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Recent developments

Have there been any notable recent developments concerning state and local taxation in your state, including any regulatory changes or case law?

In March 2018 the Illinois Department of Revenue issued guidance concerning its treatment of the deemed repatriated foreign earnings provisions found in Section 965 of the Internal Revenue Code (IRC), enacted in the federal tax reform bill (known as the Tax Cuts and Jobs Act). The department confirmed key aspects of Illinois’ treatment of the repatriation provisions, including as follows:

  • Both the income inclusion and deduction provided for in the deemed repatriated foreign earnings provisions will be considered in determining a taxpayer’s tax base, so that the inclusion in Illinois will be net.
  • The net amount included as deemed repatriated foreign earnings will be treated as a foreign dividend eligible for Illinois’ dividend-received deduction, which can be a 70%, 80%, or 100% deduction depending on a taxpayer’s percentage share of ownership of the foreign subsidiary subject to the repatriation provisions (see 35 ILCS 5/203(b)(2)(O)). Notably, for tax periods beginning on or after January 1, 2018, 80% is reduced to 65% and 70% is reduced to 50% because this provision incorporates the federal dividend-received deduction rates found in IRC 243, which was amended by the Tax Cuts and Jobs Act.

The Illinois General Assembly recently passed SB 3141, which imposes a rebuttable penalty on retailers that fail to keep books and records or produce them to the department for examination. The penalty is $1,000 for the first offense and $3,000 for subsequent offenses.

Recent Illinois tax developments are frequently featured on the blog found at https://insidesalt.com.

General framework

Legislation

What primary and secondary legislation governs the collection and remittance of taxes in your state?

Illinois state taxes are governed by the Illinois Compiled Statutes and the Illinois Administrative Code. Some of the relevant statutes and regulations include:

  • Income tax:
    • Illinois Income Tax Act, 35 ILCS 5/101, et seq.
    • 86 Ill. Admin. Code § 100.2000, et seq.
  • Personal property replacement tax:
    • 35 ILCS 5/201(c) and (d)
  • Sales taxes:
    • Retailers’ Occupation Tax Act, 35 ILCS 120/101, et seq.
    • 86 Ill. Admin. Code § 130.101, et seq.
    • Use Tax Act, 35 ILCS 105/101, et seq.
    • 86 Ill. Admin. Code § 150.101, et seq.
    • Service Occupation Tax Act, 35 ILCS 110/101, et seq.
    • 86 Ill. Admin. Code § 140.101, et seq.
  • Franchise tax:
    • 805 ILCS 5/15.75
  • Property tax:
    • 35 ILCS 100/1-1, et seq.
    • 86 Ill. Admin. Code § 110.101, et seq.
  • Insurance taxes:
    • premium tax, 215 ILCS 5/409
    • retaliatory tax, 215 ILCS 5/444
    • self-procurement tax, 215 ILCS 5/121-2.08

Many of the above-listed statutes and regulations, and information regarding other taxes administered by Illinois state agencies, can be accessed through the Illinois Department of Revenue’s website.

Government authorities

What government authorities (at both state and local level) are charged with the collection and administration of taxes, and what are the extent of their powers?

The Illinois Department of Revenue is charged with administration and collection of the Illinois income tax, personal property replacement tax, sales tax, hotel taxes, and utilities taxes, among others. The Illinois Secretary of State administers and collects the franchise tax. Insurance taxes are the responsibility of the Illinois Department of Insurance. All three state agencies have the power to:

  • audit taxpayers;
  • issue subpoenas;
  • impose interest and penalties for late payment;
  • make estimated tax assessments against taxpayers who fail to produce requested books and records;
  • negotiate compromises and settlements;
  • seek the imposition of fraud penalties; and
  • in the appropriate circumstance, request the assertion of criminal charges.

Illinois has a plethora of local governments, many of which also have taxing authority.

State/local balance

How would you describe the balance between taxes collected at state and local level?

