State of il s&u tax presentation by glga 1 23-14

January 23, 2014

Great Lakes Graphics AssociationIllinois Sales & Use Tax Overview

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Welcome

Bill Gibson, Illinois Director, Great Lakes Graphics Association

Bob Kolosky, Director, McGladrey Chuck Pribble, Supervisor, McGladrey

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Hosted by PagePath Technologieswww.PagePath.com866-770-7561

Learning Objectives/Agenda

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

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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

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http://taxfoundation.org/sites/taxfoundation.org/files/docs/sources_sales_large.png

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

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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

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Illinois Sales & Use Tax – In General

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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


Retailers Occupation Tax

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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


Retailers Occupation Tax

Examples of retail sales applicable to graphic arts industry- Legal forms

- Greeting cards

- Pictures

- Anything which is considered stock and standard

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Service Occupation Tax

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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


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

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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)

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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)

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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

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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)

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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

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Exemptions

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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

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Resale Certificate-Illinois

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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

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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

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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

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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

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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

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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

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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

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Exemptions

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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

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Computer Hardware & Software

Computer Hardware- Taxable as tangible personal property- Not taxable when qualifies for exemption (i.e.

controlling manufacturing equipment)

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Computer Software - Canned software is taxable- Custom software is not taxable

Other factors to consider with canned software

- Method of delivery-taxable in IL

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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

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)

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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.

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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.


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)

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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 non-

residential contractor services

You do not owe use tax on pure contractor charges

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Construction Contractors

What are building materials

- Lumber

- Brick

- Roofing materials

- Insulation

- Doors & windows

- Water heaters, furnaces and air conditioning units

- Electrical and ventilation systems

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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

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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

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Earning the credit-Example

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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$


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

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ST-16-C

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Using the credit-Example

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Purchase of consumables 5,000.00$ Total tax rate charged by vendor 8.00%Tax that would have been due 400.00$ MPC Use on ST-16-C (6.25% Only) (312.50)$ Tax due to vendor 87.50$


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)

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Chicago Taxes

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City of Chicago Taxes

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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)


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Use Tax for Non-Titled Personal Property - (8402B) Personal Property Lease Transaction Tax - (7550) Employers' Expense Tax - (7540)


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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


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Use Tax for Non-Titled Personal Property – Examples- Office supplies

- Building supplies

- Non-graphic arts supplies

- Only applies if purchased from non-Chicago vendors


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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


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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

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Audit Observations

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

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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

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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

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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

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Final Thought on Audits

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Legislative Update

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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

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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.

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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

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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 (click-

through 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

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Illinois - litigation updates

Hartney Fuel Oil Co. v. Department of Revenue, Tenth Circuit Court of Illinois, Putnam County, No. 08-MR-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

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Contact Information

Bob Kolosky

Director, State and Local Tax

312.634.4622

[email protected]

Chuck Pribble

Supervisor, State and Local Tax

312.634.5372

[email protected]

Bill Gibson

Illinois Director, GLGA

312.704.5000

[email protected]

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State of il s&u tax presentation by glga 1 23-14