Alert: 2019 Illinois legislative changes

Illinois made significant changes to income, sales/use, and franchise taxes during the spring legislative session that will affect many taxpayers. Highlights include a potential move to graduated tax rates for individuals, an expansion of the manufacturing machinery and equipment exemption, changes to sales taxation on remote sellers, a phaseout of the franchise tax, and tax amnesty in the fall. These changes have varying effective dates, and are described in detail below.

Net income tax

Proposed changes to tax rates

Senate Bill 687 would enact a graduated income tax rate structure for individuals. The current Illinois Constitution prohibits the imposition of graduated income tax rates. However, Illinois legislation, along with Governor Pritzker’s support, was previously passed that would allow for graduated income tax rates if approved by Illinois voters in the November 2020 general elections. The graduated income tax rates will become law if approved by either three-fifths of those voting on the question, or a majority of those voting in the election approve the amendment. If passed, the new rates would be effective as of Jan. 1, 2021, and would be as follows:

Filing jointly

 

Net income between	Tax rate
$0 and $10,000	4.75%
$10,001 and $100,000	4.90%
$100,001 and $250,000	4.95%
$250,001 and $500,000	7.75%
$500,001 and $1,000,000	7.85%
More than $1,000,000	7.99% on ALL income

 

All other filing methods

 

Net income between	Tax rate
$0 and $10,000	4.75%
$10,001 and $100,000	4.90%
$100,001 and $250,000	4.95%
$250,001 and $350,000	7.75%
$350,001 and $750,000	7.85%
More than $750,000	7.99% on ALL income

If the resolution to change the Illinois Constitution to allow graduated individual income tax rates is passed, then the C corporation net income tax rate will increase from 7.0 to 7.99 percent for tax years beginning on Jan. 1, 2021. The passage of such measure would push the total C corporate income tax rate to 10.49 percent (7.99 percent net income tax rate plus 2.5 percent replacement tax). The replacement tax rate for taxable pass-through entities wouldn’t change, and would remain at 1.5 percent.

Disallowance of FDII deduction

The federal income foreign-derived intangible income (FDII) deduction is disallowed for Illinois income tax for tax years beginning after Dec. 31, 2018.

Taxation of nonresidents

Under a bill awaiting Governor Pritzker’s signature, Illinois would tax a nonresident’s wages earned in Illinois if they worked more than 30 days in Illinois starting with tax years ending on or after Dec. 31, 2020. Once a nonresident tripped the 30-day requirement, the employer would be required to withhold taxes for every day worked in Illinois, and not just for wages worked in excess of 30 days. Currently, Illinois taxes nonresident individuals in the same manner as for unemployment compensation taxes, which often results in nonresidents paying Illinois tax on either zero percent or 100 percent of her/his wages.

Further, the new law generally allows Illinois residents a credit for taxes paid to other states even if the individuals don’t work more than 30 days in those states. Under existing law, Illinois residents are generally not allowed a credit for taxes paid to other states on their wages, unless the Illinois resident works at a base of operations outside of Illinois. Thus, if passed, the new law would significantly increase the ability for Illinois residents to take a credit for taxes on wages paid to other states.

The bill wouldn’t impact the existing reciprocal agreements that Illinois currently has with Iowa, Kentucky, Michigan, and Wisconsin.

Sales/Use Tax

Expansion of the manufacturing machinery & equipment exemption

Taxpayers who purchase machinery and equipment that’s primarily (greater than 50 percent) used in the process of manufacturing or assembling in Illinois are allowed an exemption from sales/use tax for those purchases. Effective July 1, 2019, the state added “production-related tangible personal property” to the exemption. The definition of this new category includes “supplies and consumables used in a manufacturing facility including fuels, coolants, solvents, oils, lubricants and adhesives, hand tools, protective apparel and fire and safety equipment used or consumed within a manufacturing facility.” Pursuant to a recently issued informational bulletin, the expanded exemption will also include tangible personal property used in research and development, material handling, storage, and a host of other manufacturing-related uses.

