Last week the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc. The court overruled the physical presence standard in Quill v. North Dakota. The court upheld a South Dakota law that requires out-of-state sellers to collect and remit sales tax if the seller, on an annual basis, delivers more than $100,000 of goods or services into the state or engages in 200 or more separate transactions for the delivery of goods or services into the state.
In anticipation of the Supreme Court's decision in Wayfair the Illinois General Assembly amended the Illinois Use Tax and the Service Use Tax to include language that mirrors the standard established by South Dakota.
The Illinois law provides that beginning October 1, 2018, a retailer making sales of tangible personal property to purchasers in Illinois from outside of Illinois will fall within the definition of "retailer maintaining a place of business in this State" and will be required to charge Illinois Use Tax (or service use tax) to its customers if: "(A) the cumulative gross receipts from sales of tangible personal property to purchasers in Illinois are $100,000 or more, or (B) the retailer enters into 200 or more separate transactions for the sale of tangible personal property to purchasers in Illinois."
The Illinois law is less about creating parity between online sellers and brick and mortar stores, and more about generating revenue for the state. The General Assembly included $150 million in new revenue from this source in this year's budget.
Locally-imposed sales taxes are, with certain exceptions, retailers' occupation taxes. Those taxes are required to be charged and collected by Illinois retailers. There are no corresponding locally-imposed use taxes.
After October 1st, online retailers like Wayfair will be required to charge and collect the 6.25% Illinois Use Tax on sales to Illinois customers. If a resident of Pekin buys an item from Wayfair, they will pay 6.25% tax. But, if you bought that same item from a Pekin retailer, you would pay 8.5% sales tax. That is still a large differential on big-ticket purchases.
Likewise, local municipalities should not expect to see any significant tax revenues from this change. Only 1.25% of the 6.25% Illinois Use Tax is distributed to local governments. It is distributed on the basis of population across the entire state. For a community like Pekin, the use tax will amount to fractions of a penny on each sale.
- The new Illinois law will require online sellers to collect 6.25% use tax on sales to Illinois residents if they make more than $100,000 in sales or more than 200 separate transactions in the state on an annual basis.
- The new law closes the gap between internet sellers and local brick and mortar retailers. But, the 6.25% online tax is still well less than the local tax of 8.5%. The lack of parity could still provide a financial incentive to shop online for big-ticket items.
- It is anticipated other states will follow Illinois' lead and require online retailers to collect use taxes from online sales. This could actually hurt local retailers who also have an online presence, as they will now have to spend time and money to collect and remit use taxes to states where they make significant sales.
- The new law does not provide any significant tax revenue to local municipalities who have lost sales tax revenues to online retailers for years.