This document provides an overview and summary of Illinois sales and use tax laws. It discusses the different taxes that make up Illinois' tax scheme, common exemptions like resale and interstate commerce, how to calculate the tax base for service providers, and exemptions for graphic arts machinery. It also covers the manufacturer's purchase credit program and provides an overview of Chicago specific taxes.
7. Sales and Use Tax
Sales tax
-
Tax imposed on the gross receipts of retailers who sell
tangible personal property unless exempt by statute
Tax imposed on the selling price of tangible personal
property transferred incident to services by service
providers unless exempt by statute
Use tax
-
-
This is tax on the use of tangible personal property and is
imposed on the purchaser
Out-of-state tax-free purchases should be reviewed for use
tax compliance
6
8. Sales & Use Tax Recent Trends
•
•
•
•
•
Increased Audits/Aggressive Auditors
Nexus/Discovery Audits
New State Taxes
Expansion of the Tax Base
Increased efforts to enforce collection on internet
sales
7
9. Illinois Sales & Use Tax – In General
Illinois’ tax scheme is actually made up 4 different
taxes (ROT, UT, SOT, SUT)
The tax is generally imposed on the
retailer/serviceman and passed onto the consumer
Sales Tax imposed on persons engaged in selling
tangible personal property and enumerated services
at retail
Use Tax imposed on the use of tangible personal
property in the state
The seller has the collection responsibility
8
10. Retailers Occupation Tax
Retailer’s Occupation Tax (ROT) was enacted in
1933
The legal incidence of the ROT is on the seller
Use Tax (UT) was enacted in 1955
Seller is generally reimbursed by collecting UT from
the customer
Tax rate is 6.25%
-
Local rates also apply
Combined rate is one of the highest in the country
9
11. Retailers Occupation Tax
Examples of retail sales applicable to graphic arts
industry
-
Legal forms
Greeting cards
Pictures
Anything which is considered stock and standard
10
12. Service Occupation Tax
Service Occupation Tax (SOT) and Service Use Tax
(SUT) were enacted in 1961
SOT is imposed on those making sales of services
The tax base for transactions subject to SOT is
generally the cost price of the materials transferred or
sold incident to providing services
The state tax rate is 6.25% and the local tax rate is
based on the seller’s location
Seller is generally reimbursed by collecting SUT from
the customer
11
13. Service Providers – Tax Base
Four distinct methods to calculate servicemen’s tax
base
-
Separately stated selling price of tangible personal
property
50% of entire invoice
De minimis service providers (two methods)
• SOT on cost price if required or choosing to be
registered to collect ROT
• UT on cost price if not registered
12
14. Calculation of Tax Base – Method One
Separately stated selling price of tangible personal
property
-
-
Tangible personal property transferred is separately stated
on the invoice
Tax applies to the separately stated charges for tangible
personal property
Charges for services are not subject to tax
Tangible personal property to be transferred is purchased
exempt from tax (resale)
13
15. Calculation of Tax Base – Method Two
50% of entire invoice
-
Tangible personal property and services are billed in one
lump sum
Tax is calculated based on 50% of the invoice price
Tangible personal property to be transferred is purchased
exempt from tax (resale)
14
16. Calculation of Tax Base – De Minimis Service
Providers
Two methods for de minimis service providers
-
Service providers otherwise required or choosing to be
registered for ROT
Service providers not registered for ROT
Qualification to be a de minimis service provider
-
-
Cost of tangible personal property transferred incident to
service is less than 75% of the total gross receipts
(percentage is specific to those engaged in graphic arts
production)
Printers generally will meet the qualification to be treated
as de minimis service providers
15
17. Calculation of Tax Base – Method Three
SOT on cost price of tangible personal property