For those who may recall Illinois’ expired Manufacturing Production Credit (MPC), this expansion is intended to provide the historical benefit without the added administrative burden of the MPC. Emergency regulations are expected to be forthcoming, which will provide further detail on the expanded exemption.

Tax sourcing for remote retailers

Beginning July 1, 2020, taxpayers meeting the remote retailer economic nexus thresholds of $100,000 in annual Illinois sales or 200 separate Illinois transactions will be required to collect and remit the applicable state and local Retail Occupation Tax (ROT). Historically, remote retailers were only required to collect the state ROT at 6.25 percent on their sales to Illinois customers.

With the passage of this law, remote retailers, which generally are retailers that don’t maintain an Illinois location, will switch to destination-based sourcing for Illinois sales starting July 1, 2020. Under existing law, remote retailers are required to collect local sales tax based on origination. However, the new law will require remote retailers to collect state and local taxes based on the Illinois location to which the tangible personal property sold is shipped, delivered, or at which the purchaser takes possession. This will further complicate compliance for remote retailers as they will need to have a process or software in place to collect the correct amount of tax based on the Illinois address the purchaser provides them. For retailers with a physical location in the state, Illinois will remain an origin-based sourcing state.

Marketplace seller/facilitator language added

Illinois has added new language for marketplace facilitators. Effective January 1, 2020, any “marketplace facilitator” with Illinois gross receipts of at least $100,000 or more than 200 Illinois transactions during the current or preceding year will be deemed the retailer for all sales made through their marketplace. Accordingly, the facilitator will be responsible for the collection and remittance of all applicable sales/use taxes. This means for the first six months of 2020, assuming the facilitator is not accepting the orders in Illinois, the facilitator will be responsible for the collection of the state’s 6.25 percent use tax on all taxable sales. As mentioned above, beginning on July 1, 2020, the facilitator will then be required to collect tax on local rates based on the destination of the goods.

Marketplace facilitator is defined as any person who facilitates sales of tangible personal property through a physical or electronic marketplace. Facilitators must also certify to their sellers that they will assume the responsibilities of collection and remittance of sales tax on sales made to Illinois customers through their marketplace. The facilitator must also maintain records for the sales.

Sales made through a marketplace are excluded from a remote seller’s determination of economic nexus in Illinois, which is $100,000 of Illinois sales or 200 or more Illinois transactions.

Leveling the playing field for Illinois Retail Act

Illinois passed legislation with the intention of making sales tax collection and remittance easier for retailers. The Act provides that the Illinois Department of Revenue (Department) must provide a taxability database no later than July 1, 2020, that: (1) is downloadable; (2) contains defined product categories that identify the taxability of each category; (3) contains all applicable rates for all jurisdictions in the state; and (4) assign delivery addresses in Illinois to the applicable taxing jurisdiction. In addition, the Department has until the end of 2019 to establish standards for certifying service providers and automated systems. Certified service providers and certified automated systems will allow remote retailers to utilize their services at no charge. Certified service providers will receive 1.75 percent of the tax dollars collected and remitted. However, remote retailers who use a certified service provider won’t be entitled to claim the vendor’s discount on their sales tax filings.

Remote retailers that use certified providers and certified automated systems are relieved of liability for charging and collecting incorrect amounts of tax only to the extent that the provider relied on erroneous data provided by Illinois.

Motor vehicle trade-in capped at $10,000

Beginning Jan. 1, 2020, the trade-in credit for motor vehicles that are designed to carry 10 or fewer persons will be capped at $10,000. Currently, Illinois provides an exclusion from gross receipts subject to ROT for the full trade-in value of property of like kind and character. With the start of 2020 any trade-in value in excess of $10,000 will be included in the selling price of the new vehicle. For example, a person that purchases a $30,000 automobile next year who trades in a car with a $15,000 value will pay Illinois sales tax on $20,000 ($30,000 less $10,000 maximum trade-in). Under the current law, that individual would pay sales tax only on $15,000 ($30,000 less full value of $15,000 trade-in).

