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On June 12, 2017, Rep. Jim Sensenbrenner (R-WI) and House Judiciary Chairman Bob Goodlatte (R-VA) introduced the No Regulation Without Representation Act of 2017. A previous version of this bill had been introduced in 2016 and failed to pass. Under the proposed bill, a State may tax or regulate a person’s activity in interstate commerce only when such person is physically present in the State during the period in which the tax or regulation is imposed. Under the proposed bill, the physical presencerequirement would apply to sales and use taxand net income and other business activities taxes, as well as the states’ ability to regulateinterstate commerce. “Physical presence” in a state includes:

 

  • maintaining a commercial or legal domicile in the state;
  • owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation, or assembly facility in the state;
  • leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state;
  • having one or more employees, agents or independent contractors present in the state who provide on-site design, installation, or repair services on behalf of the remote seller;
  • having one or more employees, exclusive agents or exclusive independent contractors present in the state who engage in activities that substantially assist the person to establish or maintain a market in the state; or
  • regularly employing in the state three or more employees for any purpose.

 

“Physical presence” in a state would not include:

 

  • entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the state, whether by an Internet-based link or platform, Internet Web site or otherwise;
  • any presence in a state for less than 15 days in a taxable year (or a greater number of days if provided by state law);
  • product placement, setup or other services offered in connection with delivery of products by an interstate or in-state carrier or other service provider;
  • Internet advertising services provided by in-state residents which are not exclusively directed towards, or do not solicit exclusively, in-state customers;
  • ownership by a person outside the state of an interest in a limited liability company or similar entity organized or with a physical presence in the state;
  • the furnishing of information to customers or affiliates in such state, or the coverage of events or other gathering of information in such state by such person, or his representative, which information is used or disseminated from a point outside the state; or
  • business activities directly relating to such person's potential or actual purchase of goods or services within the State if the final decision to purchase is made outside the state.

 

In addition, the bill prohibits the imposition or assessment of a sales, use or other similar tax or a reporting requirement unless the purchaser or seller has physical presence in the state.  This would prohibit all the remote seller legislation (click through, affiliate, economic, marketplace and reporting/notification). If enacted, the legislation would apply with respect to calendar quarters beginning on or after January 1, 2018. (No Regulation Without Representation Act of 2017)

(07/12/2017)

An Illinois appellate court has determined that online travel companies (OTCs) were not liable for Chicago’s hotel accommodations tax on facilitation and service fees charged to customers reserving hotel rooms through the OTCs, since the fees were not rent. For the tax years at issue in the case, a Chicago ordinance imposed a hotel accommodations tax on the "gross rental or leasing charge" made by every owner, manager, or operator of hotel accommodations. In general, rent is paid for the use of property. As a result, "gross rental or leasing charges" are sums paid by customers to use or occupy hotel rooms. The charges imposed by the OTC included the rental rate paid by the OTCs to the hotels plus the facilitation and service fees – which were not for the use of hotel rooms - imposed on the OTCs’ customers. The rate also included a tax recovery amount which represented the amount of tax that the hotels remitted to the City on the price charged the OTC for the room.  Although the tax and service charges were included in the price charged, they were not separately stated on the invoices or documentation to the customers.  The court reversed a lower court’s summary judgement in favor of the City of Chicago and remanded the case. The Court’s finding was based on the definition of gross rents and the determination that the service fees do not constitute gross rents.  Due to this, they did not rule on whether the OTC’s were considered owners, managers or operators of hotel accommodations.  Since the tax years at issue, the Chicago Hotel Accommodations Tax ordinance has been amended to define "operator" as "any person who has the right to rent or lease hotel accommodations to the public for consideration," including "persons engaged in the business of selling or reselling to the public the right to occupy hotel accommodations, whether on-line, in person or otherwise."  In 2014, the City added to that definition "persons engaged in the business of facilitating the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise."(Chicago v. Expedia, Inc., Appellate Court of Illinois, First District, No. 1-15-3402, April 26, 2017)

(06/05/2017)

On April 27, 2017, a bipartisan group of senators introduced the Marketplace Fairness Act of 2017 (MFA). Similar legislation was introduced in both 2013 and 2015 and failed to be enacted both times. If enacted, the legislation would authorize states meeting certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes. The small seller exception is set again at $1 million of remote sales annually. The only other significant change from the 2015 version is a prohibition of making the effective date during the 4th quarter of the calendar year. For information on the previous versions of the bill, visit Senate Introduces Marketplace Fairness Act of 2015.  