transferred
-
De minimis service provider
Service provider makes retail sales and is required or has
chosen to be registered for ROT
Tax is billed to customer on the invoice but need not be
separately stated
Tangible personal property to be transferred is purchased
exempt from tax (resale)
16
18. Calculation of Tax Base – Method Four
UT on the cost price of tangible personal property
transferred
-
-
Service provider must qualify as a de minimis serviceman
and NOT be registered for purposes of ROT
Service provider pays UT to the vendor or self assesses
tax if vendor does not collect (i.e., service provider does
NOT claim a resale exemption on the purchase of tangible
personal property to be transferred)
No “tax” is charged to the customer, although service
provider may seek “reimbursement” of the tax paid if any
such “reimbursement” is noted as such on the invoice
17
20. Exemptions
Resale
-
Must present completed form CRT-61 to vendor
Alternatively, the Multistate Tax Commission's
Uniform Sales & Use Tax Certificate may be used
Components of an Illinois Resale Certificate
-
Name of purchaser
Name of seller
Illinois business tax number
Statement for resale
Signature
19
22. Exemptions
Interstate Commerce
-
Sales delivered outside of Illinois are not subject to
Illinois sales or use tax
Sale will likely be subject to tax in the other state
Proof that item was shipped by the vendor to the
consumer outside of Illinois (bill of lading, delivery
ticket, etc.)-No exemption certificate needed
If the customer arranges for shipping, deemed to be
picked up in Illinois and subject to tax
21
23. Exemptions
Sales to Exempt Organizations
-
-
Sales to certain exempt organizations are exempt
from sales tax
Seller must obtain the actual certificate including
confirmation of the exempt organization’s status and
exemption number
Illinois issues tax exempt organizations “E” numbers
22
24. Exemptions
“Newsprint & Ink” Exemption
-
-
Must be issued periodically
Other factors to consider
• Can a member of the public subscribe?
• Does it have the basic format of a magazine?
• Does it have articles that have value to the general
public?
• Does it contain advertising?
If the publication is issued peridically and has one or more
of the other factors, then it will be exempt
23
25. Graphic Arts Machinery & Equipment
Graphic arts machinery & equipment
-
-
The definition of “graphic arts production” means the
production of tangible personal property for wholesale, retail
sale, or lease by means of printing through the processes
described in enumerated Groups and Subsectors of the
North American Industry Classification System. This
includes persons engaged primarily in the business of
printing or publishing newspapers or magazines that qualify
as newsprint and ink by using the processes described in
the Groups 511110-511199 of Subsector 511
Graphic arts production does not include the transfer of
images onto paper or other tangible personal property by
means of photocopying
24
26. Graphic Arts Machinery & Equipment
Machinery and equipment used in the process of
graphic arts are exempt from sales and use tax
Must be used “primarily” in the process
-
Primarily is defined as greater than 50%
Process begins with the initial production operation
-
Excludes raw material handling
Process ends upon completion of the final product
-
Excludes inventory handling or shipping area
Items used and consumed in the process are taxable
25
27. Graphic Arts Machinery & Equipment
What qualifies as exempt?
-
-
Machinery and equipment
Replacement parts/Repair parts
Tools, dies, jigs, patterns and molds
Computers and software used to operate exempt machinery
and equipment
Chemicals and chemicals acting as catalysts if they effect a
direct and immediate change upon the product being
manufactured
Forklifts? Depends
26
28. Graphic Arts Machinery & Equipment
What does not qualify as exempt?
-
Hand tools
Coolants
Lubricants
Solvents
Safety supplies such as gloves, shoes, glasses, goggles,
aprons and masks
Apparel
Maintenance supplies (rags, sweeping compounds, etc.)
