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Chicago has issued a revised ruling providing guidance on the Chicago personal property lease transaction tax related to computer use and software.  This revised ruling makes a significant change in city policy related to software licenses.  Prior to the issuance of this revised ruling, perpetual leases of computer software were not subject to the transaction lease tax.  However, the City’s new position is that any software license agreement that meets the 5-prong tests in Illinois Administrative Code Section 130.1935 and is considered an exempt transaction for Illinois sales tax purposes will be deemed taxable in Chicago if the software is licensed for use in Chicago.  This could result in significant additional costs for software licenses in Chicago.  Concern has been raised that Chicago has expanded the basis of the tax through a revised ruling rather than through the passage of an amendment to the Ordinance imposing the tax.  We are monitoring this issue and will provide updates as they become available.  (Personal Property Lease Transaction Tax Amended Ruling #5, Chicago Department of Finance, August 6, 2013, effective September 1, 2013 )

(10/30/2013)

The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013.  If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes.  Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.

 

Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.

 

States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.

 

To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.

 

-       A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

-       A single audit of a remote seller for all state and local taxing jurisdictions within that state

-       A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

-       Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.

-       Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.

-       Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.

-       Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.

-       Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.

-       Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.

-       Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.

 

For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.

 

On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.

 

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.

 

UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet.  The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights.  For more details on the principles, click here to see the House Judiciary Committee’s press release.

 

We are continuing to track the activities of these bills.  We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage.  Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates. 

 

The text of the bill passed by the Senate can be viewed here.

 

For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.

 

(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)

(09/20/2013)

Illinois’ Cook County has passed an ordinance that imposes a 1.25% use tax on non-titled personal property purchased outside of Cook County and subsequently used in Cook County. This tax is in addition to the Illinois use tax and the City of Chicago Non-Titled Personal Property Use Tax.  The Cook County use tax is effective April 1, 2013, and the rate is imposed on the property’s value when first subject to use in Cook County. The tax is imposed on the purchaser or user and is payable when the property is first subject to use in the county.  The seller should not collect the tax – it is strictly a purchaser self-assessed use tax.  If the purchaser resides in Cook County or the property was delivered to a location in the county, the property will be considered for use in the county and first used on the delivery date.  The ordinance also imposes a registration obligation on every person who acquires non-titled personal property subject to the use tax. The person must register with the Cook County Department of Revenue.  Click here or here to access the Cook County registration web page.   Individuals with a tax liability under the ordinance will receive an annual tax credit for the first $3,500 of non-titled personal property purchased outside Cook County. The credit will be applied against the person’s tax liability arising under the ordinance each year and cannot be used against tax liability arising in another tax year.

The following items are exempt from the tax: items of non-titled personal property exempt from tax under the Illinois Use Tax Act; food for human consumption that is to be consumed off the premises where it is sold, other than alcoholic beverages, soft drinks, and food which has been prepared for immediate consumption within the county; and prescription and non-prescription medicines, drugs, medical appliances used by persons who are public aid recipients in nursing homes, as well as insulin, urine testing materials, syringes, and needles used by natural persons who are diabetics for personal use.

The following uses are exempt from the tax: the use in the county of non-titled personal property acquired outside the county by a nonresident natural person if the property is brought into the county by the person for his or her own use while temporarily in the county or while passing through the county; the use of non-titled personal property by (1) an interstate carrier for hire as rolling stock moving in interstate commerce; or (2) the lessor under a lease of at least one year, executed or in effect at the time of purchase of the property, to an interstate carrier for hire as rolling stock moving in interstate commerce, but only so long as the property is used by the interstate carrier for hire; the use by an owner, lessor, or shipper of non-titled personal property that is utilized by interstate carriers for hire as rolling stock moving in interstate commerce as so used by interstate carriers for hire; the temporary storage in the county of non-titled personal property that is acquired outside the county and that, after being brought into the county and stored temporarily in the county is (1) used solely outside the county; (2) physically attached to, or incorporated into, other tangible personal property that is used solely outside the county; or (3) altered by converting, fabricating, manufacturing, printing, processing, or shaping and, as altered, is used solely outside the county; the temporary storage in the county of building materials and fixtures by a combination retailer and construction contractor registered with the state, but only if the contractor thereafter incorporates the building materials and fixtures into real estate located outside the county; the purchase or use of non-titled personal property by a common carrier by rail that receives possession of the property in the county and that transports the property, or shares with another common carrier in the transportation of the property, out of the county on a standard uniform bill of lading showing the seller of the property as the shipper or consignor of the property to a destination outside the county, for use outside the county; the personal use in the county of non-titled personal property acquired outside the county by a natural person who, at the time of acquisition, was not a resident of the county, and who used the property outside the county for at least three months prior to bringing the property into the county; and the use in the county of non-titled personal property by a person who uses said property in the course of business and who relocates to the county, or opens an office, plant, or other facility in the county, if the property has been used at least three months outside the county by the person before being moved into the county.

Additionally the ordinance provides rules for the filing of returns, tax payments and remittances, as well as the required books and records, and violations and penalties. The County will be notifying taxpayers they believe are subject to the tax and these taxpayers must register within the notification period.  Although there are significant issues with the imposition and administration of the tax that are not yet resolved, it is advisable for taxpayers to proceed with registration to minimize their risk. (Cook County Ordinance 12-O-63, adopted November 9, 2012)

 

UPDATE: On June 19, 2013, the Cook County Board voted to amend the ordinance establishing a use tax on non-titled personal property purchased outside the County. The amendments lower the tax on purchases made outside Cook County from 1.25 percent to .75 percent, the same rate for purchases within the County, and provide taxpayers with a credit against the Chicago non-titled personal property use tax in the amount of sales taxes paid on property purchased in another county.  The amendments are effective June 19, 2013. Three lawsuits have been filed against the County in regards to the constitutionality of the law and whether the County has the authority under Illinois law to impose this tax.  We will continue to monitor the activities.  It is recommended that any funds remitted under the law be filed under protest in order to protect your rights to a refund the tax is repealed.

