27 July 2017 Illinois 2017 state and local legislative roundup The first two quarters of 2017 were very busy in Illinois, both at the state and local level, culminating on July 6, 2017, with a last minute deal that narrowly avoided a third straight year without a state budget. Tax changes included in the budget bill are codified in Public Act 100-0022 (which was SB 9 as it went through the legislative process) and permanently increase the individual and corporate tax rates by 33%, modify combined reporting provisions to repeal the like-apportionment rule, decouple Illinois from the IRC Section 199 production deduction, reinstate the state's research and development (R&D) credit through 2021, exempt from sales and use tax graphic arts machinery and equipment used in manufacturing, and amend many of the state's unclaimed property rules. (Please see Tax Alert 2017-1197 for more information on the unclaimed property law changes.) In addition to the tax law changes contained in the Public Act, other tax law changes are set forth in some legislation still pending Governor Rauner's signature. Finally, of note at the local level, Cook County joined the chorus of localities around the US by enacting a sweetened beverage tax and Chicago with a checkout bag tax. The Public Act permanently increased both the individual and corporate income tax rates by 33% effective July 1, 2017. The individual rate (which also applies to trusts and estates) increased from 3.75% to 4.95%, while the corporate rate increased from 5.25% to 7%. The corporate personal property replacement tax rate of 2.5% did not increase, but is added to the corporate income tax rate to produce a combined 9.5% tax rate marking Illinois as having one of the highest corporate income tax rates in the US. Since the tax rates are effective July 1, 2017, the vast majority of taxpayers whose year did not end on June 30, 2017, will be subject to two different rates for their income earned during calendar year 2017. The Public Act allows taxpayers to elect either of two methods to determine which portion of their income during their taxable year is subject to the old rate and which is subject to the new rate. Under the first method, taxpayers can elect to use a blended rate multiplying the old rate and the new rate by a fraction based on the number of days in the tax year prior to and after July 1. Under the second alternative method taxpayers can specifically allocate their income earned in periods prior to and after July 1 to determine their 2017 tax liabilities. Taxpayers should be aware that the specific allocation method has special rules for addressing periods with losses. The Illinois Department of Revenue (Department) describes both methods in Information Bulletin FY 2018-02 (July 2017). Fiscal year-end and 52/53 week year-end taxpayers with tax years commencing after July 1, 2016, may be immediately affected by the rate increase as they may have income earned after July 1, 2017. Guidance from the Department instructs a taxpayer to choose the allocation method it intends to use on or before the extended due date of its return. Moreover, taxpayers must realize that if the specific allocation election is made, it is irrevocable. Regardless, most calendar year taxpayers will not need to select a method until filing their 2017 returns. — Employers and other withholding agents should realize that the changes to the Illinois individual income tax rate also require changes to Illinois individual income tax withholding. Please see EY Tax Alert 2017-1093 and Information Bulletin FY 2018-03 (July 2017) for more information. — An earlier version of SB 9 provided guidance for adjusting estimated payments to avoid penalties. That guidance did not make it into the final version of the Public Act. Accordingly, taxpayers should evaluate how best to adjust, if necessary, their estimated tax payments due for the remainder of the 2017 tax year. For individuals, corporations, partnerships, trusts and estates, the federal deduction for domestic production activities under IRC Section 199 is required to be added back for years ending on or after December 31, 2017. The Public Act amends combined reporting provisions by sun-setting the like apportionment rule. The prohibition against a unitary business group from including members that apportion income using different Illinois sourcing methods (i.e., general companies, financial organizations, insurance companies or transportation services companies) is in place only for tax years ending prior to December 31, 2017. Under the revised law, a unitary business group may now be required to include such mixed members provided they are engaged in a unitary business. For tax years ending on or after December 31, 2017, the definition of "United States" for purposes of the composition of the unitary business group is extended to cover any area where the United States has asserted jurisdiction or claimed exclusive rights with respect to the exploration or exploitation of natural resources. The purpose for this change is to address activities taking place on the outer-continental shelf but not in any particular state. It should be noted that the definition still excludes territories and possessions of the United States. The R&D credit that expired for years ending prior to January 1, 2016, has been restored and extended. The credit is available for tax years ending prior to January 1, 2022. The legislature explicitly stated its intention to have the R&D credit apply continuously until January 1, 2022, including the previously expired periods. No other changes were made to