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Daily Tax Report: State

Illinois’s ‘Discriminatory’ Sales Tax May Land in Hot Water

May 28, 2020, 7:55 PM

Illinois is cruising toward a legal challenge of its Wayfair-inspired laws after the state’s General Assembly finished a short and speedy legislative session without fixing the so-called “Associated Industries problem.”

Here’s the backstory: Illinois passed a law last spring making remote sellers subject to the local retailer’s occupation tax (ROT), rather than the use tax, giving local governments their slice of the Wayfair pie. The law, however, sets up a potentially discriminatory tax scheme that the U.S. Supreme Court has already declared unconstitutional.

Illinois’s law requires out-of-state sellers to collect and remit the destination-based ROT, but it permits sellers with an in-state physical presence to collect and remit on the basis of origin. This structure creates an inconsistency by which remote retailers will be paying more local ROT than many retailers located in low-tax municipalities in the state.

Problematic Inconsistency

The inconsistency could prove problematic under the Supreme Court’s 1994 ruling in Associated Industries of Missouri v. Lohman. In that case, the court found that Missouri’s use tax system discriminated against interstate commerce in those localities where the use tax exceeded the sales tax.

During the fall 2019 veto session, the Illinois legislature modified its approach to bring marketplace facilitators into the ROT fray and created an effective date of Jan. 1, 2021. But anyone hoping lawmakers might address this constitutional problem during the rushed legislative session that finished May 24 left the capitol disappointed, said Carol Portman, president of the Taxpayers’ Federation of Illinois.

“The people who understand this issue don’t have the political ability to make any changes until something horrible happens,” she said, “a legal challenge where it’s held unconstitutional, or if lots of glitches and problems start surfacing.”

All but two of the 45 sales tax states have begun imposing remote sales tax collection-and-remittance requirements based on some measure of economic activity, as opposed to physical presence, since the U.S. Supreme Court’s seminal South Dakota v. Wayfair ruling in June 2018. The ruling tossed out the court’s 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales.

The majority in the Wayfair 5-4 ruling suggested strongly that South Dakota’s law, which requires remote sellers to collect sales tax if they have more than $100,000 in sales or 200 transactions to buyers in the state, would pass constitutional muster. In addition, nearly 40 states have passed marketplace facilitator laws, which place tax-filing requirements on large websites such as Amazon Marketplace, eBay Inc., and Etsy Inc. that broker transactions for other, typically smaller, vendors.

Missouri Mayors Unite

For Missouri mayors, remote sales taxation is just as much a matter of fairness as it is of money.

But the need for tax revenue is more urgent now in light of the pandemic, they said in a recent letter to Gov. Mike Parson (R). The group Missouri Mayors United is urging Parsons to call the General Assembly into a special session so the state can join the 43 sales tax states that require remote vendors to collect and remit taxes on sales to Missouri buyers. Missouri and Florida are the only two sales tax states that don’t have a remote sales filing requirement.

“Our state, counties and cities all could use the extra funding as the Covid virus has placed a huge dent in our sales tax revenues,” the group said in an email to Parsons on behalf of 367 mayors.

Enacting a remote sales tax filing requirement would supply more than just a one-time revenue boost, David Slater, the group’s president and mayor of Pleasant Valley, said in a phone interview. “It’s more than just the money, it’s the fairness of it. We want a level playing field for Missouri companies.”

The state estimates such a measure would generate about $200 million in annual revenue, with $120 million to $140 million going to local governments, he said.

Slater said the group has offered to help the governor’s office draft a bill. He said Parson hadn’t yet responded to the request.

Louisiana Marketplaces

A bill to require marketplace facilitators such as Amazon, Etsy, and eBay to collect and remit sales and use taxes on transactions involving third-party merchants on their platforms is going back to the Louisiana Senate for debate after the House amended the measure.

Under S.B. 138, marketplace facilitators would have to meet the same economic presence thresholds as remote sellers: $100,000 in sales or 200 transactions into the state. It would take effect July 1, the same day Louisiana will begin requiring remote sellers to collect and remit state and local sales taxes.

On the House floor on May 27, Rep. Neil Riser (R) added an amendment specifying that marketplace sellers with more than $1 billion in U.S. gross sales can collect and remit all applicable taxes and fees, including those that would be paid by facilitators.

The major telecommunications companies and other large companies have said they prefer to collect their own taxes and fees, such as 911 fees associated with sales of some electronic devices, Riser said. “They want to do that separate and apart, and to be held accountable separate and apart,” he said.

The Louisiana House approved Riser’s amendment with no objection and passed S.B. 138 on Tuesday with a 96-0 vote. It now goes back to the Senate, which had cleared the bill on May 12 by 34-0.

—with assistance from Michael J. Bologna in Chicago and Jennifer Kay in Miami.

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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