March 29, 2023
Illinois adopts amended Retailers' Occupation Tax sourcing and marketplace regulations
The Illinois Department of Revenue (IL DOR) adopted amendments to various Retailers' Occupation Tax regulations that will significant affect sourcing, remote retailing and marketplace facilitator operations in the state. Most notably, the amendments revise, effective February 7, 2023, 86 Ill. Adm. Code 270.115 (the "Home Rule Municipal Retailers' Occupation Tax") to "provide uniformity among the various sourcing rules." The requirements in Section 270.115 apply to other Retailers' Occupation taxes (listed below).1
Home Rule Municipal Retailers' Occupation Tax
Amendments to Section 270.115 clarify that the sourcing rules described within do not apply to remote retailers and marketplace facilitators, except as specifically provided — namely in subsections (e), (f) and (g). These subsections apply beginning January 1, 2021, to remote retailers and marketplace facilitators that met either of the tax remittance thresholds set out in 86 Ill. Adm. Code 131.115(a) (i.e., cumulative gross receipts from sales of tangible personal property of $100,000 or more, or 200 or more separate transactions of sales of tangible personal property, to Illinois purchasers).
New subsection 270.115(e) explains that remote retailers are engaged in the business of selling at the Illinois location where the tangible personal property is shipped or delivered or where the purchaser takes possession (i.e., destination sourcing). Subsection 270.115(e) further clarifies the effect of inventory in determining a retailer's physical presence in Illinois, noting that a remote retailer's inventory at the location of a marketplace facilitator in Illinois does not create physical presence nexus when the inventory is used exclusively to fulfill orders made on a marketplace that meets the tax remittance threshold.
Subsection 270.115(f) describes destination sourcing for sales to Illinois purchasers by marketplace facilitators on behalf of marketplace sellers; this rule applies notwithstanding the presence of a marketplace seller's inventory in Illinois. An exception, however, applies for sales of coal.
Subsection 270.115(g) describes sourcing rules for sales made by marketplace facilitators not on behalf of marketplace sellers. A marketplace facilitator located in Illinois applies origin sourcing on its own sales to Illinois purchasers when the sales are fulfilled from inventory in Illinois, or the selling activity otherwise occurs at a location in Illinois. A marketplace facilitator applies destination sourcing when it makes its own sale to an Illinois purchaser that is fulfilled from inventory located outside of Illinois and for which the selling activity otherwise occurs outside the state.
Other amendments to the Section 270.115 include:
Other amendments to Subsection (d)(4) do the following:
Extending changes to Home Rule Municipal Retailers' Occupation Tax regulation to other Retailers' Occupation taxes
Amendments to 86 Ill. Adm. Code 220.115 (the "Home Rule County Retailers' Occupation Tax") provide that "[t]he substance and provisions of 86 Ill. Adm. Code 270.115 of the Home Rule Municipal Retailers' Occupation Tax Regulations which are not incompatible with the Home Rule County Retailers' Occupation Tax Law of the Counties Code, shall apply to this Part."2 Similar amendments and references to 86 Ill. Adm. Code 270.115 were made to the following regulations :
Changes to the Retailers' Occupation Tax Regulations — Part 130
IL DOR also adopted various amendments to 86 Ill. Admin. Code Part 1303 to treat a remote retailer or marketplace facilitator that meets either of the remittance thresholds (described previously) as a retailer that is engaged in the occupation of selling retail in Illinois and liable for all applicable state and local retailers' occupation taxes administered by the IL DOR on or after January 1, 2021. Other changes to Part 130 do the following:
These changes took effect January 24, 2023.
Changes to the Use Tax Regulation — Part 150
IL DOR adopted amendments to 86 Ill. Admin. Code Part 1504 (the "Use Tax") to conform current rules with the Leveling the Playing Field for Illinois Retail Act under 86 Ill. Adm. Code 131. Section 150.201 is modified to add out-of-state retailers making sales of tangible personal property to Illinois purchasers (as of October 1, 2018) and marketplace facilitators (as of January 1, 2020) to the definition for "retailer maintaining a place of business in this State" when such retailers and facilitators meet either of the tax remittance thresholds (described previously). Beginning January 1, 2021, the amended rule also makes retailers without physical presence in Illinois and marketplace facilitators meeting either remittance threshold liable for all applicable state and locally imposed retailers' occupation taxes administered by the IL DOR on all sales made to Illinois purchasers. Those retailers and marketplace facilitators are no longer only mandatory Use Tax collectors.
