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Sales and Use Tax in Illinois
It can be helpful to think of sales tax and use tax as mirror images of each other. They’re closely related and they’re generally two ways of getting at the same thing. In both cases the state is collecting a tax on a purchase or a service. The main difference is whether that tax appears on the receipt (sales tax) or whether it’s the responsibility of the purchaser to report and pay the tax later (use tax).
In Illinois there are four main types of sales and use tax. They are the Retailers’ Occupation Tax (ROT), the Retailers’ Use Tax (RUT), the Service Occupation Tax (SOT) and the Service Use Tax (SUT). There are other sales and use taxes, but these four are the main ones.
It can be confusing to try to keep these four taxes straight. Try to think of them as pairs. There’s a sales tax and a use tax for retail purchases (ROT and RUT) and then there’s also a sales tax and a use tax for services (SOT and SUT).
So if you go to the drugstore on the corner and make a purchase, the sales tax on your receipt is ROT. If you bought something out of state and used it in Illinois you are required to declare that purchase and pay use tax (RUT) on it. SOT and SUT work in the same way, the only difference being that they are assessed on services instead of retail products.
For more information on the four kinds of sales and use tax in Illinois or for help with other tax related legal concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.
Before the debt ceiling we were talking about sales tax
With the debt ceiling raised and the beginnings of a compromise on dealing with the long term US debt laid down–and thus far, these plans do not include any of the rumored tax changes such as the elimination of the AMT fix–the world of tax has turned its focus back to the issue on online sales tax.
California has joined the roster of states to institute its own version of New York’s 2008 affiliate tax law. The addition of California is particularly significant because New York and California tend to be trend setters among states. Laws often start in one of those states and eventually spread to whole of the union. To have both of these big names behind the online sales tax discussion will likely add impetus to the conversation.
It was first mentioned back in April, but now Senator Dick Durbin (D-IL) has finally submitted his Main Street Fairness Act, which would allow states to charge sales tax to online retailers like Amazon and also on mail order retailers, both of which can currently avoid paying sales tax in states where they do not have a brick and mortar presence.
The Act achieves this through something first proposed in 2002, the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA has been previously endorsed by Amazon and other online retailers. It is an agreement states voluntarily join. They agree to common sales and use tax rules and in exchange they gain the power to charge sales tax on online and other out of state retailers. Currently, the sales tax systems in the country vary wildly state to state.
At present the Act has been submitted to the Senate and a counterpart is in the House.
For more information on sales tax, use tax or other tax related legal concerns, contact the Illinois tax attorneys at Horowitz & Weinstein.
Nexus
For a family owned shop on Main Street, their sales tax situation is relatively straightforward. They are required to collect and remit to the appropriate authorities the applicable sales tax for their state, their city, and the other municipalities they may fall within. (This is tax we’re talking about, so the emphasis really needs to be on “relatively”–tax situations are rarely simple.)
But what about a company whose business crosses state lines? What if, say, a company were based in Illinois but sold products in Illinois, Indiana and Wisconsin? Does it need to collect sales taxes in all three states?
The key concept to answering questions like this is nexus. The basic rule is this: if you are “doing business” within a state, then you owe sales tax on that business. What constitutes “doing business” within a state? That’s where nexus comes in.
Nexus is the term for all your connections, contacts, links, with a given political jurisdiction, a state in this case. Once your nexus passes a certain point (and where exactly that point lies is the crux of many sales tax disputes), you are considered to be conducting business within that state and thus you are required to charge sales tax on your business there.
The clearest precedent on nexus comes from a 1992 Supreme Court case. In the case the Court held that physical presence was the litmus test which counted. This helped clear up some of the gray area, but plenty of ground was left uncertain. Especially in the case of online and mail order retailers (that second group tends to get left out of the headlines but they have just as much, possibly more, of a stake in the current debate as Amazon) the debate has recently come to a head. The new laws passed in Illinois and other states say that having affiliates within the state is sufficient nexus to be doing business within the state. This would allow Illinois and the other states who have passed such laws to tax online and mail order retailers, but in practice it has led to Amazon and similar companies canceling their affiliate programs to avoid the taxes.
For more information on nexus and how business in a state may alter your tax situation, contactthe Chicago tax attorneys at Horowitz & Weinstein.
Foreign Gifts and Foreign Trusts
For quite a few taxpayers, filing their yearly tax returns doesn’t go much beyond the trusty old Form 1040. There are of course many other forms for reporting to the IRS and one that is especially worth noting is Form 3520, a return for reporting transactions with foreign trusts and the receipt of foreign gifts.
For 2010, foreign trust and gift reporting was changed primarily by the HIRE Act. Specifically a number of penalties for failure to report foreign trusts and gifts have been modified and new penalties have been introduced. In addition, the scope of individuals who are required to file Form 3520 has been expanded. The penalties for failing to file can be severe, in general amounting to $10,000 or a percentage of the assets in questions (usually 35%), whichever is greater.
The specific requirements and nuances of foreign gift and trust reporting and compliance are complex and of course the best course of action is to consult a tax professional. Here are the basics.
You have to file Form 3520 for a tax year if you received a gift from a foreign (meaning non-US) source of $100,000 or more from an individual or $14,165 or more from a corporation or partnership. You must file if you are a U.S. person who received a distribution from a foreign trust. You must also under certain conditions file if you are the owner or part owner of certain foreign assets.
For more information on foreign gift reporting, foreign trust compliance, or for help with other tax related legal concerns, contact Horowitz & Weinstein.
Possible Debt Ceiling Deal Includes Tax Reforms
For weeks the talk in Washington has been about the debt ceiling, the legal limit on the amount the federal government can borrow. The debate has not so much been about the debt limit itself, but on the wider issue of deficit reduction. Several plans have been presented in Congress, but these have tended to be favored by one party the other and to lack bipartisan report.
Except for one. There’s an old term in Washington, the “Gang of Six”, a term that refers to a bipartisan group of Senators. A plan for addressing the deficit has recently come out with the Gang of Six phrase attached and it has been met with bipartisan support.
From a tax perspective the plan is strange. It proposes to do things that many tax professionals have long considered impossible. Proposed measures include eliminating the alternative minimum tax (AMT), replacing the current income tax brackets with three brackets with the highest rate being between 23 and 29 percent. Currently it is 35. The plan also calls for a single corporate tax rate of between 23 and 29 percent.
In addition to lowering tax rates, the plan calls to for the elimination of many credits, deductions such as those for mortgage interest or charitable contributions, and other breaks currently in the tax code. The proposal also calls for multinational companies not to be taxed on their foreign income.
It must of course be noted that these are just ideas at present and even if this plan is eventually passed, it will likely change before becoming law. Still, any of these proposed changes would constitute a major change in the tax landscape in this country and they could create new tax opportunities or new tax pitfalls for individuals, corporations and other entities.
For more information on this and other tax issues, contact the Chicago tax lawyers at Horowitz & Weinstein.