l. The Leveling the Playing Field for Illinois Retail Act: An Overview

The Leveling the Playing Field for Illinois Retail Act was introduced to harmonize the state’s sales and use tax requirements across various types of retailers. The law categorizes Illinois sales tax into four distinct types:

• Retailers’ Occupation Tax: Imposed on the sale of tangible personal property.
• Service Occupation Tax: Applied to service providers who transfer tangible personal property.
• Service Use Tax: Paid by consumers who use services involving the transfer of tangible property.
• Use Tax: Collected on tangible personal property purchased from out-of-state vendors for use in Illinois.

While the Act did not change these tax types, it clarified the obligations of different retailers, specifying which taxes they must collect and at what rates, depending on their location and the nature of their sales. This clarification was intended to ensure that all sellers, whether based in Illinois or outside the state, were subject to equitable tax obligations.

ll. The Leveling the Playing Field for Illinois Retail Act: An Overview

Two companies have mounted legal challenges against audit assessments under the Illinois law:

1. PetMeds: PetMeds, an online pet medication pharmacy based in Florida, is contesting an audit assessment on the grounds that Illinois’ requirements place an undue burden on remote retailers. The company argues that these requirements discriminate against interstate commerce, potentially violating the Commerce Clause of the U.S. Constitution. This clause prohibits states from enacting legislation that imposes excessive restrictions or burdens on interstate commerce.
2. Coast to Coast Computer Products: Coast to Coast Computer Products, a California-based telemarketing company specializing in computer supplies, is also challenging an audit assessment. The company asserts that Illinois’ remote sales tax laws and the varying sourcing rules they impose are unconstitutionally burdensome. Coast to Coast contends that the complexity of complying with different tax sourcing rules for in-state versus out-of-state sales imposes an excessive and inequitable burden on businesses that operate across state lines.

These legal challenges highlight the complexities and potential issues within the current law, prompting Illinois lawmakers to consider amendments that could address these concerns and prevent further costly litigation.

lll. Senate Bill 3362: A Potential Solution or Further Complication?

In response to the ongoing legal challenges and the confusion surrounding the current law, Illinois lawmakers introduced Senate Bill 3362 (SB 3362). This bill, signed into law by Governor JB Pritzker on August 9, 2024, seeks to standardize the tax collection process for out-of-state sellers.

Under SB 3362, out-of-state sellers who ship goods to Illinois customers from locations outside the state will be required to collect state and local retailers’ occupation taxes at the rate in effect at the delivery address, beginning January 1, 2025. This “destination sourcing” rule aligns the tax obligations of out-of-state sellers more closely with those of remote retailers, thereby simplifying the compliance process for businesses that ship goods from outside Illinois.

However, the law retains the “origin sourcing” rule for out-of-state sellers who ship goods from inventory located within Illinois. These sellers will continue to collect state and local retailers’ occupation taxes based on the location from which the goods are shipped.

IV. Debate Surrounding SB 3362: Does It Simplify or Complicate  Compliance?

While SB 3362 seeks to address the issues raised by the legal challenges from PetMeds and Coast to Coast Computer Products, it has sparked debate among tax professionals and businesses. Some argue that the bill may increase the complexity of sales tax compliance for out-of-state sellers. Under the new law, these sellers must navigate different sourcing rules depending on the origin of their goods, potentially increasing their administrative burden.

Diane Yetter, founder of the Sales Tax Institute, has expressed concerns that the new law could exacerbate compliance challenges for businesses. She notes that out-of-state sellers will need to determine the correct tax jurisdiction for each delivery address in Illinois and then consolidate sales for each jurisdiction on their tax filings. This process, she argues, is significantly more complex than the current system, where a single statewide use tax rate applies to all sales originating from outside Illinois.

Scott Peterson, Vice President of Government Relations at Avalara, also suggests that Illinois may face limited options if the courts rule in favor of the plaintiffs in the ongoing cases. He points out that other states have either eliminated origin sourcing entirely—forcing all sellers to use destination sourcing—or established a single statewide tax rate for remote sellers. Both options present their own challenges and potential drawbacks, making it difficult to predict the long-term implications of Illinois’ approach.

V. Conclusion: The Uncertain Future of Sales Tax Compliance in Illinois

As Illinois prepares to implement SB 3362, the state’s sales tax compliance landscape remains uncertain. While the new law aims to standardize and simplify tax collection rules for out-of-state sellers, it may also introduce new complexities that could lead to further legal challenges. As these issues continue to evolve, businesses operating in Illinois must stay informed about the latest developments and seek expert guidance to navigate the ever-changing tax requirements effectively.

The outcomes of the PetMeds and Coast to Coast Computer Products cases will likely have significant implications for the future of sales tax compliance in Illinois. Whether SB 3362 will successfully address the concerns raised by these cases, or whether further legislative action will be necessary, remains to be seen. What is clear, however, is that Illinois’ efforts to level the playing field for retailers have sparked a critical debate on the balance between fairness, simplicity, and compliance in the state’s tax system.

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