Illinois General Assembly

On November 14, the second day of its 2018 veto session, the Illinois Senate voted unanimously to override Governor Rauner’s amendatory veto of Senate Bill 1737 (Bill). As we have previously reported, the Bill is 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. The Illinois General Assembly passed the Bill on May 31, 2018, with bi-partisan support. The Illinois Department of Insurance, key industry groups and several large Illinois-based taxpayers also support the legislation.

If it becomes law, the Bill would create a much more favorable regulatory framework for Illinois captives, following the lead of multiple jurisdictions, including Vermont, Hawaii, South Carolina and the District of Columbia. Continue Reading Illinois Moves One Step Closer to Enacting Captive Reform

On May 31, the Illinois General Assembly closed its regular legislative session, without a budget agreement.

Senate Bill 9

As we previously reported, the Senate passed a modified version of Senate Bill 9 (Bill), a tax proposal that is part of the Illinois “Grand Bargain” that we described in a previous post. The version of Senate Bill 9 that passed out of the Senate passed the House Revenue Committee on May 29 on a partisan vote. The House has extended the Bill’s final action deadline to June 30.

The current version of the Bill is similar but not identical to the version that we have previously described. Some of the more significant amendments include the following:

Two New Taxes. The Bill now proposes to create two new taxes. The “Video Service Tax Modernization Act” purports to impose a tax on satellite television and streaming television services at a rate of 5 percent of the gross revenues that a provider earns from its Illinois customers. The Bill also creates the “Entertainment Tax Fairness Act” which seeks to tax viewing “entertainment,” defined as “paid video programming whether transmitted by cable service, direct-to-home satellite service, direct broadcast satellite service, digital audio-visual works service, or video service.” The tax rate is 1 percent of charges paid by the customer. Both taxes exempt satellite or subscription radio services and can be passed-through and collected from customers.

Income Tax. The Bill now proposes to increase income tax rates for individuals, trusts and estates to 4.95 percent (rather than the previously proposed 4.99 percent rate). Also, the tax rate increases, including the increase to 7 percent for corporations (corporate increase unchanged from the Bill’s prior version), continue to be permanent.

Sales Tax Base Expansion. The current version of the Bill removes repair and maintenance services, landscaping services, cable television services (but see “Two New Taxes” described above) and some personal care services (including nails and hair removal) from the Bill’s expansion of the Illinois sales tax base.

It is difficult to predict whether any portion of Senate Bill 9 will be enacted. Since the Illinois General Assembly’s regular sessions have now ended, legislative approval will require a three-fifths majority and, to date, the governor has refused to endorse the legislation.

Senate Bill 1577

We have previously reported on Senate Bill 1577, which proposes to increase the penalty amounts imposed for violation of the Illinois False Claims Act. The bill passed the House on May 30 with the exception for certain low dollar tax claims as previously described.

Wrapping Up May – and Looking Forward to June

Our May 2017 blog posts are available on our Inside SALT blog, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, fill out the form on the right to subscribe to our email list.

May 16, 2017: Illinois Department of Revenue Affirms Cloud-Based Services Not Taxable

In two recent General Information Letters (GILs), the Illinois Department of Revenue (Department) reaffirmed that computer software provided through a cloud-based delivery system is not subject to tax in Illinois. The Department announced that while it continues to review cloud-based arrangements and may determine they are taxable at some point, any decision to tax cloud-based services will be applied prospectively only.

May 24, 2017: Illinois Bills to Watch

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. On May 23, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support, but it seems likely that Illinois’ Republican Governor will veto the legislation.

Looking forward to June:

June 8, 2017: Chicago – Tax in the City®: A Women’s Tax Roundtable

McDermott Will & Emery’s Tax in the City® network will host a CLE/CPE discussion focusing on current developments in professional responsibility and ethics, including a discussion focused on ethical issues arising out of our increasing access to connectivity.

June 8, 2017: New York – Inside SALT: Significant State Developments and Opportunities

McDermott Will & Emery’s New York State and Local Tax group presents a half-day program that will discuss a wide range of topics, including New York developments such as false claims and budget provisions, Nexus updates and developments in digital taxation, and new developments in apportionment, transfer pricing and unclaimed property.

