City of Chicago Announces Economic Nexus Provisions

The City of Chicago has announced in an information bulletin that it will impose economic nexus provisions. The bulletin notes that Chicago is a home-rule jurisdiction, which gives it the power to impose tax. The bulletin also notes that while the state can preempt a home-rule jurisdiction’s authority, it has not done so for certain Chicago tax ordinances imposing obligations on various sellers.

The Illinois Supreme Court has held (in Mulligan v. Dunne) that a home-rule jurisdiction can require an Illinois seller outside of its boundaries that does business within its boundaries to collect its taxes. Mulligan v. Dunne does not address the federal constitutional issues with respect to out-of-state sellers. The bulletin states that “Mulligan is consistent with Wayfair’s holding that deliberate or purposeful business activities within a jurisdiction are relevant in determining whether a tax collection obligation may be imposed.”

While Illinois has enacted economic nexus provisions that apply to the state use tax, it does not apply to local home rule taxes. Per the bulletin, “Therefore, it does not limit the analysis of what constitutes nexus for the purpose of determining whether the City can require an out-of-state entity to collect a City tax.” The bulletin states that the City of Chicago will consider whether an out-of-state seller meets the thresholds that apply to the state use tax. The City will include a safe harbor provision. If the safe harbor does not apply to an entity, other factors that the City may consider include:

• Agreements that the entity has with other businesses in Chicago;
• Activities that the entity’s employees or other agents perform on the entity’s behalf in Chicago;
• Any physical presence that the entity has in Chicago;
• Advertising directed at Chicago customers; and
• Any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago

Under the safe harbor provision, an out-of-state entity that received under $100,000 in revenue from Chicago customers during the most recent four calendar quarters will not be expected to collect the following taxes during the current calendar quarter:

• Chicago’s amusement tax, as applied to amusements that are delivered electronically, such as video streaming, audio streaming and on-line games
• Chicago’s personal property lease transaction tax, as applied to nonpossessory computer leases

The safe harbor provision has the following conditions:

• It will apply only to an entity that has no other significant contacts with Chicago
• It will apply on a prospective basis, beginning July 1, 2021.
• If an out-of-state business initially qualified for the safe harbor but no longer does, it must register with the City’s Department of Finance within 60 days, begin collecting Chicago taxes within 90 days, and continue collecting Chicago taxes for at least 12 months.
• The safe harbor concerns only the issue of whether a provider has a duty to collect taxes from its customers; it does not affect the issue of whether a customer has a duty to pay those taxes.

In discussions with the City Law Department, they indicated that sellers that exceed $100,000 in revenue in Chicago for the amusement tax on streaming as well as for the lease tax for nonpossessory computer leases could be liable for tax prior to July 1, 2021.  The determination will be made on a case by case basis potential retroactively to either the enactment of economic nexus in Illinois on October 1, 2018 or to the date of the Wayfair decision of June 21, 2018.  They do not believe they would impose tax prior to the Wayfair decision.   This is all dependent on NO physical presence in the City.  They continue to take the position that leases of tangible property where the lessee is in Chicago establishes physical nexus.

The bulletin notes that the City expects any business that does business in Chicago to comply with its tax ordinances, and the facts must be analyzed on a case-by-case basis. The Departments of Finance and Law are happy to discuss individual cases with any business or its authorized representatives. Out-of-state sellers who make sales to Chicago customers should take note. We’ll continue to monitor this for developments. (Information Bulletin – Nexus and Safe Harbor, City of Chicago, issued January 21, 2021)