Illinois Legislative Update: Highlights of Recent Changes

Illinois recently completed its 2019 legislative session, which culminated in the passage of the state’s budget for fiscal year 2020 as well as multiple bills with significant tax measures. The newly approved tax legislation makes the following changes:

• Replaces the flat-rate income tax with a graduated income tax (effective only if voters in next November’s general election approve a change to the Illinois Constitution to eliminate the current mandated flat tax);
• Introduces tax amnesty programs and a decoupling from the federal deduction of foreign-derived intangible income (FDII), provides for the phase-out and repeal of the Illinois franchise tax, and introduces a number of new and expanded tax credits and incentives; and
• Imposes an economic nexus threshold for remote sellers of tangible personal property and taxable services in the state and includes tax provisions related to sports betting and gambling.

Below are more details and highlights of key tax provisions in recently enacted Illinois legislation.

Graduated Income Tax Rate

Senate Joint Resolution Constitutional Amendment (SJRCA) No. 1 places a measure on the ballot in the November 2020 statewide election to amend the Illinois Constitution and permit the implementation of a graduated income tax rate. The Illinois Constitution only permits a flat income tax rate (currently 4.95%), thus the proposed amendment must not only be approved by the legislature and Governor, but also ratified by 60% of those voting on the issue, or by a majority of those voting in the election.

Assuming a successful vote on SJRCA No.1, the following graduated income tax rates will be implemented, effective for taxable years beginning on or after January 1, 2021.

Individuals

• For single and joint filers earning less than $250,000 per year, the first $10,000 would be taxed at 4.75%, then income between $10,001 and $100,000 would be taxed at 4.9%. Income from $100,001 up to $250,000, would be taxed at 4.95%.
• For taxpayers earning above $250,000, the rates differ for single and joint filers. For single filers from $250,001 to $350,000, and for joint filers up to $500,000, the rate would be 7.75%. That increases to 7.85% for single filers reporting between $350,001 and $750,000 in income, and for joint filers from $500,001 to $1 million.
• Single filers earning more than $750,000 and joint filers earning more than $1 million would be taxed at the top rate of 7.99%. It is important to note that for taxpayers that fall within the highest bracket, the taxpayers’ net income would all be taxed at that top rate, unlike the rest of the brackets.

Corporations

For corporations, the tax rate will be raised to 7.99% for taxable years beginning on or after January 1, 2021. The Replacement Tax will remain at 2.5%, meaning corporations subject to the replacement tax will be subject to a rate of 10.49%. Currently, the corporate rate is 7.0% plus the 2.5% Replacement Tax.

Amnesty Programs

Amnesty

A tax amnesty program will apply to all taxes administered by the Department of Revenue. Effective October 1, 2019 and ending November 15, 2019, the program covers the taxable period beginning July 1, 2011 and ending June 30, 2018. In return for a taxpayer’s participation in this amnesty program the Department of Revenue will waive all interest or penalties that may be applicable and will not seek civil or criminal prosecution for the periods for which amnesty has been granted.

Franchise Tax/License Fee Amnesty

A similar tax amnesty program will be effective October 1, 2019 and ending November 15, 2019, and will apply to any outstanding franchise tax liabilities or license fees. The program covers all taxable periods after March 15, 2008 through and including June 30, 2019. In return for a taxpayer’s participation in this amnesty program the Illinois Secretary of State will waive all interest or penalties that may be applicable and will not seek civil or criminal prosecution for the periods for which amnesty has been granted.

Corporate Income and Franchise Tax

Foreign-Derived Intangible Income

The definition of Illinois base income for corporations has been amended. The revised version of 35 ILCS 5/203(b)(2) included in the bill includes subparagraph (E-18), which requires that taxpayers add-back to their federal taxable income the amount of the deduction allowed under Internal Revenue Code Sec. 250(a)(1)(A) relating to Foreign-Derived Intangible Income (FDII). This amendment is effective for taxable years beginning after December 31, 2018. Thus, taxpayers will be allowed to take the FDII deduction for Illinois purposes on their 2018 returns.

Franchise Tax Phase-Out

The Illinois franchise tax will be phased out under the newly enacted legislation. For domestic and foreign corporations, the franchise tax is subject to phase-out beginning on or after January 1, 2020. The franchise tax is repealed on December 31, 2025. The phase out operates by exempting increasing amounts of a taxpayer’s franchise tax liability, as follows:

• On or after January 1, 2020 and prior to January 1, 2021, the first $30 in liability is exempt.
• On or after January 1, 2021 and prior to January 1, 2022, the first $1,000 in liability is exempt.
• On or after January 1, 2022 and prior to January 1, 2023, the first $10,000 in liability is exempt.
• On or after January 1, 2023 and prior to January 1, 2024, the first $100,000 in liability is exempt.
• On or after January 1, 2024, no payment of any franchise tax is required.