The authority of local government units to impose taxes is more restricted than the state taxing authority. Local governments have no inherent taxing power; in order to tax, they must be specifically authorized to do so by the Illinois Constitution (Article IX, §10) or the Illinois General Assembly (Santiago v. Kusper, 133 Ill. 2d 318 (1990)). Units of local government that are “home rule” units are generally authorized to impose taxes by Article VII, Section 6 of the Illinois Constitution, while non-home rule units may assess taxes only as specifically authorized by the Illinois General Assembly. All Illinois counties with an elected chief executive officer and all municipalities with a population in excess of 25,000 are presumptively home rule units; other units of local government can elect to become home rule units by referendum (Ill. Const. Article VII, § 6). Although home rule units of local government do not require specific approval of the Illinois General Assembly for every tax, absent express legislative authority they may not assess a tax based on income or earnings or imposed on occupations (Ill. Const. Article VII, § 6(e)). The scope of local government taxing authority is a frequent subject of controversy between taxpayers and local taxing units (see, e.g., Hertz Corp. v. City of Chicago, 2015 IL App (1st) 123210 (Sept. 22, 2015)).  

As home rule taxing units, the City of Chicago and Cook County, together with various regional taxing authorities, impose significant added tax burdens to those already imposed by the State of Illinois. Sales/use, telecoms, utility charges, hotel charges, leases, and parking charges are examples of the types of activity frequently subject to tax at both state and local level in Illinois. In addition, the City of Chicago taxes activities not subject to tax at state level, including video streaming services and other cloud-based lease charges.

Some local taxes are paid directly to the Illinois Department of Revenue, while others are paid directly to the local taxing authority. When local taxes are separately administered by a local taxing authority, even when a local tax mirrors definitional terms in a corresponding state act, the local taxing authority may or may not defer to a prior state determination of taxability.

Tax year and filing deadlines

What is the prescribed tax year in your state and what filing deadlines apply?

Illinois state and local filing deadlines vary greatly by tax type. Illinois income tax returns are due on April 15 of each calendar year. Property taxes are assessed bi-annually. Sales tax returns typically are filed monthly.

Many Chicago tax returns are filed annually in August, following the close of the city’s fiscal year end. The timing of tax payments to the City of Chicago and other local governmental units varies.

Illinois state and local governments increasingly are encouraging (and requiring) the electronic submission of tax returns and electronic payment of taxes. The portal for tax payments made to the Illinois Department of Revenue, called MyTax Illinois, can be found on the department’s website at https://mytax.illinois.gov. The City of Chicago’s electronic filing/tax payment portal can be found at https://webapps1.cityofchicago.org. Cook County’s electronic filing/tax payment portal can be found at https://ccdortax.cookcountyil.gov.

Government policy

How competitive is your state in terms of taxation in relation to other states? What is the government’s general policy and approach to taxation?

Generally speaking, Illinois state and local governments have been more concerned with closing large budget deficits than with lowering tax rates to compete with other states. The subject of tax policy is one of great debate within the state, which recently experienced a two-year government stalemate in which the democratically-controlled Illinois General Assembly and the Illinois Republican governor were unable to agree on a budget. Both the state and certain local government units (including the City of Chicago and Cook County) are burdened with large unfunded pension obligations. Surrounding states advertise themselves as being more tax and business-friendly venues.

Corporate income and franchise taxes

Taxable income

How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?

Under the Illinois Income Tax Act, a corporation’s taxable income conforms to the definition of “taxable income” under the Internal Revenue Code (35 ILCS 5/203(e)(1)), which states that “a taxpayer’s… taxable income for the taxable year shall mean the amount of… taxable income properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code.”

How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?

For multi-state businesses that are non-residents of Illinois, business income is apportioned to Illinois using a single sales factor (35 ILCS 5/304(a), (h)(3); see 35 ILCS 5/304(a)(3)(A) (numerator of the sales factor is total sales in Illinois during the taxable year, and the denominator is total sales everywhere during the taxable year); see also 35 ILCS 5/301(a) (resident corporation’s income is allocated to Illinois)).

