Illinois Enacts Tax Increase and New York-Style Nexus Legislation

14 January 2011 Publication
Author(s): John B. Palmer

Legal News: Taxation

The Illinois Legislature enacted a substantial personal and corporate income tax increase on January 12, 2011, in the final hours of its 96th General Assembly. The new law, known as Public Act 96-1496 (Act), was signed by the governor on January 13, 2011 and takes effect as of January 1, 2011.

The Act increases the Illinois personal income tax rate from three percent to five percent and the corporate income tax rate from 4.5 percent to seven percent. In addition to the income tax, corporations remain subject to Illinois’ 2.5 percent personal property replacement income tax. Thus, the total Illinois tax rate applicable to corporations will be 9.5 percent.

The Act provides for the income tax rate to decrease in future years. The personal income tax rate reverts to 3.75 percent in 2015 and 3.25 percent in 2025. Similarly, the corporate income tax rate reverts to 5.25 percent in 2015 and 4.8 percent in 2025. The tax increases are subject to suspension if the state fails to meet certain spending limits set forth in the Act for the fiscal years 2012 through 2015.

The Act also suspends net operating loss absorption (except for S corporations) for tax years ending after December 31, 2010 and prior to December 31, 2014. The current carryover provisions (12 years for losses incurred on or after December 31, 2003) are extended for the four years of the suspension.

The Act contains no property tax relief. No portion of the tax increase is shared with local governments.

The Act also reinstates the Illinois Estate and Generation Skipping Transfer Tax for deaths occurring after December 31, 2010. The tax is equal to the full amount of the estate tax credit that would have been allowed under the Internal Revenue Code in effect on December 31, 2011, but limits the exclusion amount to $2 million.

Illinois General Assembly Enacts New York-Style Nexus Legislation

On January 1, 2011, the Illinois General Assembly adopted a Sales/Use Tax Nexus Bill, which for the first time would attempt to collect sales tax from online retailers that have at least $10,000 in annual sales through contractual relationships with Illinois-based affiliates. The legislation, which the governor has indicated he will sign, would take effect as of July 1, 2011.

The Illinois Nexus Bill, known as House Bill 3659, amends the Illinois Use Tax Act’s definition of a “retailer maintaining a place of business in this state,” the term which determines who has the duty to collect and remit Illinois sales/use tax, to include two new circumstances:

(1) First, when a retailer has a contract with a person located in Illinois under which the person, for consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person’s Internet Web site; and

(2) Second, when a retailer has a contract with a person located in Illinois under which the retailer sells the same or a similar line of products as the person, the retailer uses an identical or substantially similar name, trade name, or trademark, and the retailer pays consideration to the person based upon the retailer’s sales of tangible personal property.

The new circumstances only apply if the retailer’s cumulative gross receipts from sales of tangible personal property to customers in Illinois under “all such contracts” exceed $10,000 in the four preceding reporting quarters. The dollar threshold is set forth in each sub-part, implying that contracts under circumstance (1) cannot be consolidated with contracts under circumstance (2) to reach the $10,000 threshold.

Circumstance (1) is similar to what colloquially has been referred to as the “Amazon” law, a New York statute recently challenged by, LLC,, Inc., and others that imposes nexus on out-of-state retailers based on contractual relationships with New York persons who provide referrals to the retailer via Internet links. (N.Y. Tax Law § 1101(b)(8)(vi).) Unlike the Illinois Nexus Bill, the New York law provides that nexus can be rebutted by proof that the person with whom the retailer has contracted did not engage in any solicitation that would satisfy constitutional nexus standards. The New York Technical Service Bureau has issued two memoranda regarding the statute, including one that creates a “safe harbor” procedure by which a retailer can rebut the nexus presumption if (i) its contracts include a provision that prohibits their in-state representatives from engaging in any solicitation activities in New York related to the retailer and (ii) the retailer submits an annual certification from its in-state representative stating that the representative has not engaged in any such solicitation during the prior year. (TSB-M-08(3)S and TSB-M-08(3.1)S.)

In November 2010, the New York Supreme Court, Appellate Division upheld the facial constitutionality of the New York law based in part on the fact that the law provides that the presumption of nexus is rebuttable and on the safe harbor created by the Technical Service Memoranda. Amazon.Com, LLC, et al. v. New York State Dept. of Taxation and Finance, et el., 2010 WL 4345742 (N.Y.A.D. 1st Dept., Nov. 4, 2010). The case was remanded to the New York Supreme Court for further discovery on the issue of whether the law violates the Commerce or Due Process Clauses of the United States Constitution as applied to the plaintiffs in the litigation.

In proceedings leading up to the passage of the Illinois Nexus Bill, the Illinois Department of Revenue has stated that it hopes to recoup $150 million in lost sales tax revenues through the passage of this measure. To date the department has not indicated whether it might issue regulations or advisory memoranda adopting a rebuttable presumption of nexus or safe harbor provisions similar to the New York law that could be critical in establishing the constitutionality of the Bill.

Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Mary Kay Martire
Chicago, Illinois

John B. Palmer
Chicago, Illinois

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

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