Data center tax exemption

Qualified tangible personal property used in the construction or operation of a new or existing qualified Illinois data center are exempt from sales/use taxes. Qualifying purchases include, but are not limited to, hardware, computers, servers, climate control and chilling equipment and systems, emergency generators, and raised floor systems. Illinois data centers must meet certain requirements in order to qualify for the exemption, including making a $250 million investment (timing may differ for new and existing data centers), creating at least 20 full time jobs over a five-year period with certain compensation levels, and the data center is carbon neutral, or is certified for green-building standards. In order to qualify, data centers need certification from the Illinois Department of Commerce and Economic Opportunity.

Parking excise tax

Beginning on Jan. 1, 2020, Illinois imposes a tax on the privilege of parking at a 6 percent tax rate for parking paid on an hourly, daily, or weekly basis, while a 9 percent% tax applies to parking that is paid on a monthly or annual basis. The parking operator is required to collect the tax from the purchaser. Note that a number of localities impose their own parking tax, such as Chicago and Cook County.

Franchise tax

Phaseout

Illinois’ franchise tax will be repealed as of Jan. 1, 2024. The franchise tax will be gradually phased out over the next four years as shown below:

For franchise taxes due and payable	Amount of exemption
On or after Jan. 1, 2020, and prior to Jan. 1, 2021	The first $30 in liability is exempt from tax
On or after Jan. 1, 2021, and prior to Jan. 1, 2022	The first $1,000 in liability is exempt from tax
On or after Jan. 1, 2022, and prior to Jan. 1, 2023	The first $10,000 in liability is exempt from tax
On or after Jan. 1, 2023, and prior to Jan. 1, 2024	The first $100,000 in liability is exempt from tax
On or after Jan. 1, 2024	No liability is due

While Senate Bill 689 repeals the franchise tax after Jan. 1, 2024, fiscal year taxpayers will not be able to seek a refund or prorate their franchise tax liability for the portion of their fiscal year that extends past Jan. 1, 2024. The repeal of the franchise tax doesn’t affect the Secretary of State’s right to seek any liability or penalty established prior to Jan. 1, 2024. 

Tax amnesty

Illinois passed amnesty programs for a variety of taxes administered by the Department and the Illinois franchise tax, which is administered by the Illinois Secretary of State (Secretary). The Department’s taxes eligible for amnesty include corporate income, individual income, and sales/use taxes. Participation will allow taxpayers to avoid interest and penalties on taxes due for any tax period ending after June 30, 2011, and prior to July 1, 2018. Taxpayers are required to file returns and pay tax between Oct. 1, 2019, and Nov. 15, 2019, in order to take advantage of the tax amnesty benefits. Similar to the previous Illinois tax amnesty that took place in 2010, there is no doubling of interest and penalties for eligible taxpayers that do not participate.

Amnesty isn’t granted to taxpayers who are subject to any criminal investigation or to any civil or criminal litigation that is pending in any circuit court, appellate court, or the Illinois Supreme Court for nonpayment, delinquency, or fraud.

The franchise tax allows participating taxpayers to avoid interest and penalties on franchise taxes and license fees owed for tax periods ending after March 15, 2008, and on or before June 30, 2019. Taxpayers are required to file returns and pay the full amount of tax due between Oct. 1, 2019, and Nov. 15, 2019. Similar to the Department’s amnesty program, the Secretary will not double interest and penalties for eligible taxpayers that do not participate.

Franchise tax amnesty will not be granted to taxpayers who are subject to a criminal investigation or to any civil or criminal litigation that is pending in circuit court, appellate court, or the Illinois Supreme Court for nonpayment, delinquency, or fraud for franchise tax or license fee.

Credits

Illinois enacted a number of new credits, including credits for eligible data centers, additional high-impact businesses, and enterprise zones. These credits will be addressed in a separate SALT alert.