With respect to transfer pricing, the Department of Revenue has discretion to adjust a taxpayer’s income and deductions if it determines that an agreement with another party causes inaccurate reflection of income in Illinois (see 35 ILCS 5/404(a)). According to the statute:

If it appears to the Director that any agreement, understanding or arrangement exists between any persons which causes any person’s base income allocable to this State to be improperly or inaccurately reflected, the Director may adjust such items of income and deduction, and any factor taken into account in allocating income to this State, to such extent as may reasonably be required to determine the base income of such person properly allocable to this State.

Nexus

How is nexus determined for corporate income tax purposes?

Illinois imposes corporate income tax “on the privilege of earning or receiving income in or as a resident of this State” (35 ILCS 5/201(a)). A detailed Illinois Department of Revenue regulation, 86 Ill. Admin. Code § 100.9720, sets out Illinois’ nexus standards for corporate income tax purposes. The regulation states that Illinois generally follows nexus standards established at the federal level, including the protection granted by Public Law 86-272. 86 Ill. Admin. Code § 100.9720(b), (c), and (e).

Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?

Generally, yes (see 86 Ill. Admin. Code § 100.9720 (income tax nexus for Illinois purposes keys to federal standard established in federal statutes and U.S. constitutional case law)). “Generally, the physical presence within a state of a taxpayer’s employees or other representatives will establish the requisite connection or substantial nexus with the state necessary to subject the taxpayer to the state’s corporate income tax” (see Illinois Dep’t of Revenue Gen. Info. Letter IT 17-0007-GIL (June 6, 2017) (citing Tyler Pipe Indus., Inc. v. Wash. State Dep’t of Revenue, 483 U.S. 232 (1987) and Scripto, Inc. v. Carson, 362 U.S. 207 (1960))). Additionally, a Department of Revenue regulation provides that nexus for income tax purposes is created by:

[e]ntering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchiser or licensor to its franchisee or licensee with the State. (86 Ill. Admin. Code § 100.9720(c)(4)(R)).

Notably, in Capital One Fin. Corp. v. Hamer (2012 TX 001/002 (Ill. Cir. Ct., May 11, 2015)), Judge Schmidt of the Circuit Court of Sangamon County granted summary judgment for the Illinois Department of Revenue, holding that the proper test for corporate income tax nexus is whether a “significant economic presence” exists in Illinois, citing Tax Comm’r v. MBNA (260 S.E. 2d 226 (W.Va. 2006)). The circuit court rejected the plaintiff’s argument that physical presence was required to create nexus for income tax purposes, and stated that it agreed with the Department of Revenue that the significant economic presence test was the “fairest test of corporate income tax given the current internet based world.”

Rates

What are the applicable corporate income tax rates?

For taxable years beginning on or after July 1, 2017, the corporate income tax rate is 7% (35 ILCS 5/201(b)(14)). Illinois also imposes a personal property replacement tax, imposed on the same basis as the corporate income tax (35 ILCS 5/201(c)). This tax has a rate of 2.5% for corporations other than S corporations (35 ILCS 5/201(d)).

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

Because Illinois starts with federal taxable income (35 ILCS 5/203(e)(1)), every item of income and deduction taken into account at the federal level automatically will be included in base income unless adjusted per statutory modification. Generally, Illinois allows deductions from federal taxable base income, as set out in 35 ILCS 5/203(b)(2). While Illinois does not allow corporations a standard exemption (35 ILCS 5/204(b)), it does have other exemptions available to corporations (see 35 ILCS 5/203(b)(2)). A number of credits are also available to Illinois corporate income taxpayers, including credits for investing in an Enterprise Zone (35 ILCS 5/201(f)) and research and development (35 ILCS 5/201(k)).

Filing requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

A corporation must file a return (Form IL-1120) for a taxable year if it is liable for tax imposed by the Illinois Income Tax Act or it is qualified to do business in the state and must file a federal income tax return (regardless of whether the corporation is liable for tax under the act) (35 ILCS 5/502(a)). With respect to a corporate group, corporations (other than S corporations) that are members of a “unitary business group” (term defined in 35 ILCS 5/1501(a)(27)(A) & 86 Ill. Admin. Code § 100.9700) must file on a combined basis as a single taxpayer and attach Schedule UB to the return (35 ILCS 5/502(e)). Illinois does not permit filing on a consolidated basis.

