As Illinois passes a new budget, State and Local Tax attorney Chris Lutz helps break down important changes with Law360 and Tax Notes.
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Out-of-state businesses will also see a big change in local sales tax collection under the legislation. For collections of the local retailer's occupation tax, a sales tax, Illinois businesses have always collected at the point of origin, the place from which the product is shipped. Now, out-of-state businesses will also have to collect the tax, but they will have to use destination-based sourcing, collecting based on the place where the product is shipped.
That raises several red flags, said Christopher Lutz of Horwood Marcus & Berk Chtd. First, different businesses are going to pay different rates. If a business in Naperville, Illinois, sells into Chicago, it will collect at the Naperville rate. But an out-of-state business will collect at the Chicago rate.
Then, Lutz said, the legislation seeks to apply the Wayfair standard to the retailer's occupation tax, but in Illinois, Wayfair applies to use tax and the ROT is a sales tax. He said he expected litigation would arise if the legislation stayed as is.
“They've taken the Wayfair standard and plugged it into the ROT,” he said. “That's going to be a problem.”
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Still, Christopher Lutz of Horwood Marcus & Berk Chtd. told Law360 that businesses would welcome the phase-out of the corporate franchise tax.
“That one caught everybody's eye,” Lutz said. “With respect to making Illinois a better place to do business, the franchise tax was always a trap for the unwary. Getting rid of that makes a lot of sense.”
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“Switching to a destination-based ROT rule is not sensible to me, because the retailer’s occupation tax is imposed on the occupation of retailing,” Christopher Lutz, state and local tax attorney with Horwood Marcus & Berk Chtd., told Tax Notes. “There could be commerce clause problems, because the sourcing rules are different if you are an out-of-state seller rather than an in-state seller. . . . I would bet dollars to doughnuts that taxpayers will challenge it if it increases [the] rate for an out-of-state seller.”