ending on the last
day of March, June, September, and December, whether he or she meets either of
the criteria of subsection (c)(1) for the preceding 12-month
period. [35 ILCS
105/2(9) ]
d) Out-of-State Retailers Who Lose
Physical Presence Nexus. If an out-of-State retailer loses its physical
presence nexus with Illinois, that retailer must first determine whether it has
Wayfair nexus under subsection (c) prior to ceasing its collection and
remittance of Use Tax. To determine if it has met a tax remittance threshold,
the retailer must review its sales for the preceding 12-month period beginning
with the last day of the most recently passed quarter (March, June, September,
and December). If an out-of-State retailer loses its physical presence nexus
and determines it meets a tax remittance threshold as established in subsection
(c), it must maintain its registration with the Department and continue to
collect and remit Use Tax for the remainder of the one-year period that begins
on the first day following the 12-month lookback period in which it met a tax
remittance threshold. If January 1, 2021, falls during this one-year period,
the retailer must collect and remit only Use Tax for all sales made through
December 31, 2020. Beginning January 1, 2021, this retailer must remit State
and local retailers' occupation tax on all sales for the remainder of that
one-year period. See "Background" in subsection (a) and 86 Ill. Adm. Code
131.115. For periods beginning
January 1, 2021 or after, for administrative purposes, if a retailer loses
physical presence nexus in the middle of a quarter, and determines that it has
Wayfair nexus as discussed above, the retailer must maintain its registration
with the Department and continue to collect and remit Use Tax until the end of
the current month. Beginning on the first day of the following month, the
retailer must register to remit State and local retailers' occupation tax for
the remainder of the one-year period that begins on the first day following the
12-month lookback period in which it met a tax remittance threshold.
Example 1: Out-of-State Retailer A loses its physical
presence nexus with Illinois on February 15, 2019. To determine if it meets a
threshold in subsection (c)(1), Out-of-State Retailer A reviews its sales for
the 12-month period beginning January 1, 2018, through December 31, 2018. The
retailer determines it has met a threshold. Out-of-State Retailer A must
register and begin collecting and remitting Use Tax based on its Wayfair nexus
on March 1, 2019 and continue to collect and remit Use Tax until December 31,
2019.
Example 2: Out-of-State Retailer B loses its physical
presence nexus with Illinois on February 15, 2021. To determine if it meets a
threshold in subsection (c)(1), Out-of-State Retailer B reviews its sales for
the 12-month period beginning January 1, 2020, through December 31, 2020. The
retailer determines it has met a threshold. Out-of-State Retailer B must
continue to collect and remit Use Tax through the end of February 2021 and must
register as a remote retailer and begin remitting State and local retailers'
occupation tax on March 1, 2021 and continue to remit State and local
retailers' occupation tax through December 31, 2021.
e) Preliminary Evaluation of Applicability of
this Section. This Section is not applicable to the specific types of
out-of-State retailers described in subsections (e)(1) and (e)(2). Out-of-State
retailers are cautioned to first evaluate these provisions to determine whether
they must proceed to calculate the thresholds under subsection (e)(3).
1) This Section applies only to out-of-State
retailers who do not have a physical presence in Illinois. While out-of-State
retailers may believe they do not have a physical presence in Illinois, they
must carefully examine their activities in making this determination. Many
times, such retailers actually do have a physical presence in Illinois because
they maintain inventory in Illinois from which sales are filled. When sales
made to Illinois purchasers
are filled from Illinois
inventory, these retailers incur
Retailers' Occupation
Tax liability on those sales. The presence of inventory in Illinois
creates physical presence nexus for these out-of-State retailers
with
respect to sales they make from outside Illinois that are not filled from their
Illinois inventory. As a result of this physical presence nexus, they
are required to collect Use Tax on sales made to Illinois purchasers from
outside Illinois that are not filled from their Illinois inventory.