the computation of the R&D credit. — Taxpayers should review the composition of their unitary business groups, evaluate the impact of the elimination of the like apportionment rule on such groups and then consider the utilization of net loss deductions, credits and other attributes in light of this significant change in the Illinois combined reporting rules. Taxpayers also should evaluate whether the key corporation of their unitary business group needs to change. — Taxpayers should evaluate the preparation of a combined return that includes mixed members, especially the implications to apportionment sourcing, credits and other matters. Table B of the existing Illinois Income Tax Regulations provides an example of a combined return with mixed membership, but that example only addresses the issues of combining a taxpayer subject to single factor apportionment with a three-factor apportionment taxpayer — something Illinois has not allowed since 1999. Moreover, the Department has a number of options to provide guidance on these matters, including issuing emergency regulations, information bulletins, compliance alerts or some other method but currently, it is unknown which type or types of guidance the Department will issue. — A separate alert addresses considerations for insurance companies (see Tax Alert 2017-1228). — The restoration of the R&D credit presents a challenge for taxpayers claiming the credit on tax returns due in 2017 because the Department updated many of its tax forms to exclude the credit. It is EY's understanding that the Department will identify procedures to claim the previously expired credit. — Eliminating the standard exemption for any taxpayer whose adjusted gross income exceeds $500,000 for spouses filing jointly, and $250,000 for all other taxpayers. — Eliminating the 5% tax credit for residential real property taxes for any taxpayer whose adjusted gross income exceeds $500,000 for spouses filing jointly, and $250,000 for all other taxpayers. — Increasing the earned income tax credit to 14% of the federal earned income tax credit beginning January 1, 2017, and 18% of the federal earned income tax credit beginning January 1, 2018. — Enacting a new credit for the costs of instructional materials and supplies, limited to $250, purchased by teachers, instructors, counselors, etc. for use in a public or non-public school located in Illinois. The Public Act also amends the Retailers' Occupation Tax Act (ROTA), the Use Tax Act (UTA) and the Service Use Tax Act (SUTA) to include graphic arts machinery and equipment in the manufacturing and assembling machinery and equipment exemption. The exemption covers machinery and equipment used to create graphic arts, but does not cover materials used in the process. Illinois previously exempted graphic arts machinery and equipment separate and apart from the manufacturing exemption. That exemption sunset in 2014 and was not reauthorized. The Public Act subsumes an exemption for graphic arts machinery and equipment under the existing exemption for manufacturing machinery and equipment. The Public Act also moves up the date on which 100% of the sales of gasohol become taxable. Under prior law, 80% of the proceeds of gasohol were subject to tax, with that number set to move to 100% on January 1, 2019. The Public Act moves that date forward by 18 months to July 1, 2017. On the other hand, it also pushes back the date on which majority blended ethanol and biodiesel become 100% taxable. Currently, exemptions for majority blended ethanol and biodiesel are set to sunset on December 31, 2018. The Public Act extends that date to December 31, 2023. Public Act 100-0009 (HB 2801), which was enacted and took effect on July 1, 2017, amends the Motor Fuel Tax Law and the Weights and Measures Act to equalize the tax rates imposed and provide a clarifying definition regarding the measure of a gallon equivalent for the varying fuel types under the Law and Act. Previously, propane, compressed natural gas, and liquefied natural gas fuels were taxed at the same motor fuel tax rate per gallon as diesel fuel. Each of these fuels, however, varies in density such that it takes more than a gallon of these fuels to travel the same distance as a gallon of diesel, the densest of the fuel types on which the tax is imposed. The law relieves the advantage or disadvantage taxpayers experienced when deciding which fuel to use. HB 821, if enacted, would amend the UTA, the SUTA, the Service Occupation Tax Act (SOTA), the ROTA, the Prepaid Wireless 9-1-1 Surcharge Act, the Public Utilities Act, and the Environmental Protection Act, to require that certain tax returns filed under those Acts be filed electronically. Vendor discounts under those Acts would be allowed only for returns that are filed electronically. An exemption would be provided for taxpayers who do not have access to the internet. While the new electronic filing mandate carries no statutory penalty for failing to comply, taxpayers that continue to file on paper would forfeit the vendor discount. HB 821 was sent to the Governor on June 27, 2017. He has 60 days to act on the measure. SB 1434, if enacted, would amend the UTA and the ROTA to create the Rental Purchase Agreement Occupation and Use Tax Act, which would impose a 6.25% occupation tax on the gross receipts of persons engaged in the business of renting merchandise for use by a consumer for personal, family, or household purposes, for an initial term of four months or less, that is automatically renewable. SB 1434 would impose a corresponding 6.25% use tax on the privilege of using merchandise rented