Why different sales tax rates can apply to similar sales in Illinois

Illinois is one of few states that bases sales tax rates on the location of the seller (aka, origin sourcing), at least when the seller is in Illinois. When a seller with no physical presence in the state collects Illinois sales tax,* the rate is based on the location of the consumer (aka, destination sourcing).

In-state retailers are required to collect both state and local Retailers’ Occupation Tax, which can be as high as 11% in some jurisdictions. Yet because they collect the rate in effect at the origin of the sale (e.g., their shop), they don’t need to deal with multiple jurisdictions’ sales tax rates.

Remote retailers currently collect Illinois use tax instead of the Retailers’ Occupation Tax. For now, they collect only the 6.25% state tax, a portion of which is given to the consumer’s local jurisdiction. They’ll need to start collecting state and local use tax based on the destination of the sale starting July 1, 2020, though many jurisdictions don’t have a local use tax.

There’s some concern that Illinois could be challenged because in-state and out-of-state sellers rely on different sourcing rules and collect different sales or use tax rates for similar transactions. A bill sitting on the desk of Illinois Governor JB Pritzker offers a solution, of sorts, to that issue.

Senate Bill 119 would require remote sellers to collect state and local Retailers’ Occupation Tax just like in-state sellers. It would also push the date they have to collect local taxes back a year, to July 1, 2021.

However, SB 119 doesn’t change the fact that remote sellers would use destination sourcing to determine the tax rate, while in-state sellers would continue to use origin sourcing. Thus, a single consumer could pay different rates for the same item, depending on whether the seller is in-state or remote.

Some tax experts worry Illinois would remain vulnerable to a legal challenge because of this. Indeed, Illinois has been embroiled in numerous conflicts over the way it sources sales in the past.

Like more than 35 other states, Illinois is requiring marketplace facilitators to collect and remit the sales or use tax due on their third-party sales. The marketplace collection obligation takes effect in Illinois January 1, 2020.

As they do for individual sellers, the sourcing rules may complicate collection for marketplaces. Since sellers that have inventory in the state are considered in-state sellers, it seems that state and local Retailers’ Occupation Tax would apply to those sales and origin sourcing would determine the rate. The origin of the sale would likely be the location of the warehouse or fulfillment center that houses the inventory.

On the other hand, for marketplace sellers that don’t have inventory or any other physical presence in Illinois, use tax would likely apply and destination sourcing would determine the rate. As the law now stands, those sales would be subject to the state use tax rate only until July 1, 2020, when local use tax would kick in.

If SB 119 is enacted, marketplaces would not collect local use tax starting July 1, 2020. Instead, they’d collect state and local Retailers’ Occupation Tax administered by the Illinois Department of Revenue for all marketplace sales starting January 1, 2021. Nonetheless, it appears the rate for marketplace sellers with inventory in the state would still be based on the origin of the sale, while the rate for remote marketplace sellers would be based on the destination of the sale.

Learn about registration requirements for marketplace sellers in Illinois and other states.

The Illinois Department of Revenue has been tasked with establishing a program to simplify use and occupation tax compliance for remote retailers. It must make the services of certified service providers and certified automated systems available to qualifying remote retailers without charge. As payment, the CSP would retain the retailer customer’s retail discount.

To get the CSP program up and running, the department must, by July 1, 2020:

• Provide and maintain an electronic database of defined product categories that identifies the taxability of each category;
• Provide and maintain an electronic database of all retailers’ occupation tax rates for jurisdictions in Illinois that levy a retailers’ occupation tax; and
• Provide and maintain an electronic database that assigns delivery addresses in Illinois to the applicable taxing jurisdiction.

Illinois didn’t come up with this idea: It’s modeled off the CSP program created by the Streamlined Sales and Use Tax Governing Board. Several other non-SST states are looking to establish similar programs, and Pennsylvania’s is already up and running.

Once the Illinois Department of Revenue gets its program operational, it should greatly simplify compliance for remote sellers. Given the added complexity of different sourcing rules, that will surely be welcome.

Avalara, a CSP in Streamlined Sales Tax (SST) states and Pennsylvania, helps facilitate sales tax compliance for remote sellers.

*Illinois taxes the business of selling, rather than the sale itself, via a retailers’ occupation tax, a service occupation tax, a service use tax, and a use tax.