Out-of-State retailers that engage in these types of selling are not subject to
this Section because they already have nexus through their physical presence in
Illinois.
A) Through December 31, 2020,
out-of-State retailers who are making sales through a marketplace and whose
inventory is in the possession of a marketplace facilitator in Illinois and is
used to fulfill sales made over a marketplace have physical presence in
Illinois. This is because the out-of-State retailer is considered to be the
retailer with respect to these sales. See 86 Ill. Adm. Code
150.804(i)(4).
B) Beginning January 1, 2021, remote
retailers whose only inventory is in the possession of a marketplace
facilitator in Illinois and is used exclusively to fulfill sales made over a
marketplace that meets a tax remittance threshold do not have physical presence
in Illinois. This is because the marketplace facilitator is considered the
retailer with respect to all sales made over the marketplace beginning January
1, 2021. See 86 Ill. Adm. Code
131.105 for
definitions.
2) This
Section does not apply to out-of-State retailers who exclusively make
nontaxable sales (i.e., 100% of their sales to Illinois purchasers are exempt).
EXAMPLE: If Out-of-State Retailer A's only activities are
sales of exempt manufacturing machinery and equipment to Illinois
manufacturers, it is not required to register with the Department. If
Out-of-State Retailer A makes any taxable sales, however, this Section applies
and it must determine whether it meets either of the thresholds in subsection
(c)(1) and is required to collect Use Tax; the rules provided in subsection
(e)(3)(E)(i) through (v) must be applied when making this determination. For
example, for purposes of determining if it has met the thresholds under
subsection (c)(1), the manufacturer must include its exempt sales as provided
in subsection (e)(3)(E)(v).
3) Calculation of the Number of Separate
Transactions or Amount of Gross Receipts. Wayfair nexus is created if an
out-of-State retailer's cumulative gross receipts from sales of tangible
personal property to purchasers in Illinois are $100,000 or more, or if it
enters into 200 or more separate transactions for the sale of tangible personal
property to purchasers in Illinois.
A) "Gross
receipts" means all the consideration actually received for a sale by the
out-of-State retailer. See 86 Ill. Adm. Code
130.401 for additional
information regarding gross receipts. Subsection (e)(3)(E) of this Section
describes the types of transactions for which gross receipts must be included
or excluded for purposes of determining if the threshold under subsection
(c)(1)(A) is met.
B) "Illinois
purchaser" means a person in Illinois who, through a sale at retail,
acquires the ownership of tangible personal property for a valuable
consideration. [35 ILCS 105/2
]
C) "Entering into a sale" occurs
when an out-of-State retailer has taken action that binds it to a sale. This
may occur even though the tangible personal property that has been sold has not
yet shipped to the purchaser.
EXAMPLE: On August 20, 2018, an out-of-State retailer takes
actions binding it to a sale that is scheduled for shipment on October 15. This
sale must be included in the calculation used to determine the retailer's sales
transactions for its initial lookback period (see subsection
(f)(1)).
D) "Separate
transactions" means sales transactions that are documented on separate
invoices, regardless of the manner in which the tangible personal property is
delivered to the purchaser.
EXAMPLE 1: A purchaser orders 12 items of clothing from an
out-of-State retailer. He receives an invoice confirming his order of 12 items.
However, due to a back order, 3 of the clothing items are shipped separately
from the other 9 items. Shipment of the 3 back-ordered items, even with a
separate shipping invoice, is not considered a separate transaction because the
original transaction was invoiced as one sale.
EXAMPLE 2: A purchaser places an order of home repair tools
at 8:00 a.m. from an out-of-State retailer. She receives an invoice confirming
her order at 8:15 a.m. At 2:00 p.m., the purchaser realizes she needs 5 other
tools to complete the job and orders these tools from the same out-of-State
retailer. The out-of-State retailer confirms this order with a separate
invoice. In this example, two different transactions have occurred. This is the
case, even if the retailer sends all the ordered tools to the purchaser in one
package.
