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Catherine (Cate) A. Battin represents clients in state and local tax controversies at the audit, administrative and judicial levels in numerous jurisdictions. She provides national state tax strategies for clients on a full range of state tax issues, including income tax apportionment, nexus, combination and sales tax characterization of products and services. She has defended numerous internet sellers in cases brought under the Illinois False Claims Act alleging fraudulent failures to collect and remit use tax. Read Catherine A. Battin's full bio.

In a bombshell opinion, the Illinois Appellate Court held that a law firm serving both as client and attorney may not recover statutory attorneys’ fees under the Illinois False Claims Act (the Act). In People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2017 IL App (1st) 152668 (June 15, 2017), the Illinois Appellate Court, First District, reversed the trial court’s award of attorney fees in excess of $600,000 for work performed by Diamond’s law firm on behalf of itself as the relator. McDermott represents My Pillow in this matter.

Much like its federal counterpart, the Act allows private citizens (referred to as relators) to file fraud claims on behalf of the state of Illinois. If successful, relators can collect up to 30 percent of the damages award plus attorneys’ fees. The Diamond firm is hardly a traditional “whistleblower” with “inside knowledge,” as it has filed approximately 1,000 different qui tam actions as the relator over the last 15 years. The firm initially focused its suits on out-of-state businesses for allegedly knowingly failing to collect Illinois use tax on merchandise delivered to Illinois customers, then expanded its dragnet to allege a knowing failure to collect tax on shipping and handling charges associated with merchandise shipped to Illinois. The firm then targeted out-of-state liquor retailers for alleged knowing nonpayment of certain taxes on the sale of alcoholic beverages to Illinois residents and, most recently, the firm filed over 80 lawsuits targeting tailors based in Hong Kong and London, making similar claims for not collecting Illinois use tax.

Continue Reading Illinois Appellate Court Blows the Whistle on Serial Relator

Just days away from the May 31 close of its regular legislative session, the Illinois General Assembly has yet to enact the comprehensive series of tax and budget reforms that were first proposed by the Illinois Senate leadership late last year. Yesterday, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support. SB 9 now moves to the Democratically-controlled House for consideration. Even if approved by the House, it seems likely that Illinois’ Republican Governor will veto the legislation. Continue Reading Illinois Bills to Watch

The Illinois Supreme Court, in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) , held that the City of Chicago’s ruling requiring rental car companies located within three miles of the City to collect tax on vehicle rentals is unconstitutional under the home rule article of the Illinois Constitution. Hopefully, the court’s ruling will stymie the City’s expansive interpretation of its taxing powers.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 extends the reach of the tax ordinance beyond Chicago’s borders in violation of the home rule provision of the Illinois Constitution and violates the federal due process and commerce clauses. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1.  The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs.  Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The Ruling provides that such a writing can be as simple as a customer’s initialing a statement that the vehicle will be used more than 50 percent outside the City (Ruling 11 § 3), but it must be part of the lease agreement or otherwise kept in the company’s business records. Companies that do not wish to comply with the record keeping requirements may opt to pay tax on 25 percent of its rental charges from Chicago customers.

Plaintiffs Hertz Corporation and Enterprise Leasing Company of Chicago LLC, filed separate actions against the City seeking declaratory and injunctive relief from the application of Ruling 11. The cases proceeded in tandem in circuit court and the court granted summary judgment to the companies. The circuit court declared Ruling 11 facially unconstitutional and permanently enjoined the City from enforcing the ordinance with respect to vehicle rental transactions occurring outside the City. The appellate court reversed and held that there is a sufficient nexus between the plaintiffs and the taxable activity (the use of the cars in the City) to permit the tax to be imposed and collection duties placed on plaintiffs. The Supreme Court granted leave to appeal and allowed the Illinois Chamber of Commerce and the Taxpayers’ Federation of Illinois to file amicus briefs on behalf of the car rental companies.