under a rental-purchase agreement in the state. The bill would exempt sales to lessors of property intended to be re-leased under rental-purchase agreements. In addition, lessors would receive a one-time transitional use tax credit for tax already paid on merchandise subject to tax under the UTA or ROTA. The credit would apply to property purchased during the six months immediately prior to the effective date of the act, it would have to be claimed within three months of the effective date of the act, and it could be applied against the tax imposed under the act. SB 1434 was sent to the Governor on June 29, 2017. He has 60 days to act on the measure. Although not yet enacted, remote sellers should be aware that HB 3057 is still pending legislation and if enacted, would establish remote seller notification provisions in Illinois similar to those adopted by Colorado. Specifically, HB 3057 would amend the UTA to require out of state retailers that do not collect use tax from Illinois purchasers, to notify those purchasers of their obligation to pay use tax on their purchases from the remote seller. An "Illinois purchaser" would be defined as a purchaser with an Illinois billing address and who makes a purchase for delivery to an Illinois ship-to address. HB3057 requires those retailers with more than $100,000 in gross sales to Illinois purchasers to send annual reports, due March 1st of each year to those Illinois purchasers who purchase more than $500 worth of goods, as well as to the Department. If enacted, the new remote seller legislation would require remote retailers to review and analyze their customer data in order to ascertain whether they fall within the purview of Illinois' "notification" and annual reporting requirement. HB 3057 has been re-referred to the Rules Committee in the Illinois House. HB3245/SB1803, if enacted as currently drafted, would amend the UTA, the SUTA, the SOTA, and the ROTA to reinstate the extended the temporary storage exemption, which sunsetted on June 30, 2016, through' June 30, 2021. If reinstated, the exemption would apply to the use or sale of tangible personal property purchased from an Illinois retailer by a taxpayer engaged in centralized purchasing activities in Illinois who will temporarily store the property in Illinois for the purpose of being processed, fabricated, or manufactured into, attached to, or incorporated into other tangible personal property to be transported outside of Illinois and/or used or consumed solely outside Illinois. HB3245/SB1803 has been referred to the Assignments Committee in the Senate. The Cook County Sweetened Beverage Tax, which was slated go into effect July 1, 2017, was preliminarily enjoined by the Cook County Circuit Court on June 30, 2017, pursuant to a lawsuit filed by the Illinois Retail Merchants Association. On July 21, 2017, a judge extended the injunction to July 28, 2017, on which date the judge will issue a final ruling. Retailers were instructed by the County to refrain from collecting the tax from their customers until the court has issued its final ruling. Retailers were also advised not to file the floor tax return which was initially due on July 1, 2017. The tax, if upheld, is imposed at a rate of $0.01 per ounce on the retail sale of all sweetened beverages, including but not limited to bottled or un-bottled: soda, sports drinks, flavored water, energy drinks, pre-made sweetened coffee and tea with less than 50% milk content, in Cook County. Distributors of bottled beverages and any syrup and/or powder used to produce a sweetened beverage, are required to collect the tax from any retailer who purchases such products. Retailers are required to only include the tax in the sales price of the sweetened beverages. Going forward, distributors will collect the tax from retailers and remit it to the County. Retailers will be required to collect it from consumers, but will treat the collection as a reimbursement of the tax paid to the distributor. Until otherwise decided, distributors and retailers should evaluate whether their products fall within the scope of what the County considers a "sweetened beverage" and to the extent a business determines it is selling a taxable beverage, it should contact the County in order to properly register, if it has not already been contacted and directed to do so. The City of Chicago issued guidance on The Checkout Bag Tax (Bag Tax), which is a $0.07 per bag tax on the retail sale or use of paper and plastic checkout bags in Chicago. Retail merchants are authorized (but not required) to reimburse themselves up to $0.02 per bag. An exemption applies for bags used to carry items purchased pursuant to a governmental food assistance program such as Supplemental Nutritional Assistance Program (SNAP, the Illinois LINK card or a similar governmental food assistance program). The Bag Tax does not apply to "bags provided by a dine-in or take-out restaurant to contain food or drink purchased by the restaurant's customers." Businesses collecting the tax from customers should identify the Bag Tax separately on receipts as the "Checkout Bag Tax" or "Bag Tax" (not fee). Businesses collecting the tax from customers should not include the tax in receipts subject to sales tax. Retailers should ensure their point of sale systems accurately comply with the Bag Tax placement and reporting requirements as well as the exemption for purchases under a qualified government assistance program. Any business selling consumable food should evaluate whether it falls within the Bag Tax's exemption for restaurants.
Document ID: 2017-1227 | |||||||