 

UPDATE: A Cook County trial court has issued a preliminary injunction enjoining Cook County’s imposition of the non-titled personal property use tax.  Two law firms have filed suit against the county.  The law firms claim that the use tax violates the state counties code by imposing a tax on the use of personal property that is based on the selling or purchase price of the property; the Illinois Constitution by imposing an ad valorem tax on personal property; and the dormant Commerce Clause of the U.S. Constitution. A hearing is set for August 15, 2013 for the court to hear a motion made by the county to stay the injunction. (Preliminary Injunction Orders, Circuit Court of Cook County, August 1, 2013)

 

UPDATE: An Illinois Cook County trial court has granted summary judgment to the two law firms and ruled that Cook County’s nontitled personal property use tax ordinance is invalid. The court held that the tax violated state law prohibiting a home rule county from imposing, under its home rule authority, a use tax, sales tax or other tax on the use, sale or purchase of tangible property based on the gross receipts from such sales or the selling price of the property.  The court also held that the tax is an ad valorem tax on personal property in violation of the Illinois Constitution and is per se discriminatory against interstate commerce in violation of the U.S. Constitution. (Reed Smith, LLP et al. v. Ali, Director of the Cook County Department of Revenue, et al., Nos. 13 L 050454 and 13 L 050470, Circuit Court of Cook County, October 11, 2013)

 

UPDATE:The Illinois Cook County trial court’s ruling against enforcement of Cook County’s nontitled personal property use tax ordinance has been affirmedby the Illinois Appellate Court. The Cook County Department of Revenue argued that the tax was not prohibited by state law because it was imposed on the value of the property, not on the sales price. The court determined that it needed to look into the intent of the county ordinance to determine the meaning of "value" because its meaning could be vague as it was used in the ordinance. The court concluded that the use tax was a sales tax upon the purchase of the propertywhich the County is prohibited from imposing. The Court dismissed the County’s "guidelines" which established four acceptable methods of determining value of the property. Since the tax was "plainly prohibited" under the state statute, the court declined to address whether it violated either the U.S. Constitution or the Illinois Constitution. Therefore the tax is an illegal tax.  Any taxpayers that remitted any Cook County Use Tax since it was effective April 1, 2013 should file a refund claim with the County.  (Reed Smith LLP v. Ali, and Horwood Marcus & Berk, Chtd. V. Ali and the Cook County Department of Revenue, Appellate Court of Illinois, First District, Nos. 1-13-2646, 1-13-2654, 1-13-3350, 1-13-3352, August 4, 2014)

 

UPDATE: On September 17, 2014, the Circuit Court of Cook County entered summary judgment in favor of the Chicagoland Chamber of Commerce on the remaining count of their complaint challenging the Cook County Non-Titled Personal Property Use Tax. The court ordered Cook County tax authorities to process refund claims received from use tax taxpayers filing claims pursuant to the Uniform Penalties and Procedures Ordinance, starting no later than September 24, 2014. A claim for credit or refund may be filed on a form provided by the Cook County Department of Revenue within four years from the date of the remittance of the tax.  If a taxpayer receives a written notice of tentative determination denying the claim, a written protest must be filed within 20 days of mailing of the written notice of tentative determination of the claim.

(09/29/2014)

The Illinois Department of Revenue ruled that an out-of-state retailer was maintaining a place of business in Illinois and was required to collect and remit use tax from its Illinois customers. A retailer is considered to maintain a place of business in Illinois if it has an agent or other representative operating in Illinois under its authority. To meet the requirement, the place of business or agent or other representative may be located in Illinois temporarily or permanently. The retailer had sales representatives that regularly appeared at trade shows in Illinois to take orders for the retailer’s products.  The retailer claimed that the products were sold by independent contractors, not agents, and that the contractors worked on consignment but did not provide proof to back up the claim. Notices of tax liability issued by the department were valid because they were issued before the applicable statute of limitations had run. If a taxpayer fails to file a use tax return, as in this case, the applicable statute of limitations is six years. The department issued the notices of tax liability within six years of the date the retailer incurred the liabilities.  The retailer did not show that the three-year statute of limitations, applicable if a use tax return is filed, applied. (Administrative Hearing Decision No. UT 13-01, Illinois Department of Revenue, January 24, 2013)

(03/26/2013)

The Illinois Department of Revenue determined that a bank that financed purchases for retailers was not entitled to a refund of Illinois sales tax paid related to debts it wrote off as bad for federal tax purposes because the bank did not remit any of the sales tax to the department. Retailers are entitled to a bad debt credit on sales tax remitted to the department to the extent that the retailer paid tax on a portion of the sales price that it did not collect from a customer. The bank started or acquired customer charge accounts and receivables from retailers under nonrecourse agreements. When a customer financed a purchase using an account, the bank would pay the retailer the amount that the customer financed, which included some of or the entire purchase price and the sales tax that the purchaser owed on the purchase. When some customers defaulted on their debts to the bank, the bank sought a refund for the amount of sales tax that was not paid by the defaulting customers. The retailers remitted the sales tax to the department, not the bank. Therefore, the bank was not entitled to a refund of the sales tax.  (Administrative Hearing Decision No. ST 12-19, Illinois Department of Revenue, December 11, 2012)

(02/25/2013)

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