Illinois to Adjust Sales Tax Nexus Rules

When Illinois first adopted an economic nexus requirement, remote and in-state sellers had to charge a state seller's use tax without local tax implications. This changed on January 1, 2021, when Illinois implemented new "Level the Playing Field" rules between in-state sellers, remote sellers, and marketplace facilitators. These rules substantially altered remote sellers' requirements, prompting the Illinois Department of Revenue (DOR) to publish a flowchart to clarify the type of tax each seller needed to collect.

A recently filed case by PetMeds, an online pharmacy that sells pet medications, pet food, and dietary supplements, raised a question of whether the Illinois remote seller collection rules are unconstitutionally complex or illegally discriminatory.

Amendments Due to PetMeds Case

In the case, PetMeds argued that there was a disparity in the tax obligations of in-state and out-of-state retailers. They pointed out that while in-state retailers selling from out-of-state only need to collect and report the 6.25% state-level use tax, out-of-state retailers like PetMeds must also report and remit local Retailers' Occupation Tax based on their customer's location.

As a result of this case, the state of Illinois amended the Retailers' Occupation Tax so that retailers making sales of tangible personal property to Illinois customers from locations outside Illinois are considered engaged in selling at retail in Illinois under certain conditions.

It also specifies that retailers with a business presence in Illinois who sell tangible personal property to Illinois customers from outside the state are deemed to be conducting business at the Illinois location where the goods are shipped, delivered, or where the customer takes possession. This regulation will take effect on January 1, 2025.

Conclusion

Expanding the requirement for more sellers to collect the Retailers' Occupation Tax instead of the sellers' use tax is significant in Illinois because local use taxes are not widely adopted by its cities, counties, and districts. By doing so, Illinois ensures that both state and local sales taxes are collected more comprehensively. 

However, while the proposed changes are a step towards fairness, they may not fully address the practical challenges faced by remote sellers. Only time will reveal whether further modifications will be necessary to withstand legal challenges and ensure an equitable tax system.

Source: Bill SB3362, PetMeds Illinois Independent Tax Tribunal Petition