The Supreme Court held that the imposition of the Lease Tax on rentals of cars taking place outside the City limits has an extraterritorial effect and is therefore an improper exercise of the City’s home rule powers. The court was seemingly troubled by the fact that the Lease Tax is imposed not on the actual use within the City’s borders but on the lessee’s stated intent to use the property in Chicago or, failing any statement of intent, on presumed used based on the lessee’s home address. The court noted that at the time of the lease transactions, the use of the vehicle has not yet taken place and may, in fact, never take place within Chicago’s borders. The court said that “unrestrained extraterritorial exercise of home rule powers in zoning, taxation, and other areas could create serious problems, given the number of home rule units in Illinois, particularly in the Chicago area.” 2017 IL 119945 at ¶ 30.  Thus, the court held that Ruling 11 exceeds the scope of the City’s home rule authority. In light of its holding that the ruling violates the Illinois Constitution, the court did not address the plaintiffs’ arguments that it also violates the federal due process and commerce clauses.

Hopefully, the court’s ruling will invite further challenges to the City’s expansive imposition of the Lease Tax. The City’s recent extension of the Lease Tax to cloud computing in Lease Tax Ruling #12 is now particularly susceptible to challenge given that the providers of those services are often located outside Chicago’s borders.

On Monday, October 17, the Illinois Appellate Court issued another taxpayer-friendly opinion in an Illinois False Claims Act case alleging a failure to collect and remit sales tax on internet and catalog sales to customers in Illinois (People ex. rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App. (1st) 151580)). The opinion, partially overturned a Circuit Court trial verdict in favor of the Relator, Beeler, Schad & Diamond, PC (currently named Stephen B. Diamond, PC).

Continue Reading Illinois Appellate Court Delivers Another Blow to Relator in False Claims Act Litigation

The Illinois Appellate Court recently affirmed a finding for a plaintiff individual, upholding the circuit court’s conclusion that defendant Sears, Roebuck and Co. (Sears) violated the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1) (the Act) by overcharging plaintiff sales tax on his purchase of a digital television converter box (converter box”). Aliano v. Sears, Roebuck & Co., 2015 IL App (1st) 143367 (Dec. 30, 2015). Sears appealed the circuit court’s ruling on two bases: (1) that the court failed to find that the plaintiff was actually deceived by any alleged misrepresentation made by Sears (an element required to be found for a violation of the Act); and (2) that the court found Sears had violated that Act based on its determination that overcollection of sales tax “is a de jure deceptive practice violation of the [Act].” Although it upheld the underlying ruling, the court reversed the circuit court’s award of attorneys’ fees pursuant to the Consumer Fraud Act and remanded for a determination of the amount of reasonable fees to which the plaintiff is entitled.

Plaintiff’s claim under the Act was based on his purchase of a converter box. At the time of his purchase, Plaintiff presented a coupon issued by the federal government for a $40 credit against the purchase price. The coupon entitled Sears to a reimbursement by the federal government for the lesser of $40 or the purchase price of the converter box. Approximately a year before Plaintiff’s purchase, the Illinois Department of Revenue (the Department) had issued a bulletin stating that the portion of the selling price covered by the coupon was not subject to Illinois sales tax. Despite this guidance, the Sears sales associates who handled Plaintiff’s purchase charged him sales tax on the full selling price of the converter box. Plaintiff sued, alleging that Sears wrongfully collected sale tax on the value of the coupon.

