Recent developments for Illinois’ marketplace facilitator tax law.

The latest

  • July 23 – the IDOR publishes emergency rules with specific guidance regarding food delivery marketplace facilitators (PDF).
  • June 9the 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:

Relevant statutes:

  • 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:

  1. listing or advertising for sale by the marketplace seller in a marketplace, tangible personal property that is subject to tax under this Act; and
  2. 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.

Marketplace Facilitator Sales Tax Laws in Illinois

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:

  1. 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
  2. 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:

  1. Remote retailers incurring state and local ROT using destination sourcing for sales made to Illinois purchasers;
  2. Marketplace facilitators incurring state and local ROT using destination sourcing for sales made over the marketplace on behalf of marketplace sellers to Illinois purchasers;
  3. 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;
  4. 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;
  5. 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
  6. 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.

Eversheds Money Court Graphic

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, 2021the 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, 2021Illinois 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.

More resources

In this episode of the SALT Shaker Podcast, host and Eversheds Sutherland Associate Jeremy Gove explores transactional nexus with Partner Breen Schiller. The two discuss the recent Quad Graphics, Inc. v. NC Department of Revenue decision out of North Carolina determining whether there was nexus to impose sales tax on out of state sales, and how the decision relates to the U.S. Supreme Court’s holding in McLeod v. J.E. Dilworth Co.

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Last year, the Texas Comptroller proposed a regulation that affects how local sales tax is allocated for online sales, to become effective October 1, 2021. While Texas generally uses origin-based sourcing, under the new rule, online sales will generally be sourced to the destination of the sale. Local governments protested these amendments, arguing that they would disrupt the sales tax revenues generated by businesses. Now, the City of Round Rock, Texas has filed a suit against the Texas Comptroller seeking to enjoin the regulation. In the petition, Round Rock argues that the regulation’s definition of where a sale is consummated and “place of business” conflicts with Texas statutes, and would significantly decrease its annual sales tax revenue. Round Rock points to one large computer and software business, with which it has an incentive agreement, whose substantial sales tax revenues would no longer be sourced to Round Rock under the new regulation. The petition further alleges that the changes from the regulation would unconstitutionally impair Round Rock’s existing incentive contracts.

The Indiana Department of State Revenue recently published Letter of Findings 01-20181612 (dated April 27, 2021), upholding the disallowance of a state research expense credit for the production of two enterprise level software applications. The Department found that the Indiana research expense credit claimed by the taxpayer was based on a similar federal credit, and thus to be eligible, the taxpayer must undertake “qualified research” that satisfies four requirements: (1) does the research qualify as an IRC § 174 business deduction for federal purposes, (2) is the research being undertaken to discover information that is “technological in nature”, (3) is the information intended to develop a new or improved business component, and (4) does substantially all of the research involve pursuing a process of experimentation?  The Letter of Findings determined that the taxpayer’s documentation was insufficient to meet any of the credit’s requirements, as it “simply outlined” the taxpayer’s continual maintenance of its software applications. It further explained that even assuming the taxpayer met the first three prongs of the test, the taxpayer still could not show that its activities met the “process of experimentation” required in the fourth prong.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

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This week’s question: Which state has implemented recent developments for their marketplace facilitator tax laws?

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Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

On July 8, 2021, the Michigan Court of Appeals issued a decision holding that a retailer was not subject to use tax on advertising materials mailed to Michigan residents. The retailer designed the materials in-house and had them printed by a third-party printer, outside of Michigan. After printing, the retailer sent the materials to a provider of marketing solutions. The retailer contracted with this marketing solutions company to prepare and deliver the advertisements to in-state residents. The marketing solutions company was in charge of preparing and delivering the advertising materials. This marketing solutions company had exclusive control over the packaging of the marketing materials and the handoff of the materials to the USPS, who ultimately delivered the materials to Michigan residents.

Upon audit, the Michigan Department of Treasury assessed the retailer for use tax on the advertising materials that were sent to Michigan customers. The Michigan Court of Claims held in favor of the retailer, declaring the use tax assessment void and invalid. On appeal to the Michigan Court of Appeals, the court upheld the decision of the Court of Claims, finding that the retailer did not exercise any control over the materials within the state’s border. The court found that the retailer’s provision of a list of Michigan customers and direction of the dates of distribution did not constitute adequate power or control to subject the retailer to use tax. As a result, the court affirmed the Court of Claims’ decision holding the use tax assessment against the retailer void and invalid.

Bed Bath & Beyond, Inc. v. Dep’t of Treas., Dkt Nos. 352088 and 325667 (Mich. Ct. App. Jul. 8, 2021).

In their article for the July-August issue of Tax Executive, Eversheds Sutherland attorneys Jeff Friedman, Todd Lard and Justin Brown discuss the Tax Injunction Act (TIA), specifically justifications for modernizing the TIA, including highlighting issues that the TIA has created and the legal and business changes that have taken place since 1937, when Congress enacted the TIA.

In this episode of the SALT Shaker Podcast policy series, host and Eversheds Sutherland Partner Nikki Dobay is joined by Tony Long, Director of Tax and Economic Policy at the Ohio Chamber of Commerce. During their conversation, they cover highlights from Ohio’s latest legislative session, review details of the state’s budget and reference tax credits and deductions taxpayers should keep in mind.

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

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The Arizona Department of Revenue recently released Private Taxpayer Ruling LR 21-003 (dated May 27, 2021), finding that gross income arising from the provision of temporary use of digital information and data is subject to the transaction privilege tax (TPT). The taxpayer is an information and analytics company that provides primarily publically available information and data from multiple sources that is continually updated, sorted, and filtered for each customer. Customers pay a subscription fee to remotely access the data that is housed on the taxpayer’s servers located outside Arizona. Customers only receive the right to use the data, and do not receive access to software. The TPT is imposed on tangible personal property, which is any property that “may be seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses.” Arizona has broadly interpreted that definition of tangible personal property to include electricity, electronic delivery of software, and even music played from a jukebox. Based on this broad understanding of tangible personal property and the application of the “dominant purpose” and “common understanding” tests, the Department concluded that the rental of data is a taxable sale of tangible personal property, regardless of how the data is delivered.

Effective July 1, 2021, Kentucky has enacted sales tax and utility gross receipts exemptions for certain transactions involving the commercial mining of cryptocurrency. The Kentucky DOR explained the two recently enacted bills here. HB 230 exempts the sale or purchase of electricity used or consumed in the commercial mining of cryptocurrency from sales tax and utility gross receipts tax. “Commercial mining of cryptocurrency” is defined as the process through which blockchain technology is used to mine cryptocurrency at a colocation facility. The facility must consume at least 200,000 kilowatt hours of electricity per month.

SB 255 updated Kentucky’s existing incentive program for energy-related businesses to extend to cryptocurrency facilities making investments over $1 million. Qualifying cryptocurrency facilities are eligible for several incentives, including the new sales tax exemption on all purchases of tangible personal property to construct, retrofit, or upgrade an eligible project, including commercial cryptocurrency mining equipment at a qualifying facility.