Corporate franchise tax

Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?

Yes. It is imposed on corporations in addition to corporate income tax (see 805 ILCS 5/15.35; 5/15.65).

If your state imposes a corporate franchise tax, please stipulate:

(a) The applicable tax base

With respect to an initial franchise tax, the tax base for domestic corporations is paid-in capital represented in Illinois as disclosed by its first report of issuance of shares (805 ILCS 5/15.40(a)). For foreign corporations (non-Illinois corporations (805 ILCS 5/1.80(b)), the tax base of the initial franchise tax is paid-in capital represented in Illinois as disclosed by its application for authority to transact business in Illinois (805 ILCS 5/15.70(a)).  

With respect to the annual franchise tax, the tax base for all corporations is paid-in capital in Illinois on the last day of the third month before the anniversary month or, for a corporation which has established an extended filing month, on the last day of the corporation's fiscal year preceding the extended filing month (805 ILCS 5/15.40(d); 805 ILCS 5/15.70(d)).   

For any additional franchise tax that may be owed due to a triggering event (e.g., the issuance of additional shares), the tax base (except in the case of a statutory merger or consolidation) is the increased amount of paid-in capital in Illinois (805 ILCS 5/15.40(b); 805 ILCS 5/15.70(b)).   

(b) Tax rates

The rate of the annual franchise tax is 0.10% of the tax base for the 12-month period, starting on the first day of the corporation’s anniversary month or, if a corporation has established an extended filing month, the corporation’s extended filing month. The annual tax cannot be less than $25 or more than $2 million (805 ILCS Chapter 5/15.45(a); 805 ILCS Chapter 5/15.75(a)).

The rate of the initial franchise tax and additional franchise tax is 0.15% of the tax base (805 ILCS Chapter 5/15.45(d), (e); 805 ILCS Chapter 5/15.75(d), (f)).

(c) Any exemptions or deductions

No.

(d) Filing formalities

The corporate franchise tax is administered by the Secretary of State. An annual report must be filed with the Secretary of State in the 60-day period before the first day of the corporation’s anniversary month or, for corporations with an extended filing month, its extended filing month each year (805 ILCS Chapter 5/15.80; 5/14.05; 5/14.10). Annual reports for domestic and foreign corporations are available on the Illinois Secretary of State’s website. In addition, corporations must file reports if certain events occur, such as issuance of shares not already reported to the Secretary of State or change in the number of issued shares (see, e.g., 805 ILCS Chapter 5/14.20(a), 5/14.30(a)).

Personal income taxes

Taxable income

How is taxable personal income determined in your state?

The starting point for taxable personal income is an individual’s adjusted gross income for federal income tax purposes (35 ILCS 5/203(a)(1) (tax imposed on “adjusted gross income”); 5/203(e)(1)).

Tax residence

Under what circumstances is an individual deemed resident in your state for personal income tax purposes?

An individual is deemed an Illinois resident when he or she is in Illinois on anything other than a temporary or transitory purpose or is domiciled in Illinois but absent from the state for a temporary or transitory purpose (35 ILCS 5/1501(a)(20)(A); see 86 Ill. Admin. Code § 100.3020, the Department of Revenue’s regulation interpreting the meaning of “residency” for personal income tax purposes).

Rates

What are the applicable personal income tax rates?

For taxable years beginning on or after July 1, 2017, the personal income tax rate is 4.95% (35 ILCS Chapter 5/201(b)(5.4)).

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

Illinois does not permit the standard or itemized deductions allowed for federal income tax purposes (see 86 Ill. Admin. Code § 100.2450(b)). Illinois does permit a number of deductions as set forth on Schedule M of an individual’s income tax return. Further, Illinois permits a personal exemption (35 ILCS 5/204(a)-(c)). Illinois allows additional exemptions for any taxpayer or spouse who is either 65 years of age or older, legally blind, or both (35 ILCS 5/204(d)). For tax years beginning on or after January 1, 2017, these exemptions cannot be claimed by taxpayers whose adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns (35 ILCS 5/204(g)).

