Recently Illinois enacted a rule that requires “marketplace facilitators”1 – companies like Amazon, eBay, and Wayfair, etc. — to collect and remit Illinois use tax on any sales made or facilitated by them (i.e. sales made through their “marketplaces”) on behalf of “marketplace sellers” (i.e. parties making sales through these mediums). The purpose of these rules is two-fold: First, to capture sales made by sellers that may not otherwise have nexus in Illinois, and secondly to simplify the state’s collection procedures (since it is easier to collect tax from Amazon, for example, rather than from each individual seller).
Shortly after the enactment date, the Illinois Department of Revenue (“IDOR”) issued a Compliance Alert regarding an identified issue (outlined below) that currently prohibits a marketplace seller from taking a credit for the taxes collected on its behalf by marketplace facilitators. In response to the Compliance Alert, IDOR received complaints from impacted marketplace sellers, and we heard IDOR was going to provide a solution that would allow the credit for marketplace sellers. As a result of COVID-19, IDOR’s solution has been delayed. We heard from IDOR on April 28, 2020, that they are still working on the solution, and it will likely be in the form of a change to the Illinois sales tax return form to allow the application of a credit for use tax collected and remitted by marketplace facilitators. At this point, it is our understanding IDOR’s solution does not include an automatic retroactive correction and therefore, it is important marketplace sellers evaluate their marketplace sales to confirm if any amended returns are required and to minimize potential exposure.
Marketplace Sellers with Illinois Nexus Still Have Retailers’ Occupation Tax Obligations
Illinois’ new marketplace facilitator law only requires marketplace facilitators to collect and remit Illinois use tax. This is a flat rate 6.25% state level tax, which out-of-state sellers are required to collect on sales made to Illinois customers. However, marketplace sellers that maintain a place of business in the state, including physical locations, employees or inventory stores, are still required to collect Illinois sales tax, what is called the Illinois Retailer’s Occupation Tax (“ROT”). The ROT consists of a base 6.25% state sales tax rate, along with local and county portions, for a total tax rate of up to 11%, depending on the seller’s location in the state.
Because Illinois only requires marketplace facilitators to collect and remit the Illinois use tax, marketplace sellers with Illinois nexus have ROT collection and remittance obligations and could be subject to significant underpayments resulting from the difference in rates between the use tax and ROT.
Compounding the issue caused by the difference in overall rates is the difference in type of tax – currently, the IDOR is not able to issue credits against the ROT for use tax paid by marketplace facilitators. This means that if an Illinois retailer makes a sale on Amazon on which Amazon collects and remits Illinois use tax, that Illinois retailer will still be liable for the entire ROT amount – not just the difference in rates —effectively resulting in “double tax” being paid on the transaction. As mentioned, we are aware IDOR is working with some of the marketplace facilitators to correct this issue, though it has not yet provided a timeline as to when it will issue a solution.
Because of this, it is very important that Illinois retailers selling on these marketplaces work with the marketplace facilitators to ensure that any tax collected be remitted to the retailer, so that the marketplace seller files its own Illinois ROT return. Each marketplace facilitator will be slightly different in this regard, so communication and cooperation between the marketplace seller and marketplace facilitator will be essential.
As previously noted, Miller Cooper is monitoring IDOR activity regarding marketplace facilitators and marketplace sellers, and can assist marketplace sellers with evaluating their Illinois ROT obligations and assist with mitigation and minimization of potential penalty. Please reach out to your Miller Cooper representative if you would like further assistance evaluating and resolving your marketplace seller ROT obligations.
[1] A ‘marketplace facilitator’ is a person who contracts with an unrelated third-party marketplace seller, directly or indirectly through one or more affiliates, to facilitate a sale by the unrelated third-party marketplace seller by doing both of the following:
- Listing or advertising for sale by the marketplace seller in a marketplace, tangible personal property that is subject to Illinois use tax; and
- Directly or indirectly, through agreements or arrangements with third parties, collecting payment from the customer and transmitting that payment to the marketplace seller regardless of whether the marketplace facilitator receives compensation or other consideration in exchange for its services.
