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June 28, 2018

U.S. Supreme Court rules out-of-state sellers can be required to collect sales taxes on consumers

Jun 28, 2018

U.S. Supreme Court rules out-of-state sellers can be required to collect sales taxes on consumers

On June 21, 2018, a U.S. Supreme Court decision paved the way for modernizing tax collection by state and local governments. South Dakota v. Wayfair, Inc., et al. overturned a 1992 decision, Quill Corp. v. North Dakota, which found that states could not require retailers without a physical presence in a state to collect sales taxes. This Policy Update examines the implications of this ruling on tax collection and revenues in Illinois and the Chicago Metropolitan Agency for Planning region. This Policy Update is not a legal opinion and should not be relied upon as such.

The court’s rationale on the 1992 Quill case was that it would be too complicated for out-of-state businesses to navigate each state’s distinct rates, base, and rules for sales taxation. However, that ruling was made with mail order businesses in mind; today, annual online sales total more than $450 billion nationally. The 2018 Wayfair decision overturned Quill on the basis of the uneven playing field it created for businesses, its lack of alignment with the internet economy, the resulting fiscal impact on state and local governments, and improvements in tax system standardization since 1992, among other points. 

In Illinois, current statute requires that consumers pay use taxes on tangible property purchased out of state or delivered from out of state for use in Illinois. Unlike sales within Illinois that are subject to the sales tax, retailers historically have not been required to collect the use tax from consumers. Illinois includes a form on its state income tax return to improve compliance among taxpayers. In addition, legislation enacted over the past eight years has required that remote sellers collect taxes if they have an affiliate located in the state, and that large online retailers with a physical presence collect taxes. As a result, major online retailers, such as Amazon, or stores with both physical and online outlets, such as Target, already impose sales or use taxes for purchases made online by Illinois residents. However, despite efforts to improve use tax compliance and updated collection laws, not all consumers are paying taxes on their purchases when the retailer has no physical presence in Illinois.

In anticipation of the Wayfair ruling, the Illinois General Assembly and the Governor approved legislation that is substantially similar to the South Dakota law reviewed by the Supreme Court. Illinois Public Act 100-0587, the Fiscal Year 2019 budget implementation act, amended the Use Tax Act and Service Use Tax Act. This change requires out-of-state retailers to collect the State’s 6.25 percent use tax on sales to Illinois purchasers if their receipts to Illinois purchasers total $100,000 or more, or if more than 200 total transactions are made, effective October 1, 2018. 

The Illinois Department of Revenue estimates an additional $200 million in use tax revenue will be generated in the first full year the amendment is effective, an increase of approximately 9 percent. The State of Illinois would retain 80 percent, or $160 million, of this revenue. The other 20 percent would be disbursed to local governments: $8 million to the City of Chicago, $4 million to the Regional Transportation Authority, $240,000 to the Madison County Mass Transit District, and $27.8 million to municipalities and counties except Chicago, by share of the state population -- with some $15.8 million going to municipalities and counties in northeastern Illinois. 

Looking ahead
The Supreme Court ruling enables Illinois to take a step toward modernizing tax collection in line with the changing economy. CMAP has long supported initiatives that sustain northeastern Illinois’ tax base and allow states to require all sellers to collect sales taxes. State funds, such as use tax revenue, play a crucial role in local government budgets.

However, the growing prevalence of internet sales increases truck traffic on the entire roadway system, including roads servicing warehouses and distribution centers, and residential areas receiving ever-increasing deliveries. To improve goods movement, the State and region should also develop new funding solutions to ensure municipalities can support necessary transportation infrastructure. The draft ON TO 2050 plan includes recommendations to reform transportation revenues, improve planning for communities experiencing an influx of ecommerce facilities, and adapt our streets and communities to changing technology and mobility.

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