Additionally, Illinois offers numerous personal and business-related tax credits against personal income tax, as set forth in Schedules 1299-C, 4255, CR, ICR, and IL-EIC attached to an individual’s return.

Filing requirements

What filing requirements and procedures apply?

In general, an annual return, Form IL-1040, must be filed by residents if they are liable for Illinois tax or if they must file a federal return, whether or not they are liable for Illinois tax. Non-residents must file if they are liable for Illinois tax (35 ILCS 5/502(a)). With respect to personal income tax, returns (without an extension) must be filed by the 15th day of the fourth month following the close of the taxpayer’s tax year (35 ILCS 5/505(a)(2)).

Employer obligations

What obligations are imposed on the employer in relation to the collection and remittance of state personal income taxes (eg, withholding)?

Employers maintaining an office or transacting business in Illinois and required under the Internal Revenue Code to withhold tax on compensation paid in Illinois to individuals or certain payments to residents must deduct and withhold Illinois income tax in an amount equal to the amount by which the individual’s compensation exceeds the proportionate part of his or her withholding exemption attributable to the payroll period, multiplied by a percentage equal to the individual income tax rate (35 ILCS 5/701(a)). In general, such employers must also file Form IL-941 on a quarterly basis to report Illinois income tax withheld and pay the tax withheld to the state (electronically or with Form IL-501) either monthly or semi-weekly (see Ill. Dep’t of Revenue, Pub’l 131, Withholding Income Tax Payment & Filing Requirements (January 2018)).

For tax years ending on or after December 31, 2014, many partnerships, S corporations, and trusts must withhold an amount equal to a partner’s share of income apportionable to Illinois from each non-resident partner included on the respective entities’ Illinois income tax returns (see 35 ILCS 5/709.5(a); 86 Ill. Admin. Code § 100.7035(a)).

Sales and use taxes

Taxable goods

What goods are subject to sales and use tax in your state (at both state and local level)?

Illinois and its localities impose tax on the occupation of selling at retail tangible personal property and on the use of tangible personal property purchased from a retailer (see, e.g., 35 ILCS 120/2; 35 ILCS 105/3; 65 ILCS 5/8-11-1 (Home Rule Municipal Retailers’ Occupation Tax Act); 65 ILCS 5/8-11-6 (Home Rule Municipal Use Tax Act)). Additionally, sales and use tax is imposed on tangible personal property acquired as an incident to the sale of a service (see, e.g., 35 ILCS 115/3; 35 ILCS 110/3; 65 ILCS 5/8-11-5 (Home Rule Municipal Service Occupation Tax Act)).

State rate

What is the state sales tax rate?

The state sales tax rate is 6.25% on sales of tangible personal property other than sales of some food (generally grocery food items), drugs, and medical appliances, which are taxed at 1% (35 ILCS 120/2-10).

Local rates

What is the range of local sales tax rates levied in your state?

Local sales tax rates generally range from 0.1% to 2.5%, depending on the taxing jurisdiction. See ST-62 (R-01/18) for a list of local sales tax rates administered by the Department of Revenue. See also the Tax Rate Database on the Department of Revenue’s website to find local sales tax rates by location.

Exemptions

What goods are exempt from sales and use tax?

Generally, sales and use tax is imposed on retail sales of tangible personal property. In order for goods to be tax exempt, they must qualify for a specific exemption. For example, Illinois exempts from sales and use tax certain items of machinery, equipment, personal property, and vehicles (see, e.g., 35 ILCS 120/2-5 & 35 ILCS 105/3-5 (listing exemptions); see also 86 Ill. Admin. Code § 150.301 (sales tax exemptions apply to use tax)).

Services

Are any services taxed?

