Recent developments for Illinois’ marketplace facilitator tax law.
- July 23 – the IDOR publishes emergency rules with specific guidance regarding food delivery marketplace facilitators (PDF).
- June 9 – the IDOR issues updated FAQs for marketplace facilitators, marketplace sellers and remote sellers.
- June 8 – IDOR revises its “Leveling the Playing Field Retailer Flowchart” (PDF).
- June 3 – IDOR publishes “What’s New in 2021 for Remote Retailers and Marketplace Facilitators PowerPoint Presentation” (PowerPoint).
- June 1 – IDOR publishes a Compliance Alert for reporting issues on form ST-1, Sales and Use Tax Return (PDF).
Illinois’s marketplace collection law at a glance:
- Retailer’s Occupation Act: 35 ILCS 120/2
- Service Use Tax Act: 35 ILCS 110/2d
- Use Tax Act: 35 ILCS 105/2d
Tax collection threshold: $100,000 in sales of tangible personal property or 200 separate transactions for the sale of tangible personal property within the preceding 12-month period. (Includes sales facilitated on behalf of marketplace sellers.)
“Marketplace facilitator” defined: A person who, pursuant to an agreement with an unrelated third-party marketplace seller, directly or indirectly through one or more affiliates facilitates a retail sale by an unrelated third party marketplace seller by:
- listing or advertising for sale by the marketplace seller in a marketplace, tangible personal property that is subject to tax under this Act; and
- either directly or indirectly, through agreements or arrangements with third parties, collecting payment from the customer and transmitting that payment to the marketplace seller regardless of whether the marketplace facilitator receives compensation or other consideration in exchange for its services.
“Remote retailer” defined: A retailer that does not maintain within this State, directly or by a subsidiary, an office, distribution house, sales house, warehouse or other place of business, or any agent or other representative operating within this State under the authority of the retailer or its subsidiary, irrespective of whether such place of business or agent is located here permanently or temporarily or whether such retailer or subsidiary is licensed to do business in this State.
Background: Marketplace facilitator collection in Illinois
Like most states with a sales tax, Illinois enacted a marketplace facilitator sales tax collection law after the 2018 Wayfair decision. The goal of this law was to “level the playing field” between online and in-store sales by requiring marketplace facilitators and remote retailers to collect sales tax. However, the interaction of Illinois’ unique sales tax system and the collection requirements imposed on digital marketplaces created issues that had to be resolved by a series of “fix” bills and guidance from the IDOR.
Sales Tax in Illinois
Illinois imposes two separate but complementary taxes upon the sale and use of tangible personal property: the Illinois Retailers’ Occupation Tax (ROT) and the Use Tax (UT). Typically, customers pay UT to retailers, who must remit the tax to the Illinois Department of Revenue unless the retailer has already remitted ROT upon the gross receipts from the same sale. If ROT has already been paid on the transaction, then the seller may keep the UT collected from the customer. Therefore, although a single retail sale transaction triggers the imposition of both the ROT and UT on the retailer and customer, only one of the taxes must be remitted to the state. If a retailer does not have nexus with Illinois and therefore lacks ROT or UT obligations, the Illinois customer must pay UT directly to state.
IDOR emergency rules cover food delivery marketplaces and formalize February guidance
On July 21, 2021, the IDOR released emergency rules formally reversing Compliance Alert 2021-01, regarding the obligations of marketplace facilitators to collect the Chicago soft drink tax and metropolitan authority’s retailer tax. The emergency rules provide that marketplace facilitators must collect both taxes. The rules are retroactive to July 13, 2021.
In connection with this change, provisions were added to emphasize that food delivery services that are considered marketplace facilitators must provide food service establishments with a certification that the food delivery service assumes the rights and duties of a retailer under the Retailers’ Occupation Tax Act and all applicable local taxes administered by the IDOR for sales made by the food service establishment on the marketplace, and that it will remit all such taxes for such sales.
The emergency rules also describe obligations of local taxing jurisdictions to provide data to the IDOR so taxpayers can determine the correct rates of local tax due on transactions.
Section 131.175 of the emergency rules provides that beginning February 1, 2022 and on or before February 1 of each year thereafter, the IDOR will make available to each local taxing jurisdiction the taxing jurisdiction’s boundaries, determined by the IDOR, for its verification. Jurisdictions shall verify these taxing jurisdiction boundaries and notify the IDOR of any changes, additions, or deletions by April 1 of each year in the form and manner required by the IDOR. The IDOR will use its best judgment and information to confirm the information provided by the taxing jurisdictions and update its database. The IDOR will administer and enforce the changes on the first day of the next following July.
