The Illinois Department of Revenue recently released a compliance alert notifying marketplace sellers—sellers that make sales using marketplace facilitators—about the new marketplace facilitator law and associated tax requirements. This alert addresses a main area of concern: the type of tax that certain marketplace sellers need to collect (the Illinois Retailers Occupation Tax) versus the type of tax marketplace facilitators are authorized to collect (the Illinois Use Tax).
The New Illinois Marketplace Facilitator Law
The alert was released in response to sellers’ questions regarding their tax obligations for goods sold through a marketplace facilitator, such as Amazon or Etsy. By definition, marketplace facilitators are businesses that facilitate sales of unrelated third-party sellers’ products by: 1) listing or advertising the tangible personal property goods for sale; and 2) either directly or indirectly collecting payment from the customer. Effective January 1, 2020, marketplace facilitators that meet economic (“Wayfair”) nexus thresholds are required to collect Illinois Use Tax (UT) on such sales. The current thresholds are $100,000 in sales or 200 sale transactions in the past four quarters and excludes sales for resale, sales of titled property and sales that are otherwise subject to ROT.
Challenges Presented by the Marketplace Facilitator Law
Though very similar and complimentary, ROT is a separate distinct tax from UT. ROT imposes both the state 6.25% tax and the local tax rate for the location where most of the selling activities occur (likely the location of the inventory at the time of sale, but there are several factors that can be involved). In addition, the ROT does not provide for a credit for any UT imposed on that same sale. UT, on the other hand, only imposes the state 6.25% rate, and it should not be imposed if that same sale is subject to ROT.
Therefore, confusion exists surrounding whether the marketplace facilitator or the seller is the true retailer responsible for collecting and remitting the applicable Illinois tax on the sale. According to the Department of Revenue, “When the tax required to be remitted to IDOR for a marketplace sale is UT, a marketplace facilitator that has Wayfair nexus is now the retailer for that sale and you, as the marketplace seller, are not the retailer for that sale. The marketplace facilitator, not you, is required to collect and remit UT.” In contrast, it is to be expected that when the tax for a sale is ROT, the seller is the retailer of the sale (i.e. not the marketplace facilitator).
Unfortunately, to many sellers’ dismay, a number of marketplace facilitators have expressed that they will collect and remit UT on all sales—both those subject to UT that they are required to collect and those subject to ROT that they are not authorized to collect. This results in the sale being taxed twice at the 6.25% state rate because the seller is still responsible for remitting ROT.
Next Steps: What to Expect as a Marketplace Seller in Illinois
As seen in the recent alert, the Department of Revenue currently offers no solutions other than that marketplace facilitators are currently working to address the problem. It is important for sellers in this situation to understand how their sales are taxed by their marketplace facilitator and the options they can consider to rectify the situation. For example, when UT is collected and remitted for sales subject to ROT, sellers can explore working with their marketplace facilitator to request refunds of UT or ideally have them collect (but not remit) the applicable ROT on their behalf. Even if the marketplace facilitator is correctly not charging and remitting UT on sales subject to ROT, the sellers will need to determine if and how they can bill their customers for reimbursement of ROT that they need to remit to Illinois.
Contact Your Tax Professional
This is just another example of how complicated sales taxes can be. Please contact your Sikich tax professional to address any additional questions you may have or to discuss in more detail how this new marketplace facilitator law impacts your business.