EXAMPLE 3: A mother places an order with Company B for care
packages to be delivered to her son's dormitory at 8 scheduled intervals during
the school year. Each delivery is separately invoiced. These are counted as 8
separate transactions.
E)
Out-of-State retailers must apply the following rules governing whether a
transaction should be included or excluded when determining if they meet either
of the thresholds in subsection (c)(1):
i)
Sales for resale must be excluded. (See 86 Ill. Adm. Code
130.201.)
EXAMPLE: Out-of-State Retailer A makes sales of seedlings to
Company B. Company B provides a resale certificate indicating that 60% of the
seedlings will be sold to customers at retail (a purchase for resale) and that
it will use 40% of the seedlings in its landscaping business (a purchase for
use). If Out-of-State Retailer A calculates the threshold using gross receipts,
it should include only 40% of the gross receipts. If it calculates the
threshold using transactions, however, the entire transaction with Company B
must be included.
ii) Sales
of tangible personal property that is required to be registered with an agency
of this State, including motor vehicles, watercraft, aircraft, and trailers,
that are made from locations outside Illinois to Illinois purchasers must be
excluded. Taxes on these items will continue to be paid, as required by Section
10 of the Use Tax Act, by purchasers as a condition of titling or registering
these items.
iii) Occasional sales
must be excluded. (See 86 Ill. Adm. Code
130.110.) Occasional sales are
not considered sales at retail. For example, a retailer that engages in selling
computers and software over the Internet closes a regional office in Michigan.
As part of that closure, it sells its office furniture and printing equipment
on an Internet marketplace platform. Transactions and gross receipts from these
sales are excluded from the calculation because they are not considered sales
at retail.
iv) Sales made by an
out-of-State retailer that are subject to Retailers' Occupation Tax must be
excluded. For example, sales made by an out-of-State retailer at an Illinois
trade show that are subject to Retailers' Occupation Tax are excluded for
purposes of calculating the thresholds in subsection (c)(1).
v) All sales of tangible personal property,
other than those excluded by this subsection (e)(3)(E), even if they are exempt
from tax, must be included for purposes of calculating the thresholds in
subsection (c)(1).
f) Determination of Obligation to Begin Tax
Collection on October 1, 2018; Determination of Obligation to Continue Tax
Collection
1) In order to determine if it is
required to begin collecting Use Tax on October 1, 2018 for sales made on and
after October 1, 2018, an out-of-State retailer must examine its selling
activities for the period September 1, 2017 through August 31, 2018. If it met
either of the thresholds in subsection (c)(1) during this period, it must
register with the Department and collect Use Tax for a one-year period on sales
made to Illinois purchasers on and after October 1, 2018. Filing frequency may
be monthly or quarterly, as provided in accordance with regulations at 86 Ill.
Adm. Code 130.501 (monthly filing applies
when a retailer's average monthly tax liability exceeds $200) and
130.502 (quarterly filing
applies when a retailer's average monthly tax liability does not exceed $200).
For monthly filers, the first return for sales made in October 2018 is due on
or before November 20, 2018.
2) At
the end of the one-year collection period in subsection (f)(1), the
out-of-State retailer must examine its sales for the year it collected Use Tax.
If it determines its sales to Illinois purchasers met either of the thresholds
in subsection (c)(1) during that year, it must continue to collect taxes for
another year. The out-of-State retailer must make this analysis each year
thereafter that it is required to collect Use Tax.
3) Alternatively, if, at the end of the
one-year collection period in subsection (f)(1), the out-of-State retailer
determines that its sales to Illinois purchasers did not meet either of the
thresholds in subsection (c)(1) during that year, it may discontinue acting as
a Use Tax collector.
