Since 1955 the State of Illinois has required individuals and companies that purchase from out-of-state retailers to pay a Use Tax, which is presently 6.25%, on items of tangible personal property that they use or consume in Illinois, unless an out-of-state retailer collected a sales tax at least equal to the Illinois Use Tax. See 35 ILCS 105/1 et seq. For many years, most Illinois taxpayers have ignored, or have been unaware of, the Use Tax. However, the Illinois Department of Revenue (IDOR) has been quietly enforcing the Use Tax, especially against individuals and businesses that purchased jewelry, equipment, boats and airplanes in other states. Recently, the State of Illinois’ focus has broadened to include internet purchases and, beginning with the 2010 tax year, individuals are required to report their Use Tax obligations on their Illinois Form IL-1040.
IDOR provides the following guidance on what goods are subject to the Use Tax: items that are purchased “for use or consumption in Illinois, from an out-of-state retailer who charges no Illinois Sales Tax or charges sales tax at a lower rate than the Illinois rate, and on which sales tax would normally be collected if you bought it from a retailer in Illinois.”1 Thus, most internet purchases made by Illinois residents are subject to the Use Tax. The Use Tax reaches beyond internet sales, however, and includes any item purchased at retail for which the necessary tax has not been paid. For example, purchases in states bordering Illinois, such as Wisconsin, Iowa, and Kentucky, may be subject to sales tax rates as low as 5%, leaving 1.25% of the retail purchase price due as Use Tax in Illinois. Qualifying foods, medicines and medical appliances are also subject to the Use Tax, but at a lower use tax rate of 1%. Cigarettes bought or acquired in another state or country for use in Illinois are subject to the Illinois Cigarette Use Tax, which the taxpayer should report on the Illinois Form RC-44.
For Taxpayers reporting their 2010 Use Tax this filing season, IDOR has published instructions on how to calculate the Use Tax due. In summary, IDOR advises that if a taxpayer does not have complete records of their purchases, the taxpayer should compute the tax based on the actual costs of any “major purchases” plus the estimated cost of other purchases. Unfortunately, the term “major purchase” has not been defined by IDOR. If a taxpayer has incomplete records and no “major purchases,” IDOR advises that the taxpayer use the following table, but cautions that the taxpayer may be subject to penalties and interest if their estimate is incorrect:
Please click here to view table.
Taxpayers owing more than $600 in Use Tax must report the tax on a separate Form ST-44 Illinois Use Tax Return. A copy of the Illinois Form IL-1040 instructions, which discuss reporting Use Taxes may be found at: http://www.revenue.state.il.us/TaxForms/IncmCurrentYear/Individual/IL-1040-Instr.pdf
On January 1, 2011 the State of Illinois began a Use Tax Amnesty program which permits individual taxpayers to pay their prior year Use Tax obligations without penalty or interest.2 Businesses are not eligible to participate. Generally, to qualify for the Amnesty program, taxpayers must owe tax under the Use Tax Act (not just penalties and interest) for purchases after June 30, 2004 and before January 1, 2011, and they must submit full payment of all eligible Use Taxes to IDOR no later than October 15, 2011.3 To participate, taxpayers must prepare and file an Illinois Use Tax Return, Form ST-44, for each year for which they “have a use tax liability and write ‘Amnesty’ in red on the top of each form.”4 The Cigarette Use Tax is not included in the current amnesty program.
Taxpayers considering participation in the current Illinois Use Tax Amnesty program should be aware that other states may share the results of their sales tax audits of venders located in their state, including information on goods shipped to Illinois residents, with the IDOR. With respect to Chicago residents, the City of Chicago imposes a 1% use tax on the privilege of using in Chicago nontitled personal property that is purchased outside of Chicago. Although, each taxpayer is allowed an annual tax credit of $25 to be applied against the taxpayer’s aggregate tax liability for each taxable year (i.e., annual tax exempt purchases of $2,500). It is possible that the IDOR will advise the City of Chicago Department of Revenue – Tax Division of participation in the Use Tax Amnesty program by Chicago residents. Thus, Chicago residents may also want to consider disclosing out of state purchases to the Chicago Department of Revenue under Chicago’s Tax Voluntary Disclosure Program to avoid the imposition of penalties, but subject to interest, on the Chicago Use Tax.