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Great Lakes Graphics Association
Illinois Sales & Use Tax Overview
January 23, 2014

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Welcome

Hosted by PagePath Technologies
www.PagePath.com
866-770-7561

 Bill Gibson, Illinois Director, Great Lakes Graphics
Association
 Bob Kolosky, Director, McGladrey
 Chuck Pribble, Supervisor, McGladrey

1
Learning Objectives/Agenda






Overview of the Illinois sales tax
Common exemptions and credits
Audits
Overview of the Chicago taxes
Legislative developments

2
The Sales & Use Tax Burden
•
•
•
•
•
•

7,500+ taxing jurisdictions
10,000+ transaction tax rates
There is more sales/use tax paid than income tax
Gross Receipts Taxes (Washington B&O)
Excise taxes (Fuel, telecom, other)
Aggressive DOR’s

3
4
5
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
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
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
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
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
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
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
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
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
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
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
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
Exemptions

18
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
Resale Certificate-Illinois

20
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
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
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
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
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
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
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
Exemptions

28
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
Computer Hardware & Software
 Computer Hardware
- Taxable as tangible personal property
- Not taxable when qualifies for exemption (i.e.
controlling manufacturing equipment)

30
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
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
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
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
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
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
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
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
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
Manufacturer’s Purchase Credit (MPC)

40
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
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
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
ST-16-C

44
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
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
Chicago Taxes

47
City of Chicago Taxes

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





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













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
City of Chicago Taxes
 Use Tax for Non-Titled Personal Property - (8402B)
 Personal Property Lease Transaction Tax - (7550)
 Employers' Expense Tax - (7540)

49
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
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
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
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
54
Audit Observations






Increased audit activity
Nexus/discovery programs
Aggressive auditors
Auditor turnover/retirements/new auditors
States are okay with litigation

55
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
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
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
Final Thought on Audits

59
Legislative Update

60
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
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
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
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
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
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
67
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McGladrey & Pullen, LLP is the U.S. member of the RSM International (“RSMI”) network of independent
accounting, tax and consulting firms. The member firms of RSMI collaborate to provide services to global clients,
but are separate and distinct legal entities which cannot obligate each other. Each member firm is responsible only
for its own acts and omissions, and not those of any other party.
McGladrey, the McGladrey signatures, The McGladrey Classic logo, The power of being understood, Power comes
from being understood and Experience the power of being understood are trademarks of McGladrey & Pullen, LLP.
© 2012 McGladrey & Pullen, LLP. All Rights Reserved.

McGladrey & Pullen, LLP
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GLGA Illinois Sales Tax Webinar

  • 1. Great Lakes Graphics Association Illinois Sales & Use Tax Overview January 23, 2014 Hosted by
  • 2. Welcome Hosted by PagePath Technologies www.PagePath.com 866-770-7561  Bill Gibson, Illinois Director, Great Lakes Graphics Association  Bob Kolosky, Director, McGladrey  Chuck Pribble, Supervisor, McGladrey 1
  • 3. Learning Objectives/Agenda      Overview of the Illinois sales tax Common exemptions and credits Audits Overview of the Chicago taxes Legislative developments 2
  • 4. The Sales & Use Tax Burden • • • • • • 7,500+ taxing jurisdictions 10,000+ transaction tax rates There is more sales/use tax paid than income tax Gross Receipts Taxes (Washington B&O) Excise taxes (Fuel, telecom, other) Aggressive DOR’s 3
  • 5. 4
  • 6. 5
  • 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
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  • 56. Audit Observations      Increased audit activity Nexus/discovery programs Aggressive auditors Auditor turnover/retirements/new auditors States are okay with litigation 55
  • 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
  • 60. Final Thought on Audits 59
  • 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
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