Forklifts? Depends
27
30. Other Sales & Use Tax Issues - Leases
True Leases
-
Lessor must pay tax on the purchase of property that will be
leased
If vendor does not charge tax, lessor must self assess UT
Receipts from the rental of such property is not subject to
tax
Rental receipts subject to Chicago Transaction Tax
Conditional Sale
-
Lease contract contains a bargain purchase option (i.e., $1
buyout)
Property to be leased is purchased exempt from tax (resale)
ROT is charged by the lessor on each lease payment
Rental receipts not subject to Chicago Transaction Tax
29
31. Computer Hardware & Software
Computer Hardware
- Taxable as tangible personal property
- Not taxable when qualifies for exemption (i.e.
controlling manufacturing equipment)
30
32. Computer Hardware & Software
Computer Software
- Canned software is taxable
- Custom software is not taxable
Other factors to consider with canned software
- Method of delivery-taxable in IL
31
33. Computer Hardware & Software
Other factors to consider with canned software
- Cloud Computing/SaaS
• Access a vendor’s computer and software via
the internet
• No software is loaded onto your computers
-
Exempt in Illinois
32
34. Computer Software – Illinois’ 5 Prong Test
A license of software is not a taxable retail sale if:
-
-
It is evidenced by a written agreement signed by the licensor
and the customer;
It restrict the customer’s duplication and use of the software;
It prohibits the customer from licensing, sublicensing or
transferring the software to a third party (except to a related
party) without the permission and continued control of the
licensor;
The licensor has a policy of providing another copy at minimal
or no charge if the customer loses or damages the software, or
of permitting the licensee to make and keep an archival copy,
and such policy is either stated in the license agreement,
supported by the licensor’s books and records, or supported by
a notarized statement made under penalties of perjury by the
licensor; and
The customer must destroy or return all copies of the software
to the licensor at the end of the license period. This provision
is deemed to be met, in the case of a perpetual license, without
being set forth in the license agreement.
86 IAC 130.1935(a)(1)
33
35. Computer Hardware & Software
Custom Software generally not taxable
-
-
Custom software has been adapted to the specific
requirements of a purchaser.
• Vendor must analyze the customer’s needs
• Vendor must adapt the program to the customer’s
particular circumstances
Custom software does not have to be written from scratch,
but there must be real and substantial changes made to its
operational coding.
34
36. Computer Hardware & Software
A vendor may not sell “custom” software multiple
times.
- Once custom software is sold as canned software
it is no longer exempt.
A vendor’s selection of a variety of canned programs
does not qualify as custom software.
35
37. Computer Hardware & Software
Optional Computer Hardware Maintenance
Agreements
- Exempt in Illinois
- If exempt, parts are taxable
Optional Software Maintenance Agreements
- Generally taxable if updates or upgrades are
included
- Generally not taxable if labor only (telephone
support for example)
36
38. Construction Contractors
Contractors remit sales or use tax on building
materials that will be incorporated into a structure
-
-
If the materials are purchased from an instate vendor, the
contractor pays sales tax to his supplier
If the materials are purchased with no tax, the contractor
pays use tax to the Department of Revenue
Contractors do not charge sales tax to their
customers on receipts related to the contract work
-
Texas is the exception that charges sales tax on nonresidential contractor services
You do not owe use tax on pure contractor charges
37
39. Construction Contractors
What are building materials
- Lumber
- Brick
- Roofing materials
- Insulation
- Doors & windows
- Water heaters, furnaces and air conditioning units
- Electrical and ventilation systems
38
40. Manufacturer’s Purchase Credit (MPC)
History of the MPC
Extension of machinery & equipment exemption to
certain consumables
MPC is calculated and maintained solely by the
taxpayer
-
There is an earning calculation
There is a use calculation
Requires annual reporting forms be filed by the
taxpayer or credit is lost
39
42. Manufacturer’s Purchase Credit (MPC)
Earning the credit
-
Credit is earned by purchasing graphic arts machinery,
equipment and replacement parts
No sales tax is paid to the vendor or state (qualifies for
exemption)
50% of the state sales tax (6.25%) that would have been
incurred on the purchase of machinery and equipment
qualifies as MPC earnings
41
43. Manufacturer’s Purchase Credit (MPC)
Earning the credit-Example
Purchase of qualifying graphic arts machine $ 25,000.00
State tax rate
6.25%
Tax that would have been due
$ 1,562.50
50%
MPC Credit Earned
$
781.25
42
44. Manufacturer’s Purchase Credit (MPC)
Using the credit
-
Use the credit against sales tax paid on taxable items used
in the process (hand tools, safety supplies, etc.)