In arguing that Plaintiff was not deceived by the sales associate’s representation of the amount of tax owed, Sears contended that Plaintiff knew he would be overcharged sales tax on the purchase, and that he “went shopping for a lawsuit.” One month before Plaintiff’s purchase, the case captioned Nava v. Sears, Roebuck & Co. was filed in the circuit court, in which virtually identical allegations were made against Sears. (On allegations that Sears violated the Act, the appellate court eventually determined that a genuine issue of material fact existed and reversed the circuit court’s grant of summary judgment in favor of Sears (see Nava v. Sears, Roebuck & Co., 2013 IL App (1st) 122063 (July 29, 2013).) Despite finding that “[t]he facts relied upon by Sears could certainly support the inference that the plaintiff was not deceived by the representations of Sears’s sales associate as to the net amount that he owed and that he was well aware at the time that he purchased the converter box that sales tax should not have been assessed on the $40 value of the NTIA coupon which he tendered,” the court agreed with the circuit court’s findings of fact. The court determined that the findings of fact turned on the Plaintiff’s credibility, which the court stated the circuit court is “in a far better position to judge” and are to be deferred to unless they are against the manifest weight of evidence.

Plaintiff testified that he paid Sears the excess sales tax in reliance on the sale associate’s representation that he owed it, and at the time he did not realize that he has been charged too much tax.  Plaintiff further testified that had he been aware he was being overcharged, he would not have paid the excess tax.  As to whether the Plaintiff was actually deceived by the sales associate’s representation that he owed tax on the full retail price, the court determined “that is the only conclusion which can reasonably by drawn from [the] factual findings.”

On Sears’ second argument on appeal that the circuit court erroneously held that overcollection of sales tax is a “de jure deceptive practice violation,” the court also found for Plaintiff, determining that “the findings of fact contained within [the circuit court’s] order clearly reflect that Sears’s liability was not predicated merely upon an isolated miscalculation of the sales tax due on the plaintiff’s purchase.”  The court pointed to the circuit court’s findings of fact that Sears had been aware since July 2008 that tax should not be collected on the value of the coupon but did not update its systems accordingly, and had charged tax on the value of the coupons in more than 280 transactions in a one month period.

The court, however, found for Sears in its appeal from the circuit court’s award of more than $150,000 in attorneys’ fees under the Act, on the basis that the computer generated records of attorney time billed were inadmissible in the absence of the underlying original time sheets on which the records were based.

Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.

VDA Offer Terms

The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.

As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.

Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:

  1. As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for any periods ending before January 1, 2016.
  2. As to charges for other nonpossessory computer leases (i.e., charges for nonpossessory computer leases that do not meet the requirements of paragraph 1 above), payment of tax for the period of January 1, 2015 through December 31, 2015 (one year), and no liability for interest or penalties.
  3. As to any other taxes owed (in other words, Lease Tax based on leases other than nonpossessory computer leases, or taxes other than Lease Tax), the terms of the City’s standard voluntary disclosure program will apply. Thus, for those other tax liabilities, penalties will be waived, and there will be no more than four (4) years of liability for tax and interest.

Unlike most VDA programs, there is no indication in the Bulletin that taxpayers can request acceptance of the voluntary disclosure on an anonymous basis. Instead, the Bulletin simply provides that “[a]ny provider or customer who wishes to accept the Department’s offer should send an email indicating such to taxpolicy@cityofchicago.org with their business name, taxpayer contact name, and telephone number.”

The main concern with the VDA offer is that there is no guidance on which charges for nonpossessory computer leases qualified for Exemption 11 under the Department’s former interpretation of the exemption (i.e., before the issuance of Ruling #12). Because qualification for Exemption 11 under the old standard is a prerequisite to receiving a prospective-only VDA, we anticipate controversy over whether charges would have qualified—something no VDA applicant wants to deal with. Since there appears to be no opportunity for anonymity, once a business signs up with the Department, it may be stuck paying one year of taxes if the Department disagrees. Providers and customers interested in participating in the Lease Tax VDA offer should consult their advisors before contacting the City.

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.
  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.
  3. Codify the use of the sourcing rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638, as amended) for the purpose of determining which customers and charges are subject to the lease transaction tax when the user accesses the provider’s computer via a mobile device. The lease transaction tax ruling issued in June prescribes the use of these rules, but the legislation adds clarity by codifying this regime. Generally these rules result in tax applying to Chicago residents and companies with primary business addresses in the city. Customers can provide evidence of complete or partial out-of-city use. If a provider has no information indicating Chicago use, it has no duty to collect tax. If the sourcing rules indicate that the tax applies, a taxable presumption is created unless the contrary is established by books, records or other documentary evidence.

