The Illinois Legislature approved and sent to Governor Pritzker bills that would make various changes to Illinois state and local tax laws. These changes establish a tax amnesty program, decouple from the foreign-derived intangible income (FDII) deduction, modify the state's economic nexus provisions for remote retailers, adopt provisions for marketplace facilitators, make a number of changes to the state's sales and use tax laws, modify various tax credit and incentive provisions, increase the tax rates imposed on gas, cigarettes and parking, legalize marijuana and provide for its taxation, among other changes.

Tax amnesty provisions and changes to the income and sales and use taxes are included in the budget bills SB 689 (Public Acts 101-0009, enacted June 5, 2019) and SB 690 (Public Acts 101-0031, enacted June 28, 2019).¹ Certain tax rate increases are included in SB 1939 (Public Acts 101-0032, enacted June 28, 2019), and new taxes on the sale of marijuana are in HB 1438 (Public Acts 101-0027, enacted June 25, 2019). Additional tax law changes are contained in other bills being considered by the Governor.

The Governor has 60 days to act on the bills he has not yet signed.

This alert provides a summary of the most significant of these many changes.

Amnesty — SB 689

The Illinois Department of Revenue (Department) is authorized to establish a tax amnesty program that will run from October 1, 2019 to November 15, 2019. Amnesty applies to all taxes administered or collected by the Department (e.g., Income Tax, Retailers Occupation Tax, Use Tax, Service Occupation Tax, Service Use Tax, certain municipal transaction taxes, Telecommunication Excise Tax, but not the franchise tax which is administered by the Illinois Secretary of State (Secretary)). Amnesty applies to any tax period ending after June 30, 2011 and before July 1, 2018. (Please note that there is a gap between the upcoming amnesty and the prior amnesty, in that, the taxable periods from July 1, 2009 to June 30, 2011 are excluded.) In exchange for participating in the amnesty program and paying all taxes due, the Department will abate all applicable penalties and interest and will not seek criminal or civil prosecution for the periods for which amnesty has been granted. Certain taxpayers are not eligible to participate in the amnesty program. Further, unlike prior amnesties where non-participation allowed for the doubling of penalties and interest after the amnesty period, the Uniform Penalty and Interest Act provisions were not modified as part of this amnesty program. Therefore, additional penalties and interest will not be imposed for non-participation.

Similarly, the Secretary is authorized to conduct a franchise tax amnesty program to allow foreign and domestic corporations to get back in compliance. The franchise tax amnesty program will run from October 1, 2019 through November 15, 2019, and it applies to any franchise tax liabilities for any tax period ending after March 15, 2008 and on or before June 15, 2019. In exchange for participating in the franchise tax amnesty program and paying all franchise tax liabilities due, the Secretary will waive applicable penalties and interest and will not pursue civil or criminal prosecution for the period of time for which amnesty has been granted. In the prior amnesty, the applicable interest per month doubled from 1% to 2% as a means of encouraging participation. The interest provisions were not changed as part of this amnesty — acknowledging the future phaseout of the franchise tax. Please note that penalties and interest may still be owed for any periods that are outside of the amnesty period.

It is expected that the Department and Secretary will issue guidance setting forth the procedures for participating in these programs. EY will issue a more detailed amnesty alert prior to the start of the programs.

Corporate and individual income tax changes

Decoupling from FDII — SB 689

Corporate taxpayers in calculating taxable income are required to add back the amount equal to the federal deduction for FDII under IRC Section 250(a)(1)(A). Addback is required for tax years beginning after December 31, 2018.

Implications

Consistent with prior instances of Illinois decoupling from federal tax law provisions, the Department is expected to specify a particular federal form and/or line where this deduction may be found and added back on the taxpayers Illinois income tax return, most likely on Illinois Schedule M.

For federal income tax purposes, the FDII deduction is allowed starting in 2018. Because add back is not required for Illinois income tax purposes until tax years after December 31, 2018, amounts of FDII deducted on the 2018 federal income tax return, will not have to be added back for Illinois purposes. It is EY's understanding that the bill language was supposed to be "for tax years ending on or after December 31, 2018", which would have pulled in the 2018 tax year. At this time a technical correction seems unlikely.

