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Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax. Read Mary Kay McCalla Martire's full bio.

Illinois Governor Bruce Rauner has until August 28 to sign or veto Senate Bill 1737, a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance.

If enacted, this new law would provide a substantially improved environment for Illinois-based companies looking for captive solutions.

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On June 4, Illinois Governor Bruce Rauner signed into law the state’s fiscal year (FY) 2019 budget implementation bill, Public Act 100-0587 (the Act). The Act makes a significant change to the Illinois sales/use tax nexus standard by adopting an “economic nexus” standard for a sales/use tax collection obligation. The economic nexus language was added to the budget bill one day before it was passed by the General Assembly. The standard is contrary to the physical presence nexus standard established by the United States Supreme Court in Quill Corp. v. North Dakota, 504 US 298 (1992), the validity of which is currently pending before the Court in South Dakota v. Wayfair, Docket 17-494. The Court is expected to rule on Wayfair by the end of this month (see here for our prior coverage of the Wayfair case).

The Act amends Section 2 of the Use Tax Act to impose a tax collection and remission obligation on an out-of-state retailer making sales of tangible personal property to Illinois customers if the retailer’s gross receipts from sales to Illinois customers are at least $100,000 or the retailer has at least 200 separate sales transactions with Illinois customers. Similarly, it would amend Section 2 of the Service Use Tax Act with respect to out-of-state sellers making sales of services to Illinois customers. These changes mirror the economic nexus standard adopted by South Dakota. See SD Codified Laws § 10-64-2.

In the wake of Wayfair, other states have adopted similar nexus provisions. See, e.g., Conn. SB 417, Ga. HB 61, Haw. HB 2514, Iowa SF 2417, provisions enacted in 2018. By enacting the statute without an escape clause, Illinois, like other states, has put a law on the books that directly conflicts with Quill, and which will be ripe for constitutional challenge if the US Supreme Court affirms the South Dakota Supreme Court’s ruling that the South Dakota statute is unconstitutional.

The Act also amended Section 223 of the Illinois Income Tax Act to extend the tax credit for for-profit hospitals (equal to the lesser of property taxes paid or the cost of charity care provided) to tax years ending on or before December 31, 2022.

The Act made no changes in response to the federal tax reform bill. In particular the General Assembly did not enact Senate Bill 3152 (proposing to add-back the new federal deduction for foreign-derived intangible income (FDII); see here for our prior coverage). The General Assembly also did not enact either of the pending bills (HB 4237 and 4563) proposing to work around the federal $10,000 limitation on the deductibility of state and local taxes by establishing funds/foundations to which taxpayers could make contributions in exchange for tax credits.

On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.

City’s Amusement Tax and Amusement Tax Ruling #5

The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.

The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here. Continue Reading Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

In Health Net Inc. v. Dep’t of Revenue, Docket No. S063625 (Apr. 12, 2018), the Oregon Supreme Court rejected a business taxpayer’s constitutional challenges to a 1993 Oregon statute that eliminated the right to utilize a three-factor apportionment formula in calculating Oregon income tax. The Oregon Supreme Court joined courts in Texas, Minnesota, California and Michigan in rejecting taxpayer arguments that states which have enacted Article IV of the Multistate Tax Compact, thereby incorporating the UDITPA three-factor (payroll, property and sales) formula, have entered into a binding contractual obligation which may not be overridden.

Oregon enacted UDITPA in 1965 (ORS 314.605 – 314.675) and the Multistate Tax Compact (including Article IV) (ORS 305.655), in 1967. In 1993, however, following a series of amendments to the apportionment formula in Oregon’s version of UDITPA, which moved the state to a single sales factor formula, the Oregon legislature eliminated taxpayers’ ability to elect the three factor apportionment formula incorporated via ORS 305.655.

In Health Net, the taxpayer argued that when Oregon enacted the MTC in 1967, it had entered into a binding contract with other states that was violated by the state’s 1993 elimination of the three factor apportionment formula, in violation of the Contract Clause of the state and US constitutions. In Oregon, a statute is considered “a contractual promise only if the legislature has clearly and unmistakably expressed its intent to create a contract.”  The Oregon Supreme Court determined that the text, context, and legislative history of ORS 305.655 did not “clearly and unmistakably” establish that the Oregon legislature intended to execute a binding contract with other states. The court found ORS 305.655 to have only created statutory obligations—according to the majority, it was a uniform law, not a compact—and, thus, there was no Contract Clause violation.

Continue Reading Oregon Bars Use of Three Factor Apportionment Formula

Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.

As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. Continue Reading Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase

On December 29, 2017, the Illinois Appellate Court issued a ruling reversing the decision of the Illinois Independent Tax Tribunal (Tribunal) in Waste Management of Ill., Inc. v. Ill. Independent Tax Tribunal, 2017 IL App (1st) 162830-U. This is the second appellate court to consider a Tax Tribunal ruling, and the first to overturn a decision of the Tribunal. The appellate court overturned the Tribunal’s grant of summary judgment in favor of the Illinois Department of Revenue (Department) and held that for the time periods at issue, the Motor Fuel Tax Law (Tax) (35 ILCS 505/1 et seq.) did not impose tax on compressed natural gas (CNG). In this case, Waste Management filed monthly returns reporting and paying the Tax on its usage of CNG. Following an amendment to a Department regulation that explicitly provided that CNG was subject to the Tax (see 86 Ill. Admin. Code § 500.200(c)), Waste Management amended its returns and sought a refund of Tax paid on CNG-powered vehicles for time periods prior to the amendment. The Department denied the refund claims, and Waste Management appealed the Department’s denial to the Tribunal. On the parties’ cross motions for summary judgement, the Tribunal found in the Department’s favor, on the basis that CNG was a taxable “motor fuel” under the Tax statutes. A copy of the Tribunal’s Order (Order) is linked here. Continue Reading Illinois Appellate Court Overturns Tax Tribunal Ruling for the First Time

The federal tax reform package recently approved by Congress (the Bill) contains a cap on the state and local tax deduction that may be claimed by individuals on their federal income tax returns. The Bill provides that an individual may claim up to $10,000 of state and local property taxes and either income or sales taxes. The cap expires on January 1, 2026.

