Significant Changes on Horizon for Illinois State Tax– June 21, 2019 by Hannah Prengler

Public Act 101-0009 and several corresponding bills have made numerous tax law changes for individuals and businesses doing business in Illinois. Some of the most impactful changes include:

  • The creation of a tax amnesty program
  • Phase-out of the replacement tax
  • Tax Cuts and Jobs Act (TCJA) conformity updates
  • November 2020 ballot measure to increase individual and corporate income tax rates
  • Marketplace facilitator
  • Local sales tax sourcing collection by remote sellers
  • Expansion of the manufacturing machinery and equipment exemption
  • Proposed employer withholding on nonresidents (new 30-day threshold)

Illinois Tax Amnesty Program Begins October 2019

The Illinois Tax Amnesty program will allow taxpayers with delinquent tax obligations to come forward, file and remit past tax due without being subject to interest OR penalties. The Illinois Tax Amnesty Program will be open October 1, 2019 through November 15, 2019. The applicable tax years for which the amnesty applies are those beginning after June 30, 2011, and before July 1, 2018.
 
Amnesty will not be granted to any taxpayer who is involved in pending civil or criminal litigation with Illinois related to state taxation.

Phase-Out of the Replacement Tax

Under current law, taxpayers are required to remit a franchise tax, also known as the personal property replacement tax, in addition to the Illinois income tax. For tax years beginning on or after January 1, 2020, the Illinois replacement tax will begin phasing out and will be fully phased out by tax years beginning in 2024. The current replacement tax rates are 2.5% for corporations and 1.5% for pass-through entities and trusts. Below is the breakdown of the phase out for tax years beginning on:

  • January 1, 2020 – December 31, 2020 - First $30 of franchise tax liability is exempt
  • January 1, 2021 – December 31, 2021 - First $1,000 of franchise tax liability is exempt
  • January 1, 2022 – December 31, 2022 - First $10,000 of franchise tax liability is exempt
  • January 1, 2023 – December 31, 2023 - First $100,000 of franchise tax liability is exempt
  • January 1, 2024 – After - replacement tax is fully phased out 

Tax Cuts and Jobs Act Conformity Changes

 In response to the TCJA, Illinois will: 

  • Require a state addback of the deduction for foreign-derived intangible income (FDII), and
  • Allow the “excess business loss” deduction for trusts and estates after 2018 

>> Read “Tax Reform Watch: An Overhaul of the U.S. International Tax System”

November 2020 Ballot measure to increase tax rates for Individuals and Corporations

The November of 2020 ballot will propose the following 2021 income tax rates (P.A. 101-0008): 

  • C Corporations – 7.99% (Increased from 7%). This does not include the 2.5% replacement tax.
  • Individuals – Replace the flat 4.95% tax rate with below graduated rates:

Non- Joint Filers
$0-$10,000 – 4.75%
$10,001-$100,000 – 4.9%
$100,001-$250,000 – 4.95%
$250,001-$350,000 – 7.75%
$350,001-$750,000 – 7.85%
$750,000 or more – 7.99%
 
Joint Filers
$0-$10,000 – 4.75%
$10,001-$100,000 – 4.9%
$100,001-$250,000 – 4.95%
$250,001-$350,000 – 7.75%
$350,001-$1,000,000 – 7.85%
$1,000,000 or more – 7.99%

Marketplace Facilitator Nexus

In the wake of the 2018 Wayfair decision, multiple states have implemented rules surrounding marketplace facilitators aimed at online sellers, such as Amazon, Ebay, etc. Under the recently enacted Illinois law, if the marketplace facilitator has certified they will collect and remit sales tax on behalf of the seller, the seller does not include these sales in their gross receipts for Illinois sales tax purposes. Thus, the seller would decrease their taxable sales when filing Illinois sales tax returns. 

>> Read “6 Things You Need to Know About Wayfair and Its Impact on Your Sales Tax Obligations”

>> Listen to our podcast: “Wayfair Creates a New Normal for State Sales Tax”
 
Marketplace facilitator criteria to be evaluated each quarter for the prior 12 months includes: 

  1. The seller has greater than $100,000 in annual sales of tangible personal property, or
  2. Facilitator and sellers annually enter into 200 or more separate transactions of tangible personal property to customers in Illinois.

Local Sales Tax Sourcing for Remote Sellers

Effective July 1, 2020, Illinois will change from origin-based sourcing to destination-based sourcing for remote sellers that exceed the economic nexus threshold (SB 690). Many remote sellers were only required to collect the state sales tax under the local origin-based sourcing rules. However, with the change remote sellers also must collect the local sales tax for the jurisdiction to where the product is being shipped. 

Expansion of the Manufacturing Machinery and Equipment Exemption

Effective for purchases on or after July 1, 2019, the Illinois manufacturing machinery and equipment sales tax exemption also will apply to qualifying purchases of supplies and consumables used in a manufacturing facility. The sales tax exemption may now include fuels, coolants, solvents, lubricants, hand tools and safety equipment used during manufacturing. 

Blue Collar Jobs Act

In accordance with SB 689, Illinois has added a credit through the “Blue Collar Jobs Act” to increase expansion in the private sector. High-impact businesses are designated by the Illinois Department of Revenue after submitting an application and meeting certain criteria (such as substantial investment in underdeveloped areas). For those that are designated, there is an opportunity for a credit on “high-impact business construction jobs.” Up to 50% of income tax withheld from construction project employees (contractor and subcontractor) can be used as an income tax credit with a five-year carryforward. Pass-through entities earning credits will flow it through to its owners. 

Employer Withholding Requirements

Employers with non-resident employees that spend more than 30 working days in Illinois are required to withhold Illinois Income tax starting with tax year 2020 (SB 1515). Illinois resident employees also will be permitted a credit for taxes paid to other states if the tax paid related to days spent in another state. 

Additional Changes

Illinois also passed various additional taxes and surcharges related to:

  • Recreational cannabis (can buy as of January 1, 2020, at which time the sales tax will be 10% to 25% depending on THC concentration; also a 7% sales tax on sales from the cultivator to dispensaries)
  • Parking (excise tax effective in 2020),
  • Cigarettes (tax increase effective July 1, 2019)
  • Illinois gaming facility winnings (new income tax surcharge 2019 through 2027)
  • Motor fuel (will double tax from 19 cents to 38 cents per gallon as of July 1, 2019) 
 

Please contact a member of your service team, or Hannah Prengler at hprengler@cohencpa.com, Sara Britt at sbritt@cohencpa.com or Jim Lelko at jlelko@cohencpa.com for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.