Send a certificate ST-16C to your vendor
If self assess use tax, apply the credit on the monthly sales
tax return
43
46. Manufacturer’s Purchase Credit (MPC)
Using the credit-Example
Purchase of consumables
Total tax rate charged by vendor
Tax that would have been due
MPC Use on ST-16-C (6.25% Only)
Tax due to vendor
$ 5,000.00
8.00%
$
400.00
$ (312.50)
$
87.50
45
47. Manufacturer’s Purchase Credit (MPC)
Reporting Requirements
-
-
An annual report of MPC earned and used (forms ST-16
AND ST-17) are filed for each calendar year, no later than
June 30th following the calendar year in which the MPC was
earned
Form ST-16-C should be issued to each vendor with
purchase order to cover the 6.25% state sales tax that
would have been due (local taxes are still due)
46
49. City of Chicago Taxes
Amusement Tax - (7510)
Amusement Tax - Subscribers to Paid Television Programming - (7511)
Boat Mooring Tax - (7560)
Bottled Water Tax - (1904, 1904IN)
Gas Use Tax - (7574)
Cigarette Tax - (7506)
Electricity Infrastructure Maintenance Fee - (7576)
Electricity Use Tax -(7578)
Emergency Telephone System Surcharge - Landline - (2908)
Emergency Telephone System Surcharge - Wireless - (2906)
Employers' Expense Tax - (7540)
Foreign Fire Insurance Tax - (7505)
Fountain Soft Drink Tax - (7590)
Ground Transportation Tax - (7595)
Hotel Accommodations Tax - (7520)
Liquor Tax - (7573)
MPEA Airport Departure Tax - (8500)
Motor Vehicle Lessor Tax - (7575)
Non-Retail Transfer of Motor Vehicles Tax - (8405)
Occupation Tax -Natural Gas Distributor and Reseller - (7571)
Parking Tax - (7530)
Personal Property Lease Transaction Tax - (7550)
Real Property Transfer Tax - (7551)
Restaurant Tax - (7525)
Telecommunications Tax - (7501)
Tire Fee - (BA94)
Use Tax for Non-Titled Personal Property - (8402B, 8402CO, 8402IN, 8403)
Use Tax for Titled Personal Property - (8400, 8400R)
Vehicle Fuel Tax - (7577)
48
50. City of Chicago Taxes
Use Tax for Non-Titled Personal Property - (8402B)
Personal Property Lease Transaction Tax - (7550)
Employers' Expense Tax - (7540)
49
51. City of Chicago Taxes
Use Tax for Non-Titled Personal Property - (8402B)
-
-
Tax is on the purchase of non-titled tangible personal
property for use in Chicago from a retailer located outside
Chicago
Everything that is stated in the Illinois Use Tax Act as
exempt is also exempted
1% of taxable purchases
First $2,500.00 of purchases each year are exempt
50
52. City of Chicago Taxes
Use Tax for Non-Titled Personal Property – Examples
-
Office supplies
Building supplies
Non-graphic arts supplies
Only applies if purchased from non-Chicago vendors
51
53. City of Chicago Taxes
Personal Property Lease Transaction Tax - (7550)
-
-
Applies to businesses or individuals that lease tangible
personal property for use in Chicago
Can be assessed on the lessor or lessee of personal
property used in Chicago
There are 12 types of leases that are exempt, including
• Use outside the City
• Leases between members of the same group
• Leases for the trading/financial markets
8% of receipts or charges
52
54. City of Chicago Taxes
Personal Property Lease Transaction Tax- Examples
-
Rental of computer hardware
Rental of fax/copiers/telephones
Rental of equipment
Owe the tax directly to Chicago if the vendor does
not charge
Conditional sales (dollar buyouts) not subject to this
tax
53
57. Audits - General Management
Assign one point person
-
Do not allow auditor to discuss questions with anyone else
Provide only records specified and requested
Provide a separate work space
-
Does not need to be the best office in the place
Keep them on schedule, check in frequently
Know your potential weak areas before and audit has
begun
-
Resale certificates, exemption certificates
Get supervisor involved when necessary
56
58. Audits – Documentation
Sales
-
Sales invoices, journals
Exempt sales and supporting documentation
Sales Tax returns and supporting workpapers
Financial statements
Purchases
-
Purchase invoices, purchase orders
P-Card transactions
Use Tax returns with supporting workpapers
Contracts
Fixed asset listing (Additions and Disposals)