Section 150.802 "Trade Shows Appearances" is amended to treat remote retailers that meet either remittance threshold and qualify for the trade show appearance safe harbor as not having a physical presence in Illinois as of January 1, 2021. As such, they must register with the IL DOR and remit applicable state and local retailers' occupation taxes on all sales to Illinois purchasers.
Section 150.803 on "Wayfair Nexus — Nexus Without Physical Presence" is amended to clarify that these provisions control from October 1, 2018 through December 31, 2020. In addition, these rules are amended to set forth the evaluation process for determining whether an out-of-sate retailer that loses its physical presence nexus has Wayfair nexus before ceasing to collect and remit Use Tax. The amended provisions also describe when a remote retailers' inventory that is possessed by a marketplace facilitator in Illinois and used to fulfill sales made over the marketplace will cause the remote retailer to have a physical presence in Illinois (through December 31, 2020) or not have a physical presence in Illinois (beginning January 1, 2021). Additionally, various amendments have been made to Section 150-804 on "Marketplace Facilitators" to clarify that the provisions control from January 1, 2020 through December 31, 2020.
These amendments took effect January 24, 2023.
Entities making sales in Illinois as either remote retailers or marketplace facilitators need to pay close attention to the sourcing rules, given the potential impact on rate determination. Specifically, those entities must use destination-based sourcing, rather than origin-based sourcing in all instances, except for sales made by a marketplace facilitator on its own behalf. Such sales that are fulfilled from inventory in Illinois, or for which the selling activity otherwise occurs at a location in Illinois, are sourced based on origin. Conversely, a marketplace facilitator must apply destination-based sourcing when it makes its own sales to Illinois purchasers and fulfills the orders from inventory located outside of Illinois, assuming that the selling activity for the sale otherwise occurs outside the state. Rate differentiation for origin- versus destination-based sourcing transactions can be significant — in some instances up to 3% — and be applied retroactively to 2021, potentially leading to incorrect calculation, collection, reporting and remittance of the tax.
The changes also may affect leasing, installment and sourcing of conditional sales in the state. Historically, the rule for conditional sales was that "persons selling tangible personal property to a nominal lessee for use or consumption under a conditional sales agreement are presumed to be engaged in the business of selling at the physical location of the property at the time the parties enter into the conditional sales agreement." If the property was not in Illinois at the time the sales contract was executed, sellers likely would have charged the 6.25% use tax rate.
The new amendment is retroactive (although it is effective February 7, 2023) and affects sourcing for Illinois installment sales "on and after July 23, 2015." From that date, any retailer "selling tangible personal property to a nominal lessee under a lease with a dollar or other nominal option to purchase is engaged in the business of selling at the location where the property is first delivered to the lessee or bailee for its intended use." This provision applies to all retailers, including remote retailers and retailers making sales over a marketplace on or after January 1, 2021. Essentially, IL DOR has removed the timing of when the agreement is executed based on where the property is located.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 Illinois Register, Vol. 47, Issue 8, Feb. 24, 2023.
2 References to "home rule municipality" or "municipality" in 270.115 mean "home rule county" for purposes of Section 220.115, and references to the Home Rule Municipal Retailers' Occupation Tax in 270.115 mean Home Rule County Retailers' Occupation Tax for purposes of Part 220.
3 Ill. Dept. of Rev., Amendments to Part 130 (Ill. Register, Vol. 47, Issue 6, Feb. 10, 2023).
4 Ill. Dept. of Rev., Amendments to Part 150 (Ill. Register, Vol. 47, Issue 6, Feb. 10, 2023). For purposes of the rule, a "remote retailer" has the same meaning as defined in 86 Ill. Adm. Code 131.105.