Something Smells: Illinois Still Needs to Solve its Marketplace ROT Problem

Like most states with a sales tax, Illinois enacted a marketplace facilitator sales tax collection law after the 2018 Wayfair decision. The goal of this law was to “level the playing field” between online and in-store sales by requiring marketplace facilitators and remote retailers to collect sales tax. However, the interaction of Illinois’ unique sales tax system and the collection requirements imposed on digital marketplaces creates an untenable situation. Many marketplace sellers will be liable for sales tax on transactions for which a marketplace facilitator may have already collected and remitted tax. This is due to the lack of a mechanism to credit marketplace sellers for tax already remitted by a marketplace facilitator on a transaction. This article provides a brief overview of Illinois’ marketplace sales tax problem and offers a solution.

Illinois’ marketplace collection law

Illinois imposes two separate but complementary taxes upon the sale and use of tangible personal property: the Illinois Retailers’ Occupation Tax (ROT) and the Use Tax (UT). Typically, customers pay UT to retailers, who must remit the tax to the Illinois Department of Revenue unless the retailer has already remitted ROT upon the gross receipts from the same sale. If ROT has already been paid on the transaction, then the seller may keep the UT collected from the customer. Therefore, although a single retail sale transaction triggers the imposition of both the ROT and UT on the retailer and customer, only one of the taxes must be remitted to the state. If a retailer does not have nexus with Illinois and therefore lacks ROT or UT obligations, the Illinois customer must pay UT directly to state.

Illinois adopted a new law that places a burden on remote sellers and the operation of Illinois’ marketplace law produces compliance challenges. Starting Jan. 1, 2020, Illinois requires remote marketplace facilitators to collect UT, but not ROT, if the marketplace facilitator meets the state’s economic nexus threshold of $100,000 in annual sales or 200 separate transactions. A marketplace facilitator meeting the economic nexus threshold is considered to be the retailer of sales made through its marketplace for UT collection purposes. Its status as a retailer means that a marketplace facilitator must charge and collect the UT on sales made by third-party sellers. A problem arises because the new marketplace law did not also impose ROT on marketplace facilitators. As we discuss further below, certain marketplace transactions create ROT liability for marketplace sellers even though marketplace facilitators have collected and remitted the UT on the same sales. Further, there is no mechanism to relieve a marketplace seller from its ROT remittance obligation when UT has been remitted by the marketplace facilitator.

The ROT problem

Illinois’ marketplace law imposes UT collection obligations on marketplace facilitators on all taxable sales of tangible personal property made by the marketplace facilitator or facilitated for marketplace sellers to customers in Illinois. However, marketplace transactions fulfilled with in-state inventory create a ROT liability for marketplace sellers. The imposition of the two taxes on the same sale is a problem because there is no mechanism to credit a marketplace facilitator’s remittance of UT against a marketplace seller’s ROT obligation on the same sale.

This ROT problem results in a compliance issue for marketplace sellers when marketplace facilitators have tax collection systems that are unable to determine the correct amount of ROT and UT, whichever is required, at the time of the sale. These marketplace facilitators may charge UT on all transactions, and not collect local ROT. Inevitably, marketplace sellers will remain liable for this local ROT. Moreover, some marketplace facilitators may remit UT directly to the Department instead of remitting ROT to marketplace sellers.

The department acknowledged this compliance problem in February through a “Compliance Alert.” In this informal guidance, the department stated that it has no authority to issue marketplace sellers a credit against their ROT liability for the UT remitted by a marketplace facilitator. Thus, these sellers remain liable for ROT even though an equivalent tax already has been paid. The department has yet to announce any solution for these marketplace sellers.

Aside from the double-tax payment issue, remote marketplace sellers may not be aware that they have a ROT obligation, especially since marketplace facilitators collect UT on most sales. Further exacerbating this problem, an in-state seller may not carefully monitor where its inventory is maintained in Illinois by a marketplace facilitator and therefore be unaware of its ROT liability. Even when this information is available, the seller typically only learns of in-state fulfillment after the sale has taken place and has no practicable way of charging the additional tax to the customer. Finally, smaller marketplace sellers may not have filed any ROT returns with Illinois because of a lack of awareness, potentially exposing these sellers to a trailing ROT liability for years to come unless a fix is implemented for 2020 sales.

A temporary issue?

Fortunately, the ROT collection problem for marketplace sellers is limited to sales made in 2020. Beginning on Jan. 1, 2021, marketplace facilitators are required to remit the applicable state and local ROT administered by the department on behalf of themselves and their marketplace sellers, with a credit given for UT liabilities. Marketplace sellers are not subject to audit for their marketplace sales where a marketplace facilitator remitted the applicable state and local ROT unless the marketplace facilitator seeks relief arising out of inaccurate information provided by the seller. The department is not permitted to collect ROT from marketplace sellers and facilitators for the same transaction.

Although the changes enacted by S.B. 119 resolve this specific issue, it does not resolve the 2020 exposure. A simple—and needed—fix is to provide a retroactive credit to marketplace sellers for 2020 marketplace sales where UT was remitted by a marketplace facilitator. The credit should be available to marketplace sellers so long as a marketplace facilitator has not been issued a UT refund on the same transaction. In the meantime, the department should pursue a policy where it declines to pursue marketplace sellers on transactions for which a facilitator remitted UT, or the department could offer an amnesty for marketplace sellers that demonstrate compliance with ROT remittance rules that take effect on Jan. 1, 2021. Without such an agreement, 2020 tax liabilities could needlessly haunt marketplace sellers for years to come even after the implementation of the state’s marketplace ROT fix.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.

Jeff Friedman is a partner in Eversheds Sutherland (US) LLP’s Washington office. Jeff provides state and local tax planning, strategic advice, and advocacy to numerous Fortune 100 and industry-leading companies.

Breen Schiller is a partner in the Chicago office of Eversheds Sutherland (US) LLP. She focuses her practice on complex state and local tax planning, audit defense, and the litigation of sophisticated multi-state and local tax issues.

Dennis Jansen is an associate at Eversheds Sutherland (US) LLP based in Dallas. He represents clients in all stages of tax controversy and advises on multistate tax planning and complex transactions.