Inter-company transfers
Inventory withdrawals
57
59. Why Audits Go Bad!
Bad audit results, so you now pay tax on everything
Your supplier was audited by an aggressive auditor,
so now they bill tax on everything
Changing revenue department interpretation of
regulations
Employee turnover
Misapplication of exemption certificates
Mixed transactions (bundled vs. non bundled)
No (or out of date) tax matrix
58
62. Tax Tribunals
• Historically, administrative hearings are conducted
by Department of Revenue personnel
• Perceived conflict of interest
• Illinois latest to pass legislation implementing Tax
Tribunals
•
•
•
•
•
Effective January 1, 2014
Must have an attorney
“Pay to play”-$500 nonrefundable fee
Run just like a courtroom setting
Appeals from the Tribunal go to the Illinois Appellate Court
61
63. Cook County, Illinois Use Tax on Non-Titled
Personal Property-UPDATE
• Effective, April 1, 2013
• Tax rate is 1.25%
• Non-titled personal property purchased outside of
Cook County and used in Cook County
• Exemptions for food and other items not subject to
Illinois sales or use tax
• Statutory and constitutional issues
• October 11, 2013-Cook County Circuit Court
declared the tax invalid. The County has
appealed.
62
64. Illinois – Legislation
House Bill 3659 (P.A. 96-1544)
-
-
Effective July 1, 2011, HB 3659 amends Illinois use tax laws
by adopting click-through nexus provisions applicable to
internet retailers
• $10,000 threshold of sales referred from the in-state
company
• The Illinois bill does not provide any opportunity for the
retailer to rebut any nexus provision
Provisions also extend to certain retailers that use the same
trademarks or trade names as the in-state retailer
63
65. Illinois – litigation updates
Performance Marketing Association v. Brian Hamer,
Director, Illinois Department of Revenue, Circuit
Court Cook County, July 27, 2011
-
Challenge to the constitutionality of House Bill 3659 (clickthrough nexus provisions)
Alleges violation of the Commerce Clause of the United
States Constitution
Alleges violation of the Federal Internet Tax Freedom Act
Illinois Supreme Court ruled in favor of the
taxpayer October 18, 2013
64
66. Illinois - litigation updates
Hartney Fuel Oil Co. v. Department of Revenue,
Tenth Circuit Court of Illinois, Putnam County, No. 08MR-11, 08-MR-13, 08-MR-15, Jan. 26, 2011
-
-
Hartney maintained a sales office in Village of Mark
IDOR Audit assessed additional local taxes based on the
company’s Forest View address
Court agreed with Hartney that the correct local tax is
Village of Mark
Taxpayer victory (or is it?) from Illinois Supreme
Court November 21, 2013
Emergency Regulations issued January 22, 2014
65
67. Contact Information
Bob Kolosky
Director, State and Local Tax
312.634.4622
Robert.Kolosky@mcgladrey.com
Chuck Pribble
Supervisor, State and Local Tax
312.634.5372
Chuck.Pribble@mcgladrey.com
Bill Gibson
Illinois Director, GLGA
312.704.5000
BGibson@GLGA.info
66