Pure services are not taxed in Illinois. Under the service occupation and use taxes, tangible personal property transferred incident to sales of service from servicemen is taxed (see, e.g., 35 ILCS 115/3; 35 ILCS 110/3).

Filing requirements

What filing requirements and procedures apply?

In general, retailers making taxable sales in Illinois must file with the Illinois Department of Revenue a sales and use tax return (ST-1) on a monthly basis (see 35 ILCS 120/3). The preceding month’s return is due by the 20th of the following month (35 ILCS 120/3). The Department of Revenue’s sales and use tax forms and instructions are available at www.revenue.state.il.us/TaxForms/Sales/.  Retailers making sales for resale must collect and maintain certificates of resale from their buyers to support the conclusion that tax was not owed on the sale. Charitable organizations must obtain certificates of sales tax exemption from the state and supply a copy of the certificate to their retailers in order to avoid sales tax.

Property taxes

Taxable value

How is the value of property assessed for tax purposes in your state? Which types of property are subject to tax?

The Illinois property tax is a direct, ad valorem tax imposed on real property (35 ILCS 200/9-145, et seq.). Real property taxes are administered, collected, and expended by units of local government. Most local governments levy a general property tax (see, e.g., 65 ILCS 5/8-3-1 (for tax imposed by municipalities) and 55 ILCS 5/5-1024, 5/5-2001 (for tax imposed by counties)), but local governments frequently also impose special purpose taxes on property (often approved by voter referendum).

State rate

What is the state property tax rate?

In Illinois, only local governments levy and collect real property tax. The state imposes a personal property replacement tax in lieu of tax on personal property (35 ILCS 5/201(c) and (d)). Some local governments, including the City of Chicago, tax the use of personal property.

Local rates

What is the range of local property tax rates levied in your state?

The required assessment level for tax purposes on any parcel of real property in any county, except Cook County, is 33.3% of the property’s fair market value, excluding farmland and farm buildings. Cook County classifies property and assesses classes at different percentages of fair market value. The required Cook County assessment level for the residential class is 10% of fair market value for residential property and 25% of fair market value for industrial and commercial property. On occasion, special assessments may also be imposed to finance local improvements.

Exemptions and deductions

What exemptions and deductions are available?

The Illinois Constitution (Article IX, Section 6) provides that the Illinois General Assembly may exempt only the following property types from property tax:

  • property owned by the state;
  • units of local government and school districts; and
  • property used exclusively for agricultural and horticultural societies, and for school religious, cemetery, and charitable purposes.

Not-for-profit hospital claims for property tax exemptions have been a source of dispute regarding the meaning of the Illinois Constitution’s charitable use requirement (see Provena Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368 (2010)). Following the Provena decision, the Illinois General Assembly amended the Property Tax Code to clarify the requirements for extending charitable property tax relief to non-profit hospitals and related organizations (35 ILCS 200/15-86). In 2017 the Illinois Supreme Court affirmed the constitutionality of this amendment (Carle Foundation v. Cunningham Twp., 2017 IL 120427). The Illinois Supreme Court currently is considering another constitutional challenge to Section 15-86, in which the appellants contend that the exemption afforded to hospitals exceeds the scope of exemptions authorized by the Illinois Constitution (Constance Oswald v. Constance Beard, 122203 (argued 5/22/18)).

The Illinois Constitution also allows homestead exemptions for residential property occupied as a primary residence on January 1 of a tax year. In addition to the general homestead exemption, there are homestead exemptions for senior citizens, low-income, long-term resident individuals, disabled veterans, and persons with disabilities, among others.

Filing requirements

What filing requirements and procedures apply?

The property tax cycle extends over a two-year period. A tax year is the year of assessment and reflects the value of real property as of January 1 of that year. The actual tax bills are paid in two instalments in the year following the tax year (e.g., taxes on a 2018 assessment will be paid in 2019). Generally, any partial exemptions or other reductions are reflected in the second instalment invoice.

Real estate transfer tax

How is the transfer of real estate taxed in your state (including tax base, rates, exemptions, and filing formalities)?

