Remote Retailers to Collect Illinois ROT at Destination Rate, Effective January 1, 2021

A significant change for remote out of state sellers and marketplace facilitators making sales into Illinois is occurring as of January 1, 2021, regarding the collection of sales and use tax, sourcing, and tax rates, and this will impact your Illinois use tax account (registration, tax systems, tax returns) requiring action. In effect, sales of tangible personal property made to Illinois purchasers by a remote retailer will be taxed at the destination sales tax (ROT) rate, including local ROT. This change only affects true remote sellers who have NO physical presence in Illinois. If you have an office, store inventory, have a resident employee or regularly travel into Illinois to service or solicit customers, you are not deemed to be a remote seller under Illinois law, and this change will NOT impact you.

Effective January 1, 2021, Illinois has amended the Retailers’ Occupation Tax and enacted the Leveling the Playing Field for Illinois Retail Act to require remote retailers and marketplace facilitators to collect and remit state and local retailers’ occupation tax (ROT) based on destination sourcing. The effect of this change is that the sourcing of an item for purchase could take on a variety of different tax rates depending on the seller. Additionally, the seller’s registration type may need to be changed. Taxpayers will need to make changes to their tax systems that charge Illinois tax rates and the type of tax being collected as well as including state and local taxes. Taxpayers will also need to make changes to how they prepare Illinois sales and use tax returns and effectively their sales tax registration.

Illinois has four unique sales and use tax types: retailers’ occupation tax (ROT), service occupation tax (SOT), service use tax (SUT), and use tax (UT). ROT is imposed on the seller who is engaged in the state of Illinois in the business of selling tangible personal property (TPP) to purchasers for use or consumption. UT is a privilege tax imposed on the purchaser for the privilege of using TPP in the state of Illinois purchased from a retailer anywhere.

Effective January 1, 2021, a remote retailer, defined as one who does not maintain within Illinois directly or by subsidiary any place of business or any agent or representative operating within Illinois whether permanently or temporarily, is considered a retailer engaged in the occupation of selling tangible personal property (TPP) at retail in Illinois and is subject to state and local ROT if they meet either of the state’s previously enacted economic nexus thresholds ($100,000 in retail sales or 200 retail transactions). A retailer that fulfills orders from inventory in Illinois is not considered a remote retailer. Remote retailers that meet or exceed either of the economic nexus thresholds are required to collect and remit all applicable state and local ROT administered by Illinois on all retail sales to Illinois purchasers. Remote retailers meeting either of the thresholds are deemed to be selling TPP at the Illinois location to which the property is shipped or delivered or at which possession is taken by the purchaser. This is commonly referred to as destination sourcing. In effect, sales of TPP made to Illinois purchasers by a remote retailer are taxed at the destination ROT rate, including local ROT.

As of January 1, 2021, a marketplace facilitator, defined as a person or party who through an agreement with an unrelated third party marketplace seller, who facilitates a retail sale by listing or advertising TPP subject to tax and directly or indirectly collects payment from the customer and transmits such payment to the seller, is considered a retailer engaged in the occupation of selling TPP at retail in Illinois and is subject to state and local ROT if they meet either of the state’s previously enacted marketplace nexus thresholds ($100,000 in retail sales or 200 retail transactions). Marketplace facilitators that meet or exceed either of the marketplace nexus thresholds are required to collect and remit all applicable state and local ROT administered by Illinois on all retail sales to Illinois purchasers. Marketplace facilitators meeting either of the thresholds and that make sales of their own via the marketplace are subject to state and local ROT.

Who is impacted?

Taxpayers currently registered for sales or use tax in Illinois can be categorized in one of three scenarios and may need to update their Illinois registration if a new tax type will be reported given the changes effective 1/1/2021:

• True remote seller with no personnel in Illinois and no physical presence or inventory in Illinois. This seller type may be most impacted by the change from collecting state only use tax (UT) to collecting destination sales tax (ROT). If you are in this group, you are impacted and must make the changes discussed below.
• Out of state seller with some type of physical presence in Illinois such as inventory at a third-party warehouse or personnel traveling into the state. For orders fulfilled from and accepted outside of Illinois, this seller will remain a use tax collector and only collect the 6.25% state rate.
• In state seller with a location in Illinois to fulfill and accept orders in Illinois. This seller will continue to collect sales tax on origin basis where the order originates.

What sales are impacted by sourcing?

• For sales that are fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois, state and local ROT is incurred at the tax rate in effect at the location of the Illinois inventory. This is considered origin sourcing.
• For sales for which selling activities otherwise occur in Illinois, state and local ROT is incurred at the tax rate in effect at the location of the selling activities. This is considered origin sourcing.
• For Remote Sellers Only: For sales that are not fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois, state and local ROT is incurred at the tax rate in effect at the purchaser’s location, the location where the item is shipped, delivered, or taken possession by the purchaser. This is considered destination sourcing.