A) The Department
strongly recommends that out-of-State retailers continue collecting the Use Tax
as a courtesy to their Illinois purchasers, as those purchasers will still
incur a Use Tax liability that they must otherwise self-assess and remit
directly to the Department. Out-of-State retailers may change their filing
frequency with the Department at this time in accordance with 86 Ill. Adm. Code
130.501 (monthly, as noted in
subsection (d)(1) of this Section),
130.502 (quarterly, as noted in
subsection (d)(1) of this Section), or
130.510 (annual filing applies
if a retailer's average monthly tax liability does not exceed $50).
B) If an out-of-State retailer is no longer
required to collect Use Tax and chooses to discontinue collection, it must
notify the Department.
C) If an
out-of-State retailer is no longer required to collect Use Tax and has chosen
to discontinue collection, it must redetermine, on a rolling quarterly basis,
whether it is obligated to once more begin collecting Use Tax. For each quarter
ending on the last day of March, June, September, and December, the
out-of-State retailer must examine its sales for the immediately preceding
12-month period to determine whether it met either of the thresholds in
subsection (c)(1). If it met either of those thresholds during that 12-month
lookback period, it must collect Use Tax for the following 12-month period. At
the end of that 12-month period, it must examine its sales as provided in
subsections (f)(2) and (f)(3) to determine if it must continue to collect
tax.
g)
Determination of Tax Collection Obligation of Out-of-State Retailers that First
Begin Making Sales On and After October 1, 2018. Out-of-State retailers that
first begin making sales to Illinois purchasers on and after October 1, 2018
must determine, on a quarterly basis, whether they are obligated to begin
collecting tax. For each quarter ending on the last day of March, June,
September, and December, the out-of-State retailer must examine its sales for
the immediately preceding 12-month period to determine whether it met either of
the thresholds in subsection (c)(1). If it met either of those thresholds
during that 12-month lookback period, it must collect Use Tax for the following
12-month period. At the end of that 12-month period, it must examine its sales
as provided in subsections (f)(2) and (f)(3) to determine if it must continue
to collect tax.
EXAMPLE 1: Out-of-State Retailer A makes sales to Illinois
customers beginning on November 1, 2019. At the end of December (its first
quarterly period), it calculates that it made 500 sales transactions to
Illinois purchasers. As a result, it is required to collect taxes on sales to
Illinois purchasers for a one-year period beginning January 1, 2020 through
December 31, 2020. On December 31, 2020, it must examine its sales to Illinois
purchasers for the one-year lookback period beginning January 1, 2020 through
December 31, 2020, to determine if it must continue to collect tax.
EXAMPLE 2: Out-of-State Retailer A makes sales to Illinois
customers beginning on December 1, 2019. At the end of December 2019 (its first
quarterly period), it calculates that it has not met the selling thresholds for
the previous 12-month period. Out-of-State Retailer A is not required to begin
collecting taxes at this time. At the end of March 2020 (its next quarterly
period), however, it determines that it made $200,000 in sales for the
preceding 12-month period. As a result, it is required to collect Use Tax on
sales to Illinois purchasers for a one-year period beginning April 1, 2020
through March 31, 2021. On March 31, 2021, it must examine its sales to
Illinois purchasers for the one-year lookback period beginning April 1, 2020
through March 31, 2021 to determine if it must continue to collect
tax.
h) Affected
Out-of-State Retailers. Out-of-State retailers are advised to closely examine
all their activities to determine if they are required to register under the
nexus standards of P.A. 100-0587. For instance, out-of-State retailers that
voluntarily collect Use Tax may become mandatory Use Tax collectors. Other
out-of-State retailers, such as telephone, television and catalog sellers, may
be required to register and collect and remit Use Tax on sales to Illinois
purchasers. Other types of out-of-State retailers that may be required to
register could include:
1) out-of-State
retailers without physical presence in Illinois who make sales to Illinois
purchasers using a traditional drop-ship arrangement. (See 86 Ill. Adm. Code
130.225.)
