Illinois Amends Administrative Code to Address Specifics of Leveling the Playfield for Out of State Sellers

Effective January 23rd, the Illinois Department of Revenue adopted amendments to their use tax rules to provide guidance in line with the state’s Leveling the Playing Field for Illinois Retail Act, which originally came into effect on January 1, 2021. The act changed the rules for retailers located outside of Illinois, and created an obligation for remote sellers who have nexus only because they exceed the economic nexus thresholds to collect retailer’s occupation taxes, Illinois’s sales tax, at the destination rate of their customers. Retailers without economic nexus in Illinois, who make sales from outside the state but have a filing obligation due to some kind of physical presence within the state, remain obligated to only collect use tax at the state rate.

The new rule updates give guidance on some of the complexities that resulted from the Leveling the Playing Field for Illinois Retail Act’s distinction between these two types of out of state sellers, including:

      • Detailed guidance about the measurement period an out of state retailer should use to determine if they have reached the threshold to be required to collect sales tax at destination rates. Taxpayers should evaluate each quarter if they exceeded the threshold in the previous 12 month period.
      • A one year obligation for an out of state business who has created physical nexus in the state to collect and file use tax on their sales into Illinois.
      • Changing the duration of the state’s Safe Harbor threshold for attending trade shows in the state from a calendar year to a twelve month period
      • Clarifying that the state will enforce the prior rules, where remote sellers with economic nexus were obliged to collect use tax at the state rate only, in relation to the tax periods between October 1, 2018 and December 31, 2020.
      • Clarifying how the state wants businesses who no longer have physical nexus but do exceed economic nexus thresholds to handle the switch between filing use tax and filing retailer’s occupation tax. The state instructs retailers to collect use tax through the end of the last month where they have physical nexus in the state, and to register for and begin collecting retailer’s occupation tax at the beginning of the next month.
      • Clarifying how inventory stored in Illinois that is held by and used for fulfillment by a marketplace facilitator affects nexus. Prior to 2021, this inventory creates nexus and a filing obligation for the marketplace seller. After January 1, 2021, this inventory does not create physical nexus.

Understanding nexus, physical and economic, can be complex, and becomes even more complex when your filing obligations depend not only on whether or not you have nexus in the state, but exactly how that nexus was created. Especially when handling an audit or a remediation of a past liability, clear rules on how the state treats historical sales, and when and how businesses are expected to change their filing types going forward, are essential to remaining compliant.

(86 Ill. Adm. Code 150.201; 86 Ill. Adm. Code 150.802; 86 Ill. Adm. Code 150.803; 86 Ill. Adm. Code 150.804)

Posted on February 27, 2023