What changes are required for Remote Sellers?

• In order to collect the correct tax rate on your sales, you will need to modify your tax calculation logic to collect sales tax not seller’s use tax and to use destination. If you are using a 3rd party tax engine, they each have different configuration changes that are necessary to accomplish this. If you have a custom tax system, you will need to make the appropriate changes in your logic. 
• Currently registered remote retailer businesses should contact the Illinois Department of Revenue by phone and request to change their registration profile from Use tax to Sales tax. It is recommended to call the Department (217-785-3707) instead of using MyTax Illinois; requesting a change using MyTax Illinois will create a duplicate account that the Department will need to correct. By calling, taxpayers can indicate they need to make the change to the account while keeping the same registration number. If your registration number changes, keep in mind that you will need to update your exemption certificates with a new registration number and reissue new exemption certificates to your suppliers. At least one location will be required to setup and enact the account change.

The Department is still working out changes to the tax return, registration application process to accommodate all Illinois location codes, new exemption certificate to accommodate remote retailer single certificate with home base location, and a concise new publication to consolidate some of this information for taxpayers, so watch for a future TIP. If you would like to stay updated on this topic as we obtain more information, please click here to be notified.

The Illinois DOR has published a helpful flowchart and definitions to help affected sellers understand their obligations, a helpful resource page to help navigate the changes brought about by the new legislation, and an informational bulletin to disseminate information on the changes. (Public Acts 101-0031 and 101-0604; Information Bulletin FY 2021-2, September 2020, Illinois DOR)

UPDATE: Illinois has released and updated several helpful documents that give marketplace facilitators and marketplace sellers additional guidance on their ROT obligations for Illinois sales. Here is a summary of some key updates:

If you are a marketplace facilitator that facilitates sales into Illinois:

• You should exclude sales for resale from your calculation of economic nexus.
• No sale made by a marketplace facilitator is considered an occasional sale (unlike a remote seller), therefore you will have no occasional sales to exclude.

If you are a marketplace facilitator that also makes your own direct sales in addition to marketplace sales into Illinois:

• You will need to register for two sales and use tax accounts, one for your own direct sales and one for sales facilitated through the marketplace on behalf of marketplace sellers. Report your own direct sales on one Form ST-1 (the Illinois sales tax return) and marketplace sales you facilitate on a separate Form ST-1.

If you are a marketplace seller that only makes sales through a marketplace into Illinois:

• If your marketplace facilitator meets either of the state’s economic thresholds, the marketplace facilitator is required to collect on your behalf and you do not have ROT collections obligations in Illinois.
• If you don’t have an agreement with your marketplace facilitator that the facilitator will collect tax, you may be required to remit sales tax on sales made through the marketplace if you meet one of the economic thresholds.

If you are a marketplace seller with both direct sales and sales through a marketplace into Illinois:

• If your direct sales meet either of the state’s economic thresholds, you will collect and remit ROT at the destination-based rate. You will report your direct, non-marketplace sales on Form ST-1. Marketplace sales (presuming the marketplace facilitator is collecting tax on them) should not be reported on your Form ST-1; do not include any marketplace sales and then deduct them on Form ST-1.

Marketplace facilitators and marketplace sellers are encouraged to review their sales into Illinois on a quarterly basis for the 12-month lookback period and to take action by the first day of the quarter immediately following the end of the 12-month lookback period.

• If your sales have fallen below either of the state’s economic thresholds in the prior 12 months, you can either voluntarily collect and remit use tax as a courtesy to your Illinois customers or, if you have an active Illinois Department of Revenue (IDOR) account, you can contact IDOR to deactivate your account.
• If you had previously fallen below an economic threshold and deactivated your account, but now exceed one of the thresholds, you can reactivate your account or create a new one beginning on the first day of the quarter immediately following the end of the 12-month lookback period.

(What’s New in 2021 for Remote Retailers and Marketplace Facilitators PowerPoint Presentation, Illinois Department of Revenue, June 3, 2021)

UPDATE: The state of Illinois has released their latest version of the “Leveling the Playing Field for Illinois Retail Act Flowchart.” The update includes a page of definitions for terms used throughout the chart, including the following:

• Marketplace

• Marketplace facilitator

• Marketplace seller

• Affiliate

• Retailers’ Occupation Tax

• Destination rate

• Origin rate

• Out-of-state seller

• Physical presence

• Remote retailer

• Tax remittance thresholds