 

On April 27, 2017, a bipartisan group of lawmakers introduced the Remote Transactions Parity Act (RTPA) of 2017. Similar legislation was introduced in 2015 but failed to be enacted. Like the MFA, the legislation would also create sales and use tax collection obligations for remote sellers, but has some differences and additional provisions. Some key differences from the Marketplace Fairness Act include a different definition of a small seller.  The RTPA has a phased in threshold starting at $10million in year one, then $5million, then $1million.  In year 4, there is no threshold.  In addition to the monetary thresholds, any seller that sells on an electronic marketplace is considered a small seller.  A difference from the 2015 version of the bill is an inclusion of a definition of remote seller which specifies when a company is NOT a remote seller which includes physical presences for more than 15 days in a state, leasing or owning real property and using an agent to establish or maintain the market in a state if the agent does not perform business services in the state for any other person during the taxable year.  For more information on the Remote Transaction Parity Act of 2015, visit House Introduces Remote Transactions Parity Act of 2015. (Marketplace Fairness Act of 2017, Remote Transactions Parity Act of 2017)

(05/04/2017)

The Illinois Supreme Court has reversed a lower court’s decision and held that Chicago’s taxation of car rentals outside city limits under the personal property lease transaction tax ordinance (Ruling 11) violates the home rule article of the Illinois Constitution because it has an extraterritorial effect and is therefore an improper exercise of the City’s home rule powers. The court held that Ruling 11 exceeds the scope of the City’s home rule authority. The court ruled that Home Rule units such as Chicago may not extend their taxing powers beyond the home rule unit’s borders absent express legislative authority. Chicago attempted to impose a tax collection requirement on rental companies located within 3 miles of the city limits if the lessee had a Chicago driver’s license. For our previous news item on this case, click here. (The Hertz Corp. v. The City of Chicago, Illinois Supreme Court, No. 119945, 119960, January 20, 2017)

(02/14/2017)

The Illinois Department of Revenue has issued two General Information Letters regarding the taxability of Software as a Services (SaaS).  In both GIL’s they have taken the position that a SaaS provider is a serviceman and therefore subject to the Service Occupation Tax (SOT) rather than the Retailer’s Occupation Tax (ROT).  If the SaaS Provider does not require or provide for any download of any software including an API, applet, desktop agent or a remote access agent, then no tax should apply.  However, if any type of software, including any of these de minimus tools are downloaded, they are considered tangible personal property and are deemed computer software.  In this case, then the SOT rules apply and the service provide must determine their tax liability in one of four ways:

 

  1. separately-stated selling price of tangible personal property transferred incident to service;
  2. 50% of the serviceman's entire bill;
  3. Service Occupation Tax on the serviceman's cost price if the serviceman is a registered de minimis serviceman; or
  4. Use Tax on the serviceman's cost price if the serviceman is de minimis and is not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.

 

It is likely that the cost of the downloaded tools would qualify as de minimus (less than 35% of the total average aggregate cost) such that the service provider can determine its tax liability under option 3 or 4.  In the alternative, the service provider could separately charge for the downloaded tool and tax it.  If the downloaded software meets the definition of licensed computer software under 86 Ill. Adm. Code 130.1935, then it would be exempt.

 

This determination will be challenging for SaaS providers to implement and to determine the cost of any downloaded applications.  SaaS providers doing business in Chicago must also take into account the Chicago Personal Property Lease Tax provisions.  

 

(General Information Letter ST 16-0035-GIL, Illinois Department of Revenue, August 17, 2016, released November 2016; General Information Letter ST 16-0034-GIL, Illinois Department of Revenue, August 17, 2016, released November 2016) 

(12/20/2016)

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