Sales and Use Tax

Marketplace Facilitators

Effective on January 1, 2020, a marketplace facilitator who meets certain sales tax thresholds is considered the retailer/serviceman of each sale of tangible personal property/service made in the marketplace and is are required to collect and remit the use tax/service use tax for one year.

The thresholds for a 12-month period are as follows:

• $100,000 gross receipts to Illinois purchasers; or
• 200 or more separate transactions with Illinois purchasers.

These thresholds are applied to the marketplace facilitator on a quarterly basis by looking at the preceding 12-month period. If the thresholds are met, the marketplace facilitator is considered the retailer of each sale made through its marketplace and is liable for collecting and remitting the Use Tax/Service Use Tax on all sales.

A marketplace facilitator who meets the thresholds must also certify to the marketplace seller that the marketplace facilitator has assumed the rights and duties of a retailer/serviceman obligated to collect and remit tax with respect to the sales of tangible personal property/service made by the marketplace seller through the marketplace. The marketplace seller is required to maintain books and records for all sales made through a marketplace and must furnish to the marketplace facilitator the information necessary for the marketplace facilitator to correctly collect and remit tax.

Additional Sales and Use Tax Related Provisions

• Expanded Sales and Use Tax Exemption for Manufacturing Machinery and Equipment – For purchases on or after July 1, 2019, the definition of Production-Related Tangible Personal Property that is exempt from sales and use tax has been expanded to include supplies and consumables used in a manufacturing facility. This exemption is applicable to a range of sales and use taxes.
• Amended Retailers' Occupation Tax (ROT) Act –  The ROT Act is amended to provide that beginning July 1, 2020 a remote retailer who has either $100,000 or more of sales of tangible personal property to Illinois purchasers or enters into 200 or more separate transactions with purchasers in Illinois is liable for all applicable state and locally imposed ROT on all retail sales to Illinois purchasers.
• Data Center Investment Sales and Use Tax Exemptions and Income Tax Credit – Exemption certificates are introduced for qualifying data centers as well as an employment tax credit. Effective January 1, 2020, qualifying data centers that make a capital investment of at least $250,000,000 in Illinois over a 60-month period, and meet other criteria, are eligible to receive certificates of exemption from a range of sales and use taxes.
• Cap on Trade-In Credit for Certain Motor Vehicles – Beginning January 1, 2020, for motor vehicles that are designed to carry 10 or fewer persons, the trade-in credit will be capped at $10,000. Any trade-in value in excess of that amount will be included in the selling price of the replacement property and subject to ROT or Use Tax, as applicable.

Other Significant Provisions

Non-Resident Sourcing of Compensation/Employer Withholding

Nonresidents will be treated as having compensation subject to Illinois Income Tax effective with the 2020 calendar year if the non-resident employee performs services within Illinois for more than 30 days during a year. Illinois compensation will include the individual’s total compensation for services performed during the tax year, as measured by the working days spent in Illinois during the tax year divided by the total number of working days spent both within and without Illinois during the tax year. It appears that once an employee passes the 30-day threshold, the employer must retroactively withhold Illinois income tax from day 1 of the tax year.

Credits and Incentives

The legislation includes a number of changes to Illinois credits and incentives and a five-year extension of the Illinois research and development tax credit. The non-resident sourcing of compensation subject to Illinois income tax is amended and Illinois residents may also claim a credit for tax paid to other states to the extent other states impose income tax on the resident’s salaries and wages. Among the new incentives is the Blue Collar Jobs Act which contains a number of new or expanded income tax credits targeting different levels of investment and a new Illinois Apprenticeship Credit which creates a nonrefundable income tax credit for qualified education expenses incurred by an employer on behalf of a qualifying apprentice.

Sports Betting and Gambling

The new Sports Wagering Act introduces a number of provisions related to sports betting and gambling, including permitting the establishment of new casinos, a surcharge on organization and gambling licensees, and withholding requirements on certain pari-mutuel wagers and gambling games.

Excess Business Losses for Trusts and Estates

Base income for a trust or estate is amended to allow a deduction for the amount of excess business loss disallowed under Internal Revenue Code Sec. 461(1)(1)(B) for tax years beginning after December 31, 2018 and before January 1, 2026.

The Takeaway

In a flurry of activity at the end of its legislative session, the Illinois legislature enacted a number of new tax measures. Some of the provisions are taxpayer favorable while others may present new challenges for Illinois taxpayers. Further, since the drafting took place at the end of session, we expect technical corrections to be made in the fall veto session.  Please reach out to an Andersen SALT professional if you have questions on how the recent Illinois tax law changes may specifically impact you and your business.