Illinois Examines Nexus Test for Tax Collection Liability

In response to a taxpayer’s inquiry, the Illinois Department of Revenue released a General Information Letter (“GIL”)examining when a business would be considered “a retailer maintaining a place of business in Illinois” and therefore subject to use tax registrations and collection liabilities. Although determinations regarding nexus are very fact specific and cannot be addressed in the context of a GIL, the Department did provide useful guidelines in determining whether a taxpayer would have nexus and therefore subject to use tax obligations. The U.S. Supreme Court in Quill Corp v. North Dakota, 112 S.CT. 1904 (1992), set forth the two-prong nexus test, which is the current guideline for determining what nexus requirements must be met before a person is properly subject to a state’s tax laws. The first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person or entity purposely avails themselves or itself of the benefits of an economic market in a forum state. The second prong requires the person or entity to have a physical presence in the forum state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical building. Under Illinois law, it also includes the presence of any agent or representative of the seller. Any type of physical presence in Illinois, including a vendor’s delivery and installation of their product on a repetitive basis, will prompt use tax collection responsibilities. Additional rules and regulations apply. (General Information Letter ST 07-0033-GIL, Illinois Department of Revenue)

Posted on September 3, 2008