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

Illinois Legislators have recently introduced three bills that would amend the Illinois False Claims Act (“Act”) to restrict the ability to bring tax-related claims. Senate Bill 9, the proposed “grand bargain” to resolve Illinois’ budget stalemate, includes language that would eliminate the ability to use the Act to bring tax claims.  In addition, Representative Frank Wheeler and Senator Pam Althoff have introduced House Bill 1814 and Senate Bill 1250, respectively, which are identical pieces of legislation that would significantly restrict a private citizen’s right to bring tax-related claims. Senate Bill 9, if adopted in its current form, would eliminate the ability to bring a tax-related claim under the Act.  Currently, the Act only excludes the right to bring income tax-related claims. 740 ILCS 175/3(c).  This would effectively conform the Act to the federal False Claims Act, which does not extend to tax claims.  Rather, tax-related claims are brought before the Internal Revenue Service’s Whistleblower Office as whistleblower claims. House Bill 1814 and Senate Bill 1250 (“Bills 1814/1250”) preserve the right to bring tax claims under the Act, and they maintain the prohibition against income tax claims.  However, in a significant improvement over current practice, the Bills would amend the Act to restrict the ability of a whistleblower or its counsel to control or profit from the filing of tax claims.  In addition, they enhance the role played by the Department of Revenue (“Department”) in determining whether a whistleblower’s tax claim should be pursued.  Effectively, the Bills make the filing of state tax-related whistleblower claims more like the procedure for bringing a federal tax violation before the IRS. Currently, the Act authorizes private citizens, termed “relators,” to initiate litigation to force payment of tax allegedly owed to the State.  740 ILCS 175/4(b).  Hundreds of such claims have been filed in Illinois by whistleblowers claiming a failure to collect and remit sales tax on internet sales.  Relators file a complaint under seal with the circuit court and serve the complaint on the State.  Id. 175/4(b)(2).  The Illinois Attorney General’s office then has the opportunity to review the allegations and decide whether to intervene in the litigation.  Id. 175/4(b)(2), (3).  The Department is not named as a Defendant and there is no requirement to involve the Department in the litigation.  If the Attorney General declines to proceed with the litigation, the relator may proceed with the lawsuit on its own and, if successful, is entitled to an award of 25 percent to 30 percent of the proceeds or settlement of the action, plus its attorneys’ fees and costs.  Id. 175/4(d)(2).  Even if the State intervenes and proceeds with the litigation, eliminating the relator’s day-to-day involvement, the relator is entitled to an award of 15 percent to 25 percent of the proceeds of settlement, plus attorneys’ fees and costs.  Id. 175/4(d)(1). In contrast, Bills 1814/1250 provide that only the Attorney General (“AG”) and the Department have the right to initiate claims under the Act for taxes administered by the Department.  Whistleblowers are required to report an alleged tax violation to the Department.  The Department must investigate the allegations and make a recommendation to the AG as to whether or not the AG should file suit based on the allegations.  Bills 1814/1250, 740 ILCS 175/4.5(b).  The AG can accept or reject the Department’s recommendation.  It can also bring suit in the absence of a Department recommendation.  Id.  If the AG initiates litigation based on a whistleblower’s allegations, the whistleblower is entitled to an award of 15 percent to 30 percent of the collected proceeds of the action and “related actions” or settlement, but no attorneys’ fees.  Id., 740 ILCS 175/4.5(d).  The whistleblower has no ability to proceed with litigation on its own if the Department or AG find the litigation unworthy.  These changes would significantly reduce the ability of a whistleblower or its counsel to profit from the filing of nuisance value claims. Bills 1814/1250 also provide that the Department has discretion to initiate an audit based on a whistleblower’s allegations and affirm that the audited entity has all the rights available to any other taxpayer to dispute any additional assessment of tax, interest and/or penalty charges.  Id., 740 ILCS 175/4.5(c).  Whistleblowers may not participate in or challenge the Department’s audit determination.  If the Department initiates an administrative action based on a whistleblower’s allegations, the whistleblower is entitled to an award of 10 percent to 15 percent of the collected proceeds of the action or settlement.  Id., 740 ILCS 175/4.5(d). Bills 1814/1250 also provide the much-needed ability to reduce the percentage award to a whistleblower under certain circumstances.  First, the Department has the discretion to reduce the percentage award to a whistleblower to 10 percent of the proceeds or settlement if it determines that the action (administrative or judicial) against a taxpayer is based primarily on disclosures from other sources.  Id., 740 ILCS 175/4.5(e).  (This provision is in the present version of the Act, but is a right afforded to the AG, not the Department.)  In addition, the Department has discretion to reduce the whistleblower’s award without limitation if it determines the whistleblower planned and initiated the violation of the Act.  Id., 740 ILCS 175/4.5(f).  The latter change should significantly reduce the ability of whistleblowers to profit from the repetitive filing of tax claims based on transactions initiated by the whistleblower. Bills 1814/1250 also would reduce the burden on the Circuit Courts with respect to these claims by requiring a whistleblower to file its claim with the Department, rather than the Court in the first instance, and by providing that Department award determinations are appealable exclusively to the Court of Claims.  Id., 740 ILCS 175/4.5(g), 705 ILCS 505/8(j). This is not the first time bills have been introduced to amend the Act.  Similar efforts over the past several years have been stymied when the legislature failed to consider the bills in Committee hearings. Hopefully, the Illinois General Assembly will take action to enact one of these much-needed legislative changes this year.