Excess business losses for trusts and estates — SB 689

For trusts and estates, the federal limitation on excess business losses under IRC Section 461(l)(1)(B) is removed. Specifically, a trust or estate in computing its taxable income is allowed a subtraction for the amount of its excess business loss disallowed as a deduction under IRC Section 461(l)(1)(B), effective for tax years beginning after December 31, 2018 and before January 1, 2026.

Implications

The limitation is in place for federal income tax purposes for a tax year beginning after December 31, 2017 and before January 1, 2026. Since the Illinois law change applies to tax years beginning after December 31, 2018, the subtraction modification is not available for the 2018 tax year.

Income tax rates — SB 687

In anticipation of voter approval of an amendment to the Illinois Constitution which would allow graduated state income tax rates, SB 687 (Pub. Act 101-0008, signed by the governor June 5, 2019) establishes new graduated rates for individuals and establishes a higher flat rate for corporations (7.99% plus the existing 2.5% personal property tax replacement income tax). If the constitutional amendment is approved by Illinois voters, graduated rates for individuals, trusts or estates (maximum rate of 7.99%) would apply starting in tax years beginning on or after January 1, 2021 under this law. The corporate tax rate will remain a flat rate, but the rate would increase to 7.99%. These changes, in addition to some tax credit changes, will only take effect if the ballot measure authorizing the Illinois Constitutional amendment allowing for graduated individual income tax rates is approved by voters at the November 2020 election.

Various tax credits — SB 689, SB 690, SB 1591, SB 1595

Multiple bills amend various tax credits. Changes include the following.

Blue collar jobs tax credit - Beginning on January 1, 2021, a designated High Impact Business (HIB) (or business entity in a certified Enterprise zone meeting other criteria) may receive an income tax credit for 50% of the incremental income tax attributable to HIB or enterprise zone construction jobs credit employees completing a designated HIB construction jobs project (credit increased to 75% if the credit project is located in an underserved area). The credit cannot reduce a taxpayer's liability below zero. Consistent with Illinois' EDGE credit, any unused credit may be carried forward and used to offset liability for five years after the credit is generated. The total aggregate amount of credits available under the Blue Collar Jobs Act is capped at $20 million per fiscal year. The law includes records retention requirements and list the information that must be kept. Similar provisions are adopted for "New Construction EDGE Credit" and "River Edge Construction Jobs Credit". (These provisions are in SB 689.)

Data center construction employment credit — Beginning January 1, 2019, a new income tax credit is allowed for 20% of the wages paid to a construction contractor employee during the construction of a data center project certified by the Department of Commerce and Economic Opportunity. (SB 690).

R&D credit extension — The research and development (R&D) credit has been extended for five years with expiration for years ending prior to January 1, 2027 (from January 1, 2022). (SB 1591 — sent to Governor on June 6, 2019.)

Film production services tax credit extension — The expiration date of the film production services tax credit is extended to years ending prior to January 1, 2027. (SB 1595 — sent to Governor on June 6, 2019.)

Phase-out of the franchise tax — SB 689

For domestic and foreign corporations qualified to do business in Illinois, the Secretary is required to phase out the franchise tax by capping the maximum amount of franchise tax due. The phaseout is as follows:

• On or after January 1, 2020 and prior to January 1, 2021 — the first $30 of liability is exempt
• On or after January 1, 2021 and prior to January 1, 2022 — the first $1,000 of liability is exempt
• On or after January 1, 2022 and prior to January 1, 2023 — the first $10,000 of liability is exempt
• On or after January 1, 2023 and prior to January 1, 2024 — the first $100,000 of liability is exempt
• On or after January 2, 2024 — no franchise tax is due

It is expected that the Secretary will issue guidance setting forth procedures regarding the interplay of the phaseout of the franchise tax and the various associated taxes collected (e.g., the annual franchise tax, the tax on additional capital and the tax on mergers).

Income Withholding

Approved bill (SB 1515, sent to the governor on June 28, 2019) would change the definition of compensation earned in Illinois and thereby change the taxation of nonresidents. The bill provides that nonresident employees would be subject to the state's income tax only if they spend more than 30 days in Illinois in the calendar year. (The prior base of operations rule did not tax certain nonresident employees because all of their wages, including time worked in Illinois, were considered earned at their out-of-state base of operations.) To support the new de minimis exception, the bill would require employers to maintain reasonable records of working days employees spend within Illinois. This bill also would modify the individual income tax credit for taxes paid to other states. Professional athletes continue to be excepted from these provisions. For more on this development, see Tax Alert 2019-1154.

