Developers in the City of Chicago should be aware of a new City revenue focus—use tax audits on recently completed construction projects. While the basis is only anecdotal, it appears that the City’s Building Department, which issues certificates of occupancy, may be alerting the Department of Finance about newly completed projects. The Department of Finance then initiates a use tax investigation with the developer to ensure proper remittance of taxes.
Chicago’s use tax is a companion to its retailers occupation tax, commonly known as the sales tax. The retailers occupation tax generally applies to purchases of products, such as building materials, within the City of Chicago. The use tax applies to products purchased outside of the City (e.g., steel from an Indiana retailer) but used within the City. The purchaser, not the retailer, is charged with payment of the use tax. If a developer pays a municipal sales tax on an out of state purchase, the developer receives a credit against its City use tax liability based on the amount of out-of-state municipal tax paid. Some states, however, do not have municipal sales taxes so developers receive no credit for taxes paid on their out of state purchases. Consequently, Chicago’s use tax will apply to out-of-state purchases where there is no municipal sales tax. It is noteworthy that the State of Illinois has a comparable tax, but to date, increased enforcement has not been apparent.
Developers sometimes do not properly structure their construction contracts and/or fail to remit Chicago use taxes where the developer self-performs work. As a result of these factors and the City’s stepped up enforcement, developers are finding themselves liable not only for back taxes but also penalties and interest. With the use tax rate of 1 percent, interest charges of 12 percent on outstanding tax debts and fines of $50 - $200 per day, amounts owed to the City can quickly mount. A developer’s failure to pay sums due can also result in the imposition of liens and loss of business licenses. To avoid these results, developers should, at a minimum, structure their contracts for work in Chicago to ensure that contractors and subcontractors are solely responsible for collection and remittance of use taxes. In addition, where developers self-perform work or purchase materials for a project, developers should be careful to properly calculate and remit use taxes to the City on a timely basis.