As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements.  The law was enacted under the guise of technical corrections to the insurance code.

Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance.  Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker.  The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois.  The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.

The law now has come into effect, applying to policies effective on or after January 1, 2015.  The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015.  Applicable taxes and fees are then due 30 days after the filing of the report.  The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax.  Affected businesses must register and complete their online reports within the requisite 90-day deadline.  Reporting is on a policy-by-policy and transaction-by-transaction basis.  The system then calculates the applicable taxes and fees.  Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.

It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session.  In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.

Despite a strong effort by a coalition of opponents, efforts to repeal the new Illinois self-procured insurance tax law in the veto session of the Illinois General Assembly were unsuccessful.  As a result, the law will take effect on January 1, 2015.

As previously covered on this blog, Illinois allows “industrial insureds” to independently procure insurance.  Prior to the enactment of the self-procured insurance tax law, Illinois had not imposed tax on these transactions.  At the end of the spring legislative session, supposedly technical amendments to the insurance code were passed that imposed a 3.5 percent premium tax on these policies (plus an additional fire marshal tax and surplus line association fee, bringing the total to between 3.6 percent and 4.6 percent depending on the type of insurance).  This tax is imposed on the nationwide premium if the insured’s home state is Illinois.  Effectively, the statute is a tax on Illinois-headquartered businesses that use captive insurance risk management arrangements.

Despite being alerted to the unfriendly business impact of the bill, Governor Quinn signed it into law with an effective date of January 1, 2015.  Since then, the Illinois business community has sought the repeal of the tax or its amendment to exempt captives.  There had been hope that this could be achieved after the November election during the veto session or a lame duck session.  The Illinois House of Representatives, however, has adjourned and does not plan to reconvene until the 99th General Assembly is inaugurated on January 14, 2015.  (The Senate also has adjourned, although the Senate President has left open the possibility of reconvening before inauguration.)  Going into the 99th General Assembly, efforts will continue to seek legislative relief for captive insurance arrangements.

The new tax applies to policies of insurance effective on or after January 1, 2015.  Within 90 days after the effective date of such a policy, qualifying insureds must file a report with the Surplus Lines Association of Illinois (similar to that required of a surplus lines broker).  Within 30 days of filing that report, the insured then must pay to the Department of Insurance the premium tax and, if applicable, the fire marshal tax.  Also within those 30 days the insured must pay the 0.1 percent surplus lines association fee to the Surplus Line Association of Illinois.  Neither the Department of Insurance nor the Surplus Line Association of Illinois has posted forms or guidance on their websites.  Indeed, the guidance on the Surplus Line Association website is outdated and does not reflect the 2014 amendments.

Affected taxpayers should carefully consider their compliance obligations and how to proceed amidst this uncertainty.  We will post on this subject again when/if additional guidelines are issued.

Illinois will soon begin taxing self-procured insurance premiums for the first time, as required by Senate Bill 3324, now Public Act 98-0978 (the Act).  The Act, which was signed into law by Governor Quinn on August 15, was quietly ushered through the General Assembly as a supposed technical amendment. The Act is anything but—it substantively amends Illinois law to tax Illinois-based companies who self-procure insurance as though they were surplus lines brokers, imposing a 3.5 percent self-procurement tax, together with additional fees and charges.  In addition, the Act makes it harder for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” limiting the types of risk that may be self-insured and increasing the qualification requirements for risk managers.  The new law applies to policies of insurance effective on or after January 1, 2015.

As we explained in a prior post, the Act hurts Illinois-headquartered businesses that manage risks using captive insurance arrangements. With the 2011 enactment of the Nonadmitted and Reinsurance Reform Act (NRRA), a company’s home state – typically its principal place of business – has exclusive authority to tax and regulate nonadmitted insurance. See 15 U.S.C. § 8201. For Illinois-headquartered businesses, this arrangement worked well because Illinois law previously allowed “industrial insureds” – companies meeting minimal size and sophistication requirements – to transact nonadmitted insurance without paying tax. An Illinois-headquartered company thus could obtain insurance from its captive domiciled overseas or in a captive-friendly U.S. state without paying any tax on its premiums.

