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.