The clerk of any municipality or county from which territory has been annexed or disconnected shall notify the IDOR of that annexation or disconnection. Required documentation shall include a certified copy of the plat of annexation or, in the case of disconnection, the ordinance, final judgment, or resolution of disconnection together with an accurate depiction of the territory disconnected. Notification shall be provided to the IDOR either:
- On or before the first day of April, whereupon the IDOR will confirm the information provided by the municipality or county and update its database and proceed to administer and enforce the confirmed changes on the first day of July next following proper notification; or
- On or before the first day of October, whereupon the IDOR will confirm the information provided by the municipality or county and update its database and proceed to administer and enforce the confirmed changes on the first day of January next following proper notification.
January 2021 sales tax guidance update
The Illinois Department of Revenue (IDOR) recently issued updated sales tax rules and guidance for remote sellers and marketplace facilitators. The updated rules and guidance reflect changes made by the 2019 “Leveling the Playing Field for Illinois Retail Act” that became effective on January 1, 2021 (Public Act 101-0031 and Public Act 101-0604).
Updated Retailers Occupation Tax (ROT) rules
The new ROT administrative rules address six categories of retailers with different tax liabilities:
- Remote retailers incurring state and local ROT using destination sourcing for sales made to Illinois purchasers;
- Marketplace facilitators incurring state and local ROT using destination sourcing for sales made over the marketplace on behalf of marketplace sellers to Illinois purchasers;
- Marketplace facilitators incurring state and local ROT using origin sourcing for their own sales that are fulfilled from inventory located in Illinois and incurring state and local ROT using destination sourcing for all other sales of its own;
- Out-of-state retailers with a physical presence in Illinois incurring a use tax collection obligation for sales made outside Illinois and shipped or delivered to Illinois purchasers; such retailers also incur state and local ROT using origin sourcing for any sales made in Illinois;
- Illinois retailers, including brick and mortar retailers, incurring no state or local ROT for sales made over a marketplace (the marketplace facilitator will now incur state and local ROT liability based on destination sourcing for these sales); and
- Illinois retailers, including brick and mortar retailers, incurring state and local ROT based on origin sourcing for sales made in Illinois.
As a result of these differing tax obligations, the IDOR advises that it is critical that retailers examine their selling activities to determine their specific tax liabilities. This is especially important for retailers that engage in multichannel retailing (for example, retailers that engage in selling through their own website, as well as through a marketplace, or Illinois brick and mortar retailers that also sell over a marketplace).
Finally, the scope of the rules is limited to state and local ROT. The rules do not impact the liability of marketplace sellers and remote retailers for other taxes administered by the IDOR or taxes administered by localities.
Destination-based sales tax guidance
On January 4, 2021, the IDOR published a website with technical guidance for remote retailers and marketplace facilitators who must collect destination-based sales tax starting Jan. 1, 2021. The website addresses how these taxpayers can determine tax rates and location codes, add and change locations on a MyTax Illinois account, and properly file Forms ST-1/ST-2.
Threshold calculation guidance for marketplace facilitators
Illinois Informational Bulletin FY 2021-02-A, provides additional ROT guidance for marketplace facilitators. The guidance advises that for the purposes of calculating the remittance threshold determination for marketplace facilitators, two categories of sales should be excluded:
- sales for resale, and
- sales of tangible personal property that is required to be registered with an agency of Illinois, including motor vehicles, watercraft, aircraft, and trailers.
All sales other than these, even if they are exempt from tax, must be included in calculating the tax remittance thresholds. Finally, a marketplace facilitator is considered to be habitually engaged in the selling of tangible personal property and as such, no sales made by a marketplace facilitator are considered to be occasional sales (unlike a remote retailer). Therefore, marketplace facilitators do not have occasional sales to exclude from their tax remittance threshold determination.
Further guidance was provided in Sept. 2020 in Illinois Informational Bulletin FY 2021-2: Retailers’ Occupation Tax Guidance for Remote Retailers as set forth by the Leveling the Playing Field for Illinois Retail Act.
Occasional sales on marketplace platforms
The IDOR takes the position that marketplace sellers cannot qualify for the occasional sale exemption for ROT. Generally, persons who make isolated or occasional sales do not incur tax liability because ROT is imposed on persons engaged in the business of selling tangible personal property. However, according to an IDOR General Information Letter released on Jan. 28, 2021, marketplace sales are not eligible for the occasional sale exemption.
