Some big remote seller changes happened in Illinois as of January 2, 2021. While details emerge, we want to share some of the strange oddities coming to light.
By Meredith Smith and Alexander Korzhen
Some big remote seller changes are happening in Illinois that impact businesses selling into the state with the adoption of the Leveling the Playing Field Act. This retailers’ “occupation tax” went into effect January 2, 2021, and with it, some strange oddities are coming to light.
The new law alters rates and how the state is treating the locals versus remote sellers. It also requires that settings be changed in the Illinois portal for sales tax tracking to comply with the Act under the state’s economic nexus guidelines and thresholds.
What’s quirky about Illinois is that it now has both destination and origin sourcing, depending on where the products are coming from. With this new law, origin sourcing still applies when a vendor has a storefront or is shipping its inventory domiciled in the state to a destination within Illinois.
For out-of-state remote sellers, the full destination rate is charged for those vendors based on where the product or service started to ship from. If you are shipping from Colorado into Illinois, and have no inventory or physical presence in Illinois, the vendor collects at the full destination rate of 6.25% for the state and any addition city and county taxes applicable for the shipped to location.
There’s a duality in Illinois right now where a vendor can be an out-of-state seller shipping into the state under full destination tax rates but, if that sale is occurring in Illinois, the vendor can instead use origin sourcing. In these instances, nexus and the applicable tax moves from a physical presence test within the state of Illinois to determining nexus based on the business sales channels the vendor is using.
A vendor with in-state inventory filling orders within the state follows origin-based sourcing rules. But a seller with in-state inventory designated solely for marketplace sales will disregard that inventory for physical presence nexus purposes—it is as if the inventory is not even there.
And that’s the weird part, that we’re ignoring the physical presence of inventory if it’s solely being used for marketplace fulfillment. If it’s being used for a seller’s own fulfillment through the other channels, then that inventory is not ignored. This is a lot to keep track of.
From a logistics standpoint, this may be hard for the state to enforce. Some vendors may be tempted to apply the higher rate, the destination rate, to not have to track origin vs. destination taxes. How would a company using this approach report taxes on a return? The company would be remitting tax that is sourced incorrectly. This could be a big mistake and result in overcharging the end-user, which if identified under audit can be costly to remediate.
The best-case scenario is to automate your sales tax system, make sure nexus is set up to collect the destination sourcing taxes correctly, such as full destination when applicable. This means figuring out who a business is, what its duty is, and how to most efficiently collect and remit.
The Illinois Department of Revenue has a useful flow chart but the rules are so different from most jurisdictions that vendors deal with, especially from a remote seller’s perspective, that this is remains a confusing area of tax law.
Activate one jurisdiction to get started in Illinois, such as Chicago. Once the portal is open for your business, then hopefully you will not have trouble adding more locations as they come up.
That is our educated guess based on what we know of the law but this is likely to change in the future as more details come to light. Keep following us at SALTovation for updates as we learn more.
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