Sales and use and other indirect tax changes

Marketplace sellers and facilitators — SB 689 and sales tax sourcing for remote retailers — SB 690

Beginning January 1, 2020, a marketplace facilitator is required to collect and remit tax on sales through the marketplace. The facilitator must certify to its sellers that it has assumed the rights and duties of a retailer with respect to those sales and must retain appropriate books and records. Marketplace sellers must provide marketplace facilitators with information regarding an item's taxability or eligibility for a lower tax rate. A seller's sales through the marketplace do not count towards determining whether the seller must collect tax on its own direct sales. (The thresholds are making $100,000 of sales or entering into 200 or more separate transactions with Illinois customers.)

Effective July 1, 2020, a remote retailer (defined as a seller located outside of Illinois that has no location or representative in the state) that meets the "Wayfair" collection threshold amounts of $100,000 in annual Illinois sales or 200 Illinois transactions must start collecting state and local retailer occupation taxes, rather than the use tax. (From October 1, 2018 through June 30, 2020, remote retailers meeting the threshold must collect and remit use tax.) Sales made by a remote retailer meeting the threshold "shall be deemed to be made at the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser." Thus, for these sellers, Illinois switches from an origin sourcing state to a destination-sourcing state.

Implications

Under the new and revised law, marketplace facilitators and remote retailers will be required to collect and remit different taxes. Marketplace facilitators are required to collect use tax, while remote retailers will be required to collect retailer occupation tax based on destination of sale. Consequently, sales made by or on behalf of the same entity will be subject to two different tax rate treatments.

Level the Playing Field for Illinois Retail Act — SB 690

The purpose of this provision is to make the services of Certified Service Providers (CSPs) and certified automated systems (CASs) available to remote retailers without charge. The Department has until December 31, 2019, to establish the standards for the certification of CSPs and CASs (the Department can work jointly with other states on this matter). By July 1, 2020, the Department (1) is required to create and maintain electronic, downloadable databases of taxability, tax rates by taxing jurisdictions, and tax rates by delivery addresses; and (2) provide uniform minimum standards for CSPs and CASs, enter into contractual relationships with companies that qualify as a CSP or that will be using a CAS. CSPs will be compensated at 1.75% (the standard retailer's allowance) of sales tax they collect and remit on behalf of remote retailers; remote retailers using CSPs may not claim the vendor's discount. Further, beginning January 1, 2020, remote retailers using a CSP or CAS are relieved of liability for having charged and collected the incorrect amount of tax if the CSP or CAS relied on erroneous data provided by the Department. The Department has the authority to adopt emergency rules to implement these provisions.

Expanded manufacturing machinery & equipment sales tax exemption — SB 689

The manufacturing machinery and equipment exemption is expanded to include production related tangible personal property (such as supplies and consumables, hand tools, protective apparel) purchased on or after July 1, 2019. Property that is exempt includes all tangible personal property that is used or consumed by the purchaser in a manufacturing facility in which a manufacturing process takes place and includes, without limitation, tangible personal property that is purchased for incorporation into real estate within a manufacturing facility, supplies and consumables used in a manufacturing facility including fuels, coolants, solvents, oils, lubricants, and adhesives, hand tools, protective apparel, and fire and safety equipment used or consumed within a manufacturing facility, and tangible personal property that is used or consumed in activities such as research and development, preproduction material handling, receiving, quality control, inventory control, storage, staging, and packaging for shipping and transportation purposes.

In Informational Bulletin FY 2019-28 (June 2019), the Department said it does not consider "production related tangible personal property" to include tangible personal property:

• used within or without a manufacturing facility in sales, purchasing, accounting, fiscal management, marketing, personnel recruitment or selection, or landscaping; or
• required to be titled or registered with a department, agency, or unit of federal, state or local government.

Implications

With respect to the inclusion of production related tangible personal property, it is not clear whether R&D consumables used in a facility separate from the manufacturing facility will qualify for the exemption. Based on the statutory language, it is assumed that such property will not qualify for the exemption if it is a stand-alone R&D function not related to a manufacturing process. The Department guidance leaves this question unanswered.

Parking excise tax — SB 690

Beginning January 1, 2020, Illinois will impose a parking tax equal to 6% of hourly, daily, or weekly parking fees, and 9% of monthly or annual parking fees. Tax does not apply to fees collected for a parking area or garage operated by the federal government, parking by hospital employees in a space owned by the hospital, residential off-street parking for apartment/home/condominium use, or a garage that stores three or fewer vehicles.