The “relief” provided by the amendments is minimal as very few companies will qualify for the small business exemption and rate reduction. Because the amendments do not modify the actual imposition of the lease tax (instead they simply provide an exemption, reduce the rate for certain taxpayers and codify sourcing rules) the January 1, 2016, effective date of the lease tax ruling still appears to be in effect.

Chicago Amusement Tax Amendment

The changes to the Amusement Tax Ordinance merely codify the sourcing rules announced in the Department’s latest ruling. Specifically, the amendment provides that

“[i]n the case of amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming and on-line games, the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, may be utilized for the purpose of determining which customers and charges are subject to the tax imposed by this chapter. If those rules indicate that the tax applies, it shall be presumed that the tax does apply unless the contrary is established by books, records or other documentary evidence.”

This change is significant because video streaming, audio streaming and on-line games were formerly not included in the imposition language of the Amusement Tax Ordinance.  The amendment illustrates that the City Council is well aware of and approves the Department’s recent ruling that explicitly imposes the tax on charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment.  The amusement tax ruling became effective September 1st and is currently being challenged in the Circuit Court of Cook County.

An Illinois Appellate Court, in Hertz Corp. v. City of Chicago, 2015 IL App (1st) 123210 (Sept. 22, 2015), gave the City of Chicago (City) permission to require rental car companies to collect tax on vehicle rentals from locations within three miles of the City, overturning a lower court ruling that found such taxation was an extraterritorial exercise of the City’s authority.  The appellate court granted summary judgment to the City and lifted the permanent injunction enjoining the City from enforcing the tax.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside of the city.”  Mun. Code of Chi. § 3-32-030(A).  While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City.  Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11).  The plaintiffs argued that Ruling 11 is an extraterritorial exercise of the City’s authority because the City lacks nexus with the rental transactions.  The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.”  Ruling 11 § 1.  The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.”  Ruling 11 § 3.  As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs.  Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax.  The Ruling applies to companies with suburban addresses located within three miles of the City.   The presumption may be rebutted by any writing disputing the conclusion that the vehicle is is used more than 50 percent of the time in the City.  The opposite is assumed for non-Chicago residents.  Ruling 11 § 3.  The Ruling provides that such a writing can be as simple as a customer’s initialing a statement that the vehicle will be used more than 50 percent outside the City (Ruling 11 § 3), but it must be part of the lease agreement or otherwise kept in the company’s business records.  Companies that do not wish to comply with the record keeping requirements may opt to pay tax on 25 percent of its rental charges from Chicago customers.

Plaintiffs Hertz Corporation and Enterprise Leasing Company of Chicago LLC, filed separate actions against the City seeking declaratory and injunctive relief.  The cases proceeded in tandem in circuit court and the court granted summary judgment to the companies.  The court declared Ruling 11 facially unconstitutional and permanently enjoined the City from enforcing the ordinance with respect to vehicle rental transactions occurring outside the City.

On appeal, the City argued that the circuit court erred in characterizing the Lease Tax as a transaction tax, arguing instead that it should be considered a use tax on Chicago residents.  The appellate court agreed and found that Ruling 11 is not an extraterritorial exercise of Chicago’s home rule authority because the Lease Tax is imposed upon a use occurring with the City.  Although the plaintiffs conceded that they “do business” in the City, they argued that the City did not have the jurisdiction over their suburban rental locations to require those locations to collect and remit the Lease Tax. The court, however, was not persuaded and found the undisputed nexus between the plaintiffs, the taxable activity and the City to be sufficient to require plaintiffs to collect and remit the Lease Tax.

