Chicago provides narrow guidance on Wayfair economic nexus
TAX ALERT |
Authored by RSM US LLP
On Jan. 21, 2021, Chicago released Information Bulletin – Nexus and Safe Harbor intended to address a number of questions received by the city since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair. Recall that Wayfair overturned the long-standing ‘physical presence’ nexus standard established under Quill v. North Dakota in 1992. As a result, states may impose sales and use tax collection and remittance responsibilities on remote sellers based solely upon their economic activity in a state. As of the date of this article, 44 of 46 states with a general state sales and use tax have adopted an economic sales tax nexus provision.
The bulletin establishes a safe harbor for remote sellers with revenues under $100,000 from Chicago customers during the most recent consecutive four quarters effective July 1, 2021. The safe harbor applies to an entity with no other significant contacts with Chicago. If a seller initially qualifies for the safe harbor and subsequently exceeds the threshold, the seller should register with the Chicago Department of Finance within 60 days, begin collecting tax within 90 days and continue collecting for at least 12 months. The safe harbor pertains specifically to the city’s Personal Property Lease Transaction Tax as applied to nonpossessory computer leases, and the Amusement Tax, as applied to amusements delivered electronically such as video streaming, audio streaming and online games. The safe harbor applies prospectively from July 1, 2021 and no refunds or credits will be issued for sellers subject to the safe harbor that have already registered and collected tax.
If the safe harbor does not apply, the city expects businesses with Chicago activity to comply with all relevant tax ordinances. Accordingly, the city will review several factors to determine if a seller has established nexus and the resulting tax collection responsibility. One factor is whether the seller meets the state of Illinois’ economic nexus threshold (i.e., $100,000 or more in sales or 200 or more transactions), though the bulletin explains that the state threshold alone is not determinative of city nexus. Other factors that will be considered include agreements that the entity has with other businesses in Chicago, activities that the entity’s employees or agents perform on the entity’s behalf in Chicago, any physical presence the entity has in Chicago, advertising directed at Chicago customers, and other factors that support the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago. The bulletin ultimately concludes that Chicago nexus will be evaluated on a case-by-case basis.
Other local taxes after Wayfair
In many states, local sales taxes are levied on the same tax base as the state sales tax and the collection and administration of the taxes occur at the state level. However, in some states, local governments administer their own sales taxes under their own ordinances, tax forms and administration – like Chicago. In these states, the local sales tax base can and often does differ from the state tax.
Remote sellers should also be cognizant of local jurisdictions enforcing remote seller provisions without the authority provided by an economic sales tax nexus provision. In Colorado, for example, a number of localities administer their own sales and use tax laws. Some of those localities have adopted their own Wayfair threshold. Other localities in states with local sales taxes have begun to enforce collection based on the Wayfair decision without a threshold or specific economic sales tax nexus law under broad interpretations of pre-Wayfair local tax law.
There are also other local sales tax considerations. For example, Alaska does not impose a state-wide sales and use tax, but over 100 local jurisdictions have the authority to impose a local sales and use tax at widely varying rates. A number of Alaskan localities have adopted economic sales tax nexus since the Wayfair decision. Additionally, the Alaska Remote Sellers Sales Tax Commission was established to simplify remote seller administration of local sales and use taxes.
Alabama, Louisiana and Texas have begun to ease administrative burdens of local tax collection on remote sellers without physical presence in the state. Alabama has created a simplified sellers use tax program with a flat rate and single point of collection. In Louisiana, the state’s Sales and Use Tax Commission for Remote Sellers is a single collection point for sales tax due on sales to Louisiana customers. Finally, Texas remote sellers without a physical presence in the state can collect local sales taxes at a flat rate.
Remote sellers making sales into Chicago should evaluate their sales into the city to determine if they will exceed the safe harbor by July 1, 2021. As explained by the bulletin, those businesses may be required to register, collect and remit the Personal Property Lease Transaction Tax and Amusement Tax if nexus is established in the city. Exceeding the threshold may be one factor the city uses to determine whether a remote seller has established the requisite nexus.
The state and local tax nexus landscape continues to change rapidly. Remote sellers with questions about compliance under the new nexus landscape should speak to their tax advisors on how to diligently track and comply with these new provisions.
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Bob Kolosky, Megan Olson, Andrienne Albritton, Mo Bell-Jacobs and originally appeared on 2021-01-27.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.