New Illinois Sales Tax Collection Requirements Take Effect for Remote Vendors and Marketplace Facilitators Starting in 2021

Beginning January 1, 2021, remote retailers and marketplace facilitators must remit state and local retailers’ occupation taxes (ROT) under the recently enacted Leveling the Playing Field for Illinois Retail Act. Previously, remote retailers (effective October 1, 2018) and marketplace facilitators (effective January 1, 2020) were only required to collect and remit the state level use tax. The changes are intended to level the playing field between Illinois-based retailers and remote retailers by imposing state and local ROT on remote retailers and marketplace facilitators.

Up until January 1, 2021, Illinois sales from remote retailers or marketplace facilitators, are subject to the use tax but not the ROT, which has a local tax component. Illinois-based retailers, including out-of-state sellers who fulfill Illinois sales with Illinois-based inventory, are required to collect and remit ROT, thus creating a disadvantage for in-state sellers by having to collect and remit the local portion of the tax from their purchasers. Beginning January 1, 2021, Illinois imposes its state and local ROT collection responsibility on remote retailers and marketplace facilitators that have met the economic nexus thresholds imposed by Illinois of $100,000 in gross sales (excludes sales for resale) or 200 transactions.

Remote Retailer Sales vs Out-of-State Sales

Illinois differentiates between a remote retailer (with no physical presence in IL) and an out-of-state seller (with physical presence in IL). A remote retailer is an out-of-state seller that sells tangible personal property (TPP) to Illinois purchasers and does not have a physical presence in Illinois (IL Bulletin FY 2021-02). Beginning on January 1, 2021, remote retailers meeting or exceeding either of the tax remittance economic nexus thresholds are deemed to be engaged in the occupation of selling TPP at the Illinois location to which the TPP is shipped or delivered or at which possession is taken by the purchaser (destination sourcing). In other words, sales of TPP made to Illinois purchasers by a remote retailer are taxed at the state and local destination rate.

An out-of-state seller with presence in IL will determine the applicable tax rate based on the location from where the inventory is shipped. If the out-of-state seller’s sale to an Illinois purchaser is filled from inventory located in Illinois, the state and local ROT is imposed at origin rate which will be the location from where the inventory is shipped. If the sale occurs and is shipped from inventory outside of Illinois, then the state 6.25% use tax must be collected, and no local taxes apply.

The above process to determine the appropriate tax rate is illustrated in the Illinois Department of Revenue’s Leveling the Playing Field Retailer Flowchart.

Marketplace Sales

Marketplace facilitators making retails sales on behalf of remote sellers (marketplace sellers) or their own remote sales may also be impacted by this law change. The following definitions apply to marketplace sales:

• Marketplace - a physical or electronic place, forum, platform, application, or other method by which a marketplace seller sells or offers to sell items (ILCS Sec. 105/2d).
• Marketplace facilitator - a person who, pursuant to an agreement with an unrelated third-party marketplace seller, directly or indirectly through one or more affiliates facilitates a retail sale by an unrelated third-party marketplace seller by:
  • listing or advertising for sale by the marketplace seller in a marketplace, TPP that is subject to tax; and
  • either 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 (ILCS Sec. 105/2d).
• Marketplace seller - a person that sells or offers to sell TPP through a marketplace operated by an unrelated third-party marketplace facilitator (ILCS Sec. 105/2d).

Since January 1, 2020, the marketplace facilitator was deemed the retailer, not the marketplace seller. As such, the marketplace facilitator meeting or exceeding the economic tax remittance thresholds was required to collect state level use tax on retail sales made on behalf of a marketplace seller and on its own remote retail sales. Under the Leveling the Playing Field for Illinois Retail Act, beginning January 1, 2021, a marketplace facilitator meeting or exceeding the economic tax remittance thresholds that makes retail sales on behalf of a marketplace seller and/or direct sales is required to collect both the state and local tax rate. The determination of whether the sales tax rate is based on origin or destination is determined by the following:

• For sales that are fulfilled from inventory located in Illinois, state and local ROT is incurred at the tax rate in effect at the location of the Illinois inventory (origin sourcing).
• For sales that are not fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois, state and local ROT is incurred at the tax rate in effect at the purchaser’s location (destination sourcing).

The Takeaway

Beginning January 1, 2021, both remote sellers and marketplace facilitators must collect both the state and local tax on Illinois sales based on either the destination or the origin, depending on where the inventory is located. This will require a robust sales tax collection system that can apply sourcing rules to each transaction to determine the applicable state and local tax rates, be it origin or destination. Furthermore, documentation necessary to support any deductions claimed on the sales tax return by the marketplace seller to account for taxable sales reported by the marketplace facilitator should be retained for audit purposes.

Consult with your Andersen SALT advisor for help navigating the new sales tax collection requirements for remote sellers and marketplace facilitators in Illinois.