The court also  rejected the plaintiffs’ argument that Rule 11 exceeds the scope of the ordinance, instead finding the ruling was well within, and even more limited than, the ordinance.  The court found Ruling 11 narrower than the Ordinance since the ordinance imposes tax on any lease personal property that is used in the city, while the Ruling explains that it is the City’s policy to only impose the tax on city residents who use the leased vehicle primarily in the City.  The court also found that the record keeping requirements contained in Ruling 11 impose no greater documentation burden than is already imposed and permitted by the ordinance.  The court noted that Ruling 11 merely provides guidance as to appropriate documentation and an obligation to maintain records is consistent with the ordinances’ ordinary requirements for taxpayers seeking to claim an exemption.  Finally, the court rejected the plaintiffs’ argument that the Ruling’s presumption that Chicago residents will incur taxable use in the City exceeds the ordinance’s scope.  The court found that the multiple ways the Ruling allows the presumption to be rebutted (including deeming customers’ initialing a sentence containing the “magic” language regarding use outside of the City to rebut, as well as any other “written proof to the contrary”) to be a reasonable implementation of the tax.

The court did not address the plaintiffs’ Commerce Clause argument that there is no minimum connection between the City and rental car transaction occurring outside of the state, e.g., Indiana.  Since the ruling does not currently include Indiana, the court found that the plaintiffs’ argument was speculative.  Finally, the court held that the plaintiffs’ did not have standing to bring a Due Process Clause minimum contacts challenge to Ruling 11 because the ordinance taxed the use of the leased personal property in Chicago, not the rental transaction.

The Illinois Department of Revenue (Department) recently proposed amendments to its regulations governing the taxability of shipping and handling charges. The Proposed Amendments to 86 Ill. Admin Code §§ 130.415 and 130.410 (Proposed Amendments) are intended “to incorporate the holding of the Illinois Supreme Court in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009) … [and to] clarif[y] when transportation and delivery charges are considered part of ‘gross receipts’ subject to the Retailers’ Occupation Tax Act or the Use Tax Act.”  The Proposed Amendments state that they are retroactive to November 19, 2009, the date of the Kean decision.

Delivery charges taxable when they are “inseparably linked” to the taxable sale of property

In Kean, the Court held that delivery charges for products purchased over the internet and shipped to Illinois customers are taxable when “an ‘inseparable link’ exists between the sale and delivery of the merchandise plaintiffs purchased.”… 235 Ill. 2d at 376.  Citing Kean, the Proposed Amendments adopt that rule (Prop. 86 Ill. Admin. Code § 130.415(b)(1)(B)(i)) and provide two examples of an “inseparable link”:

  • When delivery charges are not separately identified to the customer in the contract or invoice; or
  • When delivery charges are separately identified to the customer, “but the seller does not offer the purchaser the option to receive the tangible personal property in any manner except by delivery from the seller (g., the seller does not offer the purchaser the option to pick up the tangible personal property).”

Prop. § 130.415(b)(1)(B)(ii)

The Proposed Amendments provide that if a product can be sold without rendering the delivery service, the service is not taxable.  Prop. §130.415(b)(1)(B)(ii).  Although this language is not limited to a circumstance in which a pickup option is offered, all of the examples provided by the Department focus on that fact pattern.  Notably, the pickup option need not be at an in-state location.  This is consistent with the Department’s recent private letter rulings concluding that when a pick up option is offered, even if it is out-of-state, the delivery charges are not taxable.  ST-15-0011-PLR (7/16/15); ST-15-0012-PLR (7/27/15).

In a change from the Department’s prior practice, the Proposed Amendments provide that separately stated shipping charges not found to be inseparably linked to the sale of goods are not taxable even if they include a profit component (i.e., exceed the actual cost of shipping).  Cf. the current regulation, at 86 Ill. Admin. Code §130.415(d), with Prop. §§ 130.415(b)(1)(C) and (b)(1)(D)(iv).