The IDOR noted that under the new administrative rules that took effect in 2021, a marketplace facilitator is considered a retailer engaged in the occupation of selling at retail in Illinois for ROT purposes if it meets the annual $100,000 in sales or 200 transaction thresholds. Thus, a marketplace facilitator makes more than isolated or occasional sales. Additionally, a “marketplace” is a location held out to the public as being habitually engaged in the selling of tangible personal property.
Ill. Dept. of Rev., General Information Letter ST 21-0003 (Jan. 28, 2021).
June 2021 Compliance Alert
The IDOR published a compliance alert on June 1 (PDF) noting that it had identified a large number of retailers who filed Form ST-1 returns for periods after January 1, 2021, with sales amounts reported only on lines 6a and 7a, the lines used to report tax on sales subject only to Illinois Use Tax.
These retailers may not be properly assessing, collecting, remitting, and reporting Illinois taxes on some or all of their sales. Some of their sales may be subject to Retailers’ Occupation Tax at the origin rate or destination rate, depending on the specifics of each sale.
The Compliance Alert notes that in-state retailers must collect and remit state and local ROT at the origin rate. Out-of-state retailers with a physical presence within the state must determine on a sale-by-sale basis if their selling activities take place within the state:
- If selling activities occur in Illinois (for example, sales are filled from inventory in Illinois or other selling activities occur in Illinois; see, e.g., 86 Ill. Adm. Code 270.115), then state and local retailers’ occupation tax is calculated using the origin rate for that sale.
- If selling activities occur outside Illinois, then use tax must be collected and remitted for that sale.
Remote retailers meeting the state’s $100,000 in sales/200 transaction threshold must collect and remit state and local ROT at the destination rate.
Taxes for sales made by a marketplace facilitator on behalf of a marketplace seller are incurred at the tax rate in effect at the purchaser’s location (destination rate). This applies to sales made through a marketplace by:
- Illinois retailers
- Out-of-state retailers (with or without physical presence)
Sales made over the marketplace by a marketplace facilitator itself are taxed as follows:
- For sales that are fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the location of the Illinois inventory (origin rate);
- For sales for which selling activities otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the location of the selling activities (origin rate);
- For sales that are not fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the purchaser’s location (destination rate).
Developments: Illinois’ marketplace and remote seller collection laws
- May 30, 2021 – the Illinois Legislature passes S.B. 2066, which creates an exemption and retroactive credit for marketplace sellers for transactions in 2020 where tax was paid by the marketplace seller and the marketplace facilitator.
- Feb. 23, 2021 – Illinois issues responses to Frequently Asked Questions regarding marketplace facilitators, marketplace sellers, and remote retailers.
- Feb. 1, 2021 – IDOR issues a Compliance Alert on the tax remittance obligations of remote retailers, marketplace sellers, and marketplace facilitators. It concluded that remote retailers and marketplace facilitators must collect and remit state and local ROT administered by the IDOR – including the Chicago Home Rule Municipal Soft Drink ROT. However, marketplace facilitators are not required to collect and remit other (non-ROT) taxes administered by the Department on sales made by marketplace sellers over the marketplace and remote retailers, including the Prepaid Wireless E911 Surcharge, Illinois Telecommunications Access Corporation Assessment, and Tire User Fee.
- Jan. 1, 2021 – Illinois issues updated sales tax rules for remote sellers and marketplace facilitators. The updated rules and guidance reflect changes made by the 2019 “Leveling the Playing Field for Illinois Retail Act” that became effective on January 1, 2021.
- Sept. 18, 2020 – IDOR proposes regulations implementing their remote seller and marketplace facilitator legislation. (PDF) The guidance adds Ill. Admin. Code tit. 86, § 131.101 et seq. to provide updated definitions, explain the determination of remote retailer status, and explain when the gross receipts and separate transaction thresholds are met.
- May 19, 2020 – IDOR issues proposed regulation 150.804 clarifying the state’s marketplace facilitator legislation (PDF). Under the proposed regulations, a marketplace facilitator must certify to marketplace sellers that it assumes the rights and duties of a retailer for Illinois use tax purposes, must maintain records of its marketplace sellers, and must clearly indicate to sellers that it is listing goods on behalf of a clearly identified seller. The proposed regulations also provide detail and definitions regarding the $100,000 annual revenue or 200 annual transactions thresholds. Finally, the proposed regulation clarifies that the marketplace requirements apply only to use tax obligations and marketplace facilitators are not authorized to remit sales tax obligations (related to orders fulfilled from in-state inventory).
- Jan. 1, 2020 –Illinois expands nexus to include marketplace facilitators that meet certain thresholds.