Data center tax benefits — SB 690

The Department of Commerce and Economic Opportunity is charged with issuing certificates to data centers that have qualified for two new tax benefits. A "qualifying Illinois data center" is a new or existing data center located in Illinois for which a capital investment of $250 million is made over a five-year period, which creates 20 new jobs (earning over 120% of that county's median full-time wage), and is either carbon neutral or achieves a green building certification. In the case of an existing data center, the $250 million capital investment collectively must be made by the data center operator and its tenants over the five-year period immediately prior to January 1, 2020 (or commit to making such investment over a five-year period).

SB 690 fully exempts from sales and use tax property used in the construction or operation of a certified data center. This change takes effect upon becoming law.

Cigarette tax (including floor tax) and electronic cigarettes — SB 690

Effective July 1, 2019, cigarette taxes are increased by a $1 a pack, a floor tax is imposed, and electronic cigarettes are subject to a 15% tax on the wholesale price. See Department Informational Bulletins FY 2019-26 (June 2019) and FY 2019-29 (June 2019).

Trade-in credit capped at $10,000 — SB 690

Effective January 1, 2020, the motor vehicle trade-in credit reducing the taxable sales price when an item of like kind and character is traded in as part of an otherwise taxable purchase will be limited to $10,000.

Motor fuel tax increases — SB 1939

SB 1939 raises new revenues for roads, bridges, and transit. Effective July 1, 2019, the motor fuel tax is increased by 19¢ to 38¢ a gallon for regular fuel. The motor fuel tax on diesel is increased 7.5 cents per gallon, resulting in a tax rate of 45.5 ¢ a gallon. The bill also indexes the tax rate to inflation, requiring rates be increased annually on July 1 of each year as warranted. For additional information, see the Department Informational Bulletin FY 2019-25 (June 2019).

Currently, only home rule municipalities and municipalities with a population of more than 100,000 can impose a motor fuel tax. This bill allows municipalities in Cook County, by ordinance, to impose a motor fuel tax of up to 3¢ per gallon.

Currently, DuPage, Kane, and McHenry Counties can impose a motor fuel tax up to 4¢ a gallon. This bill adds Lake and Will Counties to this list. Upon enactment of the bill, these counties will be able to impose a motor fuel tax of at least 4¢ but no more than 8¢ a gallon. The tax rate will increase each year by inflation automatically.

Annual vehicle registration fee increase — SB 1939

Beginning with the 2021 registration year, the annual vehicle registration fee is increased from $101 per year (fee of $98 plus $3 in surcharges) to $151 per year (fee of $148 plus $3 in surcharges). The commercial distribution fee is eliminated beginning on July 1, 2020.

Third party sales tax audits — SB 1881

For several years, Illinois has considered various proposals that would allow third parties to access taxpayer information the Department shares with municipalities. Third parties would use this information to assist municipalities in determining whether the correct amount of tax was collected. The bill considered this legislative session — SB 1881 — incorporated provisions which addressed many of the taxpayer community's concerns and established a pilot program allowing limited data-sharing for limited purposes. One version of the bill also removed sales and use taxes from the False Claims Act. SB 1881 passed the House but the Senate did not vote on whether to concur with House amendments to the bill. The Senate may vote on the measure during the upcoming veto session.

Recreational cannabis — HB 1438

HB 1438 legalizes cannabis for adult use and creates new taxes that will be imposed on the cannabis industry. Beginning September 1, 2019, a 7% tax will be imposed on gross receipts from the sale of cannabis by a cultivator to a dispensing organization. Beginning January 1, 2020, tax on retail sales will be imposed at rates ranging from 10% to 25% of the purchase price. Municipalities and counties have the authority to impose a tax on the sale of cannabis of up to 3% or up to 3.75% of the purchase price, respectively.

Aviation fuel sales tax — SB 1814

Effective June 5, 2019, SB 1814 eliminates the retailers' discount for aviation fuel as that is not considered an airport purpose. (Public Acts 101-0010, enacted June 5, 2019).

———————————————

———————————————
ENDNOTES

¹ SB 690 includes provisions for taxing revenues from sport betting, gaming, and wagering. These provisions will not be addressed by this alert.