Recent Changes to Illinois Sales Tax Law and the Impact on Local Governments

Ian Brown • July 8, 2019

A new Illinois sale tax law regarding out-of-state retail sales continues to level the playing field for brick-and-mortar stores in Illinois.

When a brick-and-mortar retailer in Illinois sells general merchandise, its tax rate consists of:

the statewide general merchandise tax rate of 6.25% (of which 5% goes to the state, 0.25% goes to counties, and 1% is distributed to local governments based on population), plus
any additional taxes on general merchandise that are imposed by a local government and collected by the Illinois Department of Revenue (“IDOR”).

However, for many years out-of-state realtors did not pay an Illinois tax, so it was up to Illinois residents to instead pay the tax directly to IDOR. This was due to federal law requiring a retailer to have a physical presence in a state for that state to require the retailer collect tax on purchases. For example, Illinois did not tax Amazon purchases until 2015 when Amazon built fulfillment warehouses in Illinois.

2018 Change in Federal and Illinois Law

In the 2018 case, South Dakota v. Wayfair , the US Supreme Court ruled that states may charge tax on purchases made from out-of-state retailers even if the seller does not have a physical presence in the taxing state. Nonetheless, the Court made it clear that a certain threshold of retailer contact with the taxing state must exist in order to charge the tax.

In light of the change in federal law, in October 2018 Illinois began taxing purchases made from out-of-state retailers that met the same contact threshold set by South Dakota ($100,000 sales or 200 transactions annually). However, this new Illinois law still put in-state retailers at a disadvantage compared to out-of-state ones for two reasons:

Illinois’ new tax law suffered from low compliance by out-of-state retailers, and
even when they did comply, out-of-state retailers still only had to pay the Illinois Use Tax (i.e., the statewide general merchandise tax rate of 6.25%), while in-state retailers must pay the Illinois Retailers’ Occupation Tax (i.e. 6.25% plus locally imposed taxes on purchases).

2019 Change in Illinois Law

On June 5, 2019, the governor signed the Leveling the Playing Field for Illinois Retail Act (“Act”) which seeks to improve the 2018 law by changing the type of tax collected and how the tax is collected. The Act is best understood by breaking it down to: 1) sales through a marketplace and 2) sales directly from out-of-state retailers.

1. Marketplace sales

Beginning January 1, 2020, marketplace facilitators (e.g., Etsy, eBay, Amazon marketplace, etc.) will be responsible for collecting and remitting taxes on behalf of the third-party retailers doing business on the marketplaces. (Currently, collecting and remitting are the responsibility of the third-party retailers, but IDOR does not have the resources to track down and audit the hundreds of thousands of individual merchants). The type of tax for sales by these out-of-state third-party retailers will continue to be Illinois Use Tax (i.e., the statewide general merchandise tax rate of 6.25%).

2. Sales directly from out-of-state retailers

Beginning July 1, 2020, out-of-state retailers that sell directly to customers in Illinois will be able have another entity (called a Certified Service Provider (“CSP”) e.g., Intuit or Turbo Tax) collect and remit sales taxes on their behalf rather than having to work directly with IDOR. This will make tax collection easier for both the retailer and IDOR. The CSP’s may keep a portion of the tax collected to incentivize them to sign up more retailers to comply. Additionally, instead of paying the Illinois Use Tax (6.25%), these out-of-state retailers will have to pay the Illinois Retailers’ Occupation Tax (6.25% plus locally imposed taxes on purchases) at the destination of the goods purchased.

Impact on Local Governments

This is a win for all local governments. Even if a local government does not have a Retailers’ Occupation Tax, the more retailers paying the statewide 6.25% tax rate will result in more money that will be distributed to each municipality. Based on revenues generated by states that have already enacted similar legislation, the Illinois Retail Merchants Association estimates that by the second year of full implementation, the changes could increase the 1% portion shared by all local governments by $74 million.

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Introduction Last summer, an attorney filed a legal brief he had written with the help of the generative AI platform, ChatGPT. The document included citations to a series of legal cases that seemingly offered precedents that supported his client’s position. There was only one problem. As the judge in the case discovered, six of those cases did not exist. Instead, they were dreamed up by the online tool. This was only one of several high-profile incidents in which new technology has sometimes embarrassed the lawyers using it. Yet many legal experts believe generative AI will also change the legal profession in ways that will aid lawyers and their clients. Lawyers must be accountable for how they use AI. Not only must they carefully assess any bias inherent in algorithms before using it, but they must also consider ethical and fairness issues. AI holds tremendous promise to free legal professionals from the most time-consuming tasks, work more efficiently than ever, and empower them to focus on strategic projects that truly matter. Still, there are many ethical considerations of AI to keep in mind. Ethical Issues Depending on your jurisdiction, there may be formal ethical opinions addressing the use of AI. Be sure to confirm the existence of these ethics’ opinions or guidelines and how they apply to the use of AI. Bias And Fairness AI uses trained algorithms to analyze vast amounts of data. These algorithms can collect biased historical information, which means that the AI system may also inadvertently produce biased results, leading to questionable outcomes. Algorithms can be difficult to interpret, and it can be challenging to understand how they arrive at their decisions or source information. Privacy AI systems often rely on sizable amounts of data, including highly sensitive and confidential information, and may store personal and conversation data. When using the technology, lawyers need to ensure that AI systems adhere to strict data privacy regulations. For example, lawyers using ChatGPT must familiarize themselves with its Privacy Policy and Terms of Use before using the service. Additionally, they must make sure that the data is only used for the specific purposes for which it was collected. Lawyers must also consider professional obligations relating to privacy and information-sharing when providing any information with AI systems to ensure they are not running afoul of confidentiality obligations (to clients or other parties) or otherwise disclosing information improperly. Responsibility And Accountability As a rule of thumb, AI should be used as a complement to work, and not a replacement. While AI can streamline time-consuming and mundane tasks, strategic decision-making, complex legal analysis, and legal counsel are all examples of responsibilities that it simply cannot take over. As a result, lawyers must be proactive in establishing clear lines of responsibility and accountability when implementing AI in their firm. Summary As the use of AI in law firms becomes increasingly widespread, it is important that legal professionals address the ethical considerations surrounding it and ensure the technology is being used responsibly. By doing so, lawyers will be able to enjoy AI’s benefits while maintaining an ethical practice at the same time. In the end, AI has its benefits but it should not be relied upon to accurately apply the law to a fact pattern in the context of giving sound legal advice. Accurate legal advice includes understanding the context in which the law exists, experience and human thoughtfulness.