Individual taxpayers who have been considering prepaying their 2018 (or later) taxes in 2017 should be aware that the final version of the Bill contains a provision that prohibits individuals from prepaying their income tax for future years in 2017. As a result, any guidance issued by state revenue departments (for example, in Illinois) regarding the prepayment of 2018 income tax is no longer applicable. In certain jurisdictions, individuals may still have an opportunity to prepay their property tax assessments. For additional details, please contact your tax preparer.

Earlier this fall, the Cook County Board voted to repeal its constitutionally suspect, politically unpopular one cent per ounce sweetened beverage tax (Tax). The short-lived Tax will expire at the end of the County’s fiscal year on November 30, 2017.

Having been tasked with implementing the Tax, the Cook County Department of Revenue (Department) is now charged with unwinding it. Distributors and retailers who have paid the Tax are entitled to credits or refunds on their unsold inventory at month’s end. The Department recently issued guidance on the credit/refund procedure.

Retailers that have paid Tax to their distributors may claim a credit/refund from their distributors for Tax paid on their unsold inventory by completing the Department form entitled “2017 Sweetened Beverage Retailer Inventory Credit Request Form and Schedule A.” Retailers should complete and submit the form to their distributors, not the Department.

Distributors must file a final Tax return with the Department on or before December 20 (Final Return). To the extent a distributor already has refunded or credited Tax to its retailers, the distributor may claim a credit for the amount refunded on the “other deductions” line of its Final Return. Distributors must file the Department’s standard refund application, found on the Department’s website, to claim refunds for amounts refunded or credited to retailers after December 20. The Department has issued a new form (the “Sweetened Beverage Tax Distributor Credit Form Schedule”) to be submitted by distributors to the Department in support of any credit or refund claims. The form requires distributors to identify the retailers to which it has provided credits/refunds and the amounts thereof.

Retailers who self-remit the Tax may take a credit on their Final Return with supporting documentation. In addition, retailers that have unsold inventory as of December 1, on which they previously remitted floor tax, may obtain a refund of the floor tax through the Department’s standard refund procedure.

Practice Notes:

  1. To the extent possible, Taxpayers should take advantage of the opportunity to claim a credit on their Final Returns in order to avoid the time and expense associated with the County’s standard refund procedure.
  2. Since the Tax was repealed, enthusiasm has waned for various Illinois House Bills (HB 4082-84) proposing to limit the authority of localities to impose beverage taxes. It’s difficult to predict whether the bills will be enacted.
  3. However, the State of Michigan has passed legislation, signed into law by Governor Snyder on October 26, 2017, which prohibits municipalities from levying local taxes on food or beverages.

The Illinois Department of Revenue (Department) has issued a proposed new administrative rule addressing the nexus implications for out-of-state retailers attending trade shows in Illinois. The proposed rule, linked here, reaffirms the Department’s long-standing position that all sales made at an Illinois trade show are subject to Illinois Retailers Occupation Tax and any applicable local taxes. In a move welcomed by taxpayers, the proposed rule goes on to delineate a “safe harbor” of activities that will not create nexus for out-of-state retailers with respect to their other Illinois sales.

Under the safe harbor provision, an out-of-state retailer’s presence at an Illinois trade show will not create nexus for its other Illinois sales if each of the following conditions is met:

  1. The retailer attends no more than two trade shows per calendar year;
  2. The retailer is physically present at the two trade shows for an aggregate total of no more than eight days during any calendar year; and
  3. Combined gross receipts from sales made at the two trade shows during any single calendar year do not exceed $10,000.

Continue Reading Illinois DOR Proposes Use Tax Nexus Standards for Trade Show Retailers

On July 28, Circuit Judge Daniel Kubasiak dismissed the Complaint filed by the Illinois Retail Merchants Association and a group of retailers challenging the constitutionality of the Cook County, Illinois Sweetened Beverage Tax (Tax). A copy of the court’s Order is linked here (Order). The Order also dissolved the June 30 temporary restraining order which had halted the county’s imposition of the Tax, on which we have previously reported. In response to the Order, the county required Tax collection to begin on August 2. The county also announced that by September 20, retailers must remit a “floor tax” on the inventory of sweetened beverages in their possession as of August 1.

The Order rejected both of the constitutional arguments raised by the Complaint. The court held that Plaintiffs raised a good faith Illinois Uniformity Clause challenge, and thereby shifted the burden of proof to the county, because the Tax applied to pre-made, but not made-to-order sweetened beverages. The court went on to hold, however, that the county met its burden to justify this arbitrary tax classification by alleging that pre-made sweetened beverages were more widely available and therefore more likely to be purchased and consumed than made-to-order beverages (thus generating more tax revenues) and by arguing that imposing the Tax on made-to-order beverages would be administratively burdensome. The court then held that Plaintiffs had failed to meet their burden of establishing that the county’s justifications were insufficient in law or unsupported by the facts. According to the court, the “County has set forth a real and substantial difference between the people taxed, who purchase ready-to-drink, pre-made sweetened beverages, and those not taxed, who purchase on-demand, custom sweetened beverages.” (Order at 9.)

Continue Reading Illinois Court Upholds Cook County’s Beverage Tax Finding It Passes Constitutional Muster and Related Developments