The Act ends this business-friendly state of affairs. An industrial insured transacting nonadmitted insurance for a policy taking effect on or after January 1, 2015, will now have to withhold (or pay out-of-pocket if it does not withhold) a 3.5 percent premium tax on insurance contracts. Two additional charges increase the total effective rate to anywhere from 3.6 percent to 4.6 percent: a countersigning fee of 0.1 percent to support the Surplus Line Association of Illinois, and for certain lines of insurance, a fire marshal tax of anywhere from 0.01 percent to 1.00 percent of premium.

The Act also makes it more difficult for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” where companies must qualify as an “industrial insured” in order to have the right to self-insure. Until now Illinois company could be an “industrial insured” if its annual premium for insurance of all risks except life and accident and health insurance exceeded $100,000 and it had either (a) at least 25 full-time employees, (b) more than $3 million of gross assets, or (c) gross revenues of more than $5 million. Under the Act, an industrial insured now must meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having either (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit with at least a $30 million budget, or (e) a municipality with a population in excess of 50,000 persons. In addition, the Act limits the types of risks that may be self-insured.  Even if they meet the new definition of an “industrial insured,” Illinois companies may no longer self-insure for policies of health or accident insurance.  Finally, the Act increases the qualification requirements for the “qualified risk managers” that must be used by industrial insureds to manage their self-insurance policies.

With the Act on the books, presumably the Department of Insurance and the Surplus Line Association of Illinois will begin preparing forms and guidance for industrial insureds to comply with the new requirements. An effort is underway to pass legislation during the post-election veto session to repeal the Act or ameliorate its effects.

On May 28, 2014, the Tax Policy Subcommittees of the Illinois General Assembly’s Joint Revenue and Finance and State Government Administration Committees (Subcommittees) issued their long-awaited Report on Findings regarding the State of Illinois (Report).  The Report was generated after months of hearings and solicitation of written comments from interested parties with respect to Illinois tax rates, tax incentives and tax policy issues.

The Report is chock full of facts and figures.  Unfortunately, it fails to offer much clear direction for the state, as the members of the Subcommittees were unable to agree on the majority of the issues considered.  For example, the Report provides that the state should “continue to explore” the question of whether Illinois should apply the sales tax to services, as do many surrounding states.  Similarly, the Report concludes that while most members of the Subcommittees believe that the corporate income tax rate should be reduced, they could not agree on the amount of the reduction, what corresponding cuts in state spending would offset such a reduction, or even whether the Illinois personal property replacement tax should be considered as part of the corporate income tax rate when comparing Illinois’ income tax rates to those of other states.  The Report also concludes that the Subcommittees are “strongly interested” in providing sales tax exemptions to customers who provide data centers in Illinois, but has not come to a consensus about how to move forward with that process.  The Subcommittees also failed to reach a consensus regarding any changes needed to the Economic Development for a Growing Economy credit, instead offering only the platitude that “it is imperative to ensure that Illinois remains competitive in today’s economy.”

The Report does, however, contain the following findings:

  1. In its most definitive finding, the Report recommends the elimination of the Illinois franchise tax.  No specific plan or timetable is put forward for the elimination of this tax.
  2. The Report concludes that Illinois’ eligibility criteria for the research and development (R&D) tax credit should be changed to match the federal requirements.  For instance, the federal alternative simplified R&D credit would require that R&D spending exceed 50 percent (instead of 100 percent) of the previous three year average.
  3. The Report concludes that initial filing fees for LLCs should be reduced.  No consensus was reached regarding the amount of the reduction.
  4. The Report recommends that the state streamline current processes by designating a point person to help businesses seeking the state’s help with respect to job creation, retention and relocation in Illinois.

In what appears to be an effort to boost the state’s image in the business community, the Report also references a number of favorable statements about Illinois’ business climate that the Report attributes to various business publications.  The Report touts that Illinois ranks third in corporate expansions, according to Site Selection Magazine, that Illinois was identified as among the top five states for “technology and innovation” and “infrastructure” according to CNBC Top States for Business 2013 and that Illinois ranks third best in business growth, according to the Chicago Examiner.  The Report concludes with a description of Forbes’ business climate rankings for the state in six categories, including business cost, regulatory environment, economic climate, growth prospects, labor supply and quality of life.  With the exception of the “quality of life” category, where Illinois ranked 14th, Illinois was ranked 29th or lower in each of the categories.

The Illinois General Assembly will end its current legislative session on or before Saturday, May 31, 2014.  It remains to be seen whether any of the Report’s recommendations will find their way into last-minute legislation.