2) out-of-State retailers without physical
presence who make sales to Illinois purchasers using an Internet marketplace
prior to January 1, 2020 platform.
3) out-of-State retailers that meet the "safe
harbor" rules for trade shows, but who may nonetheless meet the Wayfair
thresholds. (See 86 Ill. Adm. Code 150.802.)
EXAMPLE: Retailer A operates a booth at a trade show and
meets the "safe harbor" rules for trade show attendance. Prior to October 1,
2018, it would not be required to collect Use Tax on sales made from outside
Illinois to Illinois purchasers because it is not considered to have a physical
presence in Illinois. On August 1, 2018, however, it determines that it has met
the thresholds under this Section for collecting Use Tax on sales made from
outside Illinois to Illinois customers. Beginning October 1, 2018, it is
required to collect and remit Use Tax on all sales to Illinois
purchasers.
NOTE: It must also remit Retailers' Occupation Tax on any
sales it makes to purchasers at an Illinois trade show. (See Section
150.802(f).)
4) Internet Auctioneers. 86 Ill. Adm. Code
130.1915 provides additional
information regarding the tax liability of auctioneers.
i) Tax Collection. Once an out-of-State
retailer determines it has nexus, it must register with the Department and
collect and remit Use Tax on the sales it makes to Illinois purchasers from its
out-of-State location. Such out-of-State retailers are subject to all
provisions of the Use Tax Act and regulations promulgated under that Act. (See
86 Ill. Adm. Code 150.)
1) Sales made to
purchasers by out-of-State retailers from out-of-State locations are subject to
the State 6.25 % Use Tax (1% for
qualifying low-rate items; see 86 Ill. Adm. Code
130.310 and
130.311) .
2) Illinois tax statutes do not authorize
local jurisdictions, except for the City of Chicago, to impose Use Tax on
general merchandise (the tax imposed by the City of Chicago is collected by the
City of Chicago and not by the Department). As a result, there is no local Use
Tax for out-of-State retailers to collect on returns filed with the
Department.
3) Illinois tax
statutes only authorize local jurisdictions to impose occupation taxes upon
retailers who are engaged in the business of selling tangible personal property
within that jurisdiction. Activities that constitute "engaging in the
occupation of selling tangible personal property" are described in Department
regulations (see, 86 Ill. Adm. Code
270.115) . Typical examples
include brick and mortar stores making over-the-counter sales. Retailers that
engage in selling tangible personal property in Illinois are subject to the
6.25% State Retailers' Occupation Tax and any applicable local occupation
taxes.
j) Tax
Distribution - Differences in Distribution of Use Tax and Retailers' Occupation
Tax
1) Use Tax remitted by out-of-State
retailers is distributed differently than Retailers' Occupation Tax and local
occupation taxes. The
1.25 % local share of the State
6.25% Use Tax is deposited into the State and Local Sales Tax Reform Fund (see
30 ILCS
105/6z-17). After amounts are transferred to the Tax
Compliance and Administration Fund, specific percentages are allocated to the
City of Chicago, the Regional Transportation Authority Occupation and Use Tax
Replacement Fund, and the Madison County Mass Transit District. Next, specific
amounts are transferred into the Build Illinois Fund. The remainder of the
monies are transferred into the Local Government Distributive Fund
[30 ILCS
115 ], from which they are distributed to all
municipalities and counties (except for Chicago, which is distributed as
described in this subsection (j)(1)) based upon the population of each
municipality or county in proportion to the total State population.
2) In contrast, the 1.25% local share of the
6.25% State Retailers' Occupation Tax, as well as the entire amount of
locally-imposed occupation taxes, are distributed to the local taxing
jurisdiction in which the selling occurred. The location in which selling
occurs is determined in accordance with Department regulations (see, 86 Ill.
Adm. Code 270.115).
It must also remit Retailers' Occupation Tax on any sales
it makes to purchasers at an Illinois trade show. (See Section
150.802(e).)