In June of this year, the General Assembly modified the Local Retailers Occupation Tax ("ROT") by expanding its imposition to not only Illinois retailers actually engaged in business in Illinois but also to remote retailers with no physical presence in Illinois. See SB 689 and SB 690. It did so by making those remote retailers subject to the Local ROT based on delivery location verses origin location used by Illinois retailers. The result of this law change is that remote retailers will be paying more local ROT than many Illinois retailers located in low tax municipalities in Illinois. Even though, it was common knowledge that a similar discriminatory tax scheme was tried by Missouri 20 years ago and was found to be in violation of the United States Commerce Clause by a unanimous United States Supreme Court in Associated Industries of Missouri v. Lohman, 114 S. Ct. 1815 (1994), the legislature passed this modification to the Local ROT anyway.
In the November veto session, the Local ROT was visited again by the General Assembly, but not to fix the obvious Commerce Clause violation. S.A# 1 to SB 119. Instead, the General Assembly decided to add even more confusion and questionable legality to the local ROT by modifying its imposition to include marketplace facilitators and sellers. It then added special provisions to specifically favor sales made by marketplace facilitators on their own behalf versus sales on behalf of marketplace sellers, and to discriminate between Illinois marketplace sellers that sell through the marketplace versus making sales through their own website. These changes will take effect January 1, 2021.
In essence, this amendment sets up a tax structure that allows a marketplace facilitator and its “related companies” (not just affiliates, which are 5 percent or more owned, but any related company) to source their sales at a much lower tax rate than Illinois companies selling through the facilitators marketplace platform. This gives the marketplace and its related companies a competitive advantage over both Illinois and out-of-state companies that sell online and may cost many Illinois communities’ significant local sales tax dollars from the shifting on Local ROT revenues. Notably, the Illinois Local ROT law may even encourage companies to become “related” to marketplace facilitator to become eligible for this favorable sales tax treatment.
Under the amendment, here is how the Local ROT will be applied and collected from Illinois consumers buying products on a marketplace facilitator’s platform:
- When the product is NOT from a marketplace facilitator directly or one of its "related companies," the sale is considered to be by a marketplace seller through a marketplace facilitator and tax will be charged by the marketplace facilitator based on delivery location: Therefore Local ROT will be based on the delivery location of the buyer – state and local sales tax combined (10.25 percent in Chicago, 9.75 percent in Springfield).
- When the product sale is directly from a marketplace facilitator or any of its "related companies," it is NOT considered a sale through the marketplace platform: Therefore if it is sent to the buyer from a location in Illinois (shipped from either the related company’s Illinois location or from an Illinois-based marketplace facilitator’s fulfillment center in Illinois) the Local ROT is based on the origin of the sale.
- When the product is from a marketplace facilitator or one of its Illinois "related companies" and is shipped from out of state: only a use tax rate of 6.25 percent is due since the sale will not be deemed thought the marketplace but rather a use tax sale under the law.
This confusing and preferential tax scheme is based on the critical definition of who is considered a “marketplace seller”:
- Illinois companies making online sales through a marketplace facilitator that are unrelated to such facilitator will be considered "marketplace sellers" and the tax will be based on the typically higher ROT destination sales tax rate (the state and local sales tax costs combined) for deliveries in Illinois, even when shipped from an Illinois location.
- The marketplace facilitator itself and Illinois companies that are its "related companies" are not defined as "marketplace sellers" so they will get the benefit of either paying the typically lower ROT origin rate for products shipped from Illinois to Illinois locations, or the 6.25 percent UT rate for products shipped from outside Illinois. Thus, the amendment creates a Local ROT benefit to the marketplace facilitator and its related companies, while independent Illinois retailers selling through the marketplace facilitator will now be required to pay a generally higher ROT rate based on destination.