Practice Note:

Sub-part (b)(1)(B)(ii) of the Proposed Amendments supports the conclusion that offering customers free standard shipping evidences that any other shipping service for which a seller charges customers (i.e., expedited shipping) are separately contracted for and thus nontaxable.  Arco Industrial Gas Division, The BOC Group, Inc. v. Department of Revenue, 223 Ill. App. 3d 386, 392 (4th Dist. 1991), which is cited in the Proposed Amendments, also supports this conclusion.  Several defendants have successfully raised this defense in response to Illinois False Claims Act litigation alleging a failure to collect tax on shipping charges.

Taxability and rate depend on the underlying property

The Proposed Amendments go on to provide that in the event delivery charges are “inseparably linked” to the sale of property, their taxability and rate depends on the taxability of the property sold:

Property Sold & Delivered Delivery Charges
All exempt Not taxable
Part exempt; part taxable Not taxable if selling price of nontaxable property > selling price of taxable property
All property subject to high or low tax rate Follows tax rate of property
Some property subject to high tax rate and some subject to low rate Low rate if selling price of low rate property  > selling  price of high rate property
Exempt, high and low rate property Not taxable if selling price of exempt property  > selling price of taxable property; low rate if selling price of low rate property  > selling price of high rate property

Prop. § 130.415(b)(1)(E).

Incoming transportation generally remains a taxable cost of doing business

The Proposed Amendments maintain the longstanding rule that a seller’s incoming transportation or delivery costs or costs to move property to ready for customer delivery are taxable costs of doing business.  The rule applies even if the seller passes on these costs to a buyer by separately stating them on an invoice.  86 Ill. Admin. Code § 130.415(e); Prop. § 130.415(b)(2).

Taxability of handling charges follows shipping charges

The Department also proposes similar amendments to the regulation relating to the taxation of handling charges.  Prop. § 130.410(c).

Practice Note:

To the extent the Proposed Amendments were issued by the Department to assist companies who have been named in lawsuits filed under the Illinois False Claims Act alleging an intentional failure to collect and remit tax on shipping and handling charges, it may be too late.  The Proposed Amendments come almost six years after Kean, and after hundreds of companies have been forced to defend against these claims, regardless of their audit history with the Department, and regardless of their shipping policies.  It remains to be seen whether the Department’s effort to impose the Proposed Amendments retroactively will be adopted, or whether the retroactivity will be helpful to companies who are forced to defend against this litigation.  The Proposed Amendments also are inconsistent with position that many of the Department’s auditors have taken, both before and after Kean, that taxpayers need to collect tax on separately stated shipping and handling charges only to the extent that the charges are a source of profit for the company.

 

 

The City of Chicago has announced that it will be delaying the effective date for its recent ruling under the Personal Property Lease Transaction Tax until January 1, 2016. Personal Property Lease Transaction Tax Ruling #12 takes a broad view of how the 9 percent tax applies to cloud-based services. It was scheduled to come into effect on September 1, 2015, but after an outcry from the startup community, Chicago has pushed back the date on which it expects cloud-based providers to begin collecting and remitting tax. The additional time will allow the city to further consider potential exemptions for small businesses. Providers of information services, software as a service (SaaS), platform as a service (PaaS), and some forms of infrastructure as a service (IaaS) that have nexus with the city will now have until January 1, 2016, to begin collecting the tax. (See a detailed discussion of Ruling #12 and its implications in a previous post.) The delay could backfire for the city because taxpayers will now have more time to launch challenges to the tax.

Ruling #12 is only part of Chicago’s two-pronged approach to taxing the cloud. The city had at the same time issued Amusement Tax Ruling #5, which provides that charges for video streaming, audio streaming, computer game subscriptions and other forms of online entertainment, as well as temporary download rentals, are subject to the 9 percent Amusement Tax—not the Lease Transaction Tax. That ruling also was issued with a September 1, 2015, effective date.  This effective date for the Amusement Tax Ruling has not been changed, and the city has indicated that no such extension is currently under consideration.