Illinois’ real estate transfer tax is imposed on the privilege of transferring:

  • title to real estate located in Illinois;
  • a beneficial interest in real property located in Illinois; and
  • a controlling interest in a real estate entity owning property located in Illinois (35 ILCS 200/31-10 (tax base excludes mortgage amount outstanding at the time of transfer if transferring document references mortgage)).

The tax rate is $0.50 for each $500 of value or fraction of $500 stated in the declaration required by 35 ILCS 200/31-25 (35 ILCS 200/31-10).

35 ILCS 200/31-45 describes various circumstances under which deeds or trust documents are exempt from the tax. Further, 35 ILCS 200/31-46 lists an exemption for a transfer of a controlling interest in a real estate entity in the amount of corporate franchise tax paid by the entity as a result of the transfer.

A transfer declaration must be presented to a recorder when a deed or other transfer document is presented for recordation, or within three business days after the transfer is made, whichever is earlier (35 ILCS 200/31-25). Declaration forms are available on the Department of Revenue’s website. Payment of the tax is evidenced by “stamps” and reported on the department’s payment document (35 ILCS 200/31-15, 200/31-20).

Illinois localities also impose real property transfer taxes (see www.revenue.state.il.us/LocalGovernment/PropertyTax/rett.htm).

Unclaimed and abandoned property

Reporting and remittance

Describe your state’s regime for reporting and remitting unclaimed and abandoned property. How is the value of such property calculated? How assertive is your state in enforcing its rights to unclaimed property?

Illinois revised its unclaimed property law, effective as of January 1, 2018 (Revised Uniform Unclaimed Property Act 765 ILCS 1026/15-101, et seq.). As revised, the Revised Uniform Unclaimed Property Act applies to business-to-business transactions, subjecting property due or owed between business associations to the escheat and reporting requirements of the statute. This is a significant expansion of the prior version of the act, which did not apply to business-to-business transactions.

The Revised Uniform Unclaimed Property Act is administered by the Illinois treasurer, who aggressively pursued the recent amendment. The act is modeled on the Uniform Law Commission’s (UCL’s) proposed uniform unclaimed property law. The statute contains varying periods of abandonment for different types of property. Gift cards without expiration dates are not considered property subject to escheat. Consistent with the UCL model version of the law, the Illinois act also expressly excludes loyalty cards and game-related digital content from the definition of “property” subject to escheat. However, broadly defined “stored-value cards” are subject to escheat, unlike the prior version of the law.

Property is presumed abandoned in the State of Illinois if:

  • the last known address of the holder is in Illinois;
  • Illinois is the last recorded address of the holder;
  • the holder is domiciled in Illinois; or
  • the transaction took place in Illinois and the last known address of the holder is unknown or in a state that does not provide for the custodial taking of the property (see 765 ILCS 1026/15-302, et seq. for additional details).

Annual reports of holdings must be filed with the Illinois Treasurer before November 1 each year. Holders must keep records of their holdings for 10 years after filing.

The Illinois General Assembly is currently considering three competing bills with proposed amendments to the act, one of which (SB 2901) would reinstate the business-to-business exemption. None of these bills was passed prior to the May 31, 2018 close of the regular 2018 legislative session.

Excise and other indirect taxes

Excise taxes

What excise taxes are levied in your state, including applicable goods, rates, and filing formalities?

The State of Illinois imposes a number of excise taxes, including on tobacco products, liquor, hotel room charges, and telecoms, among others. A link to a complete list of state-imposed excise taxes can be found at http://tax.il.gov/businesses/taxinformation/excise. This site also contains a link to the various forms required for the computation and submission of these taxes.

Other indirect taxes

Are any other indirect taxes levied in your state?

Yes. Illinois taxes electricity and gas charges. A description of these taxes and links to forms used for the computation and submission of these taxes can be found at http://tax.il.gov/businesses/taxinformation/excise. The electricity excise tax is imposed on persons distributing, supplying, furnishing, or selling electricity in Illinois for use and consumption (not for resale). Certain municipalities, including the City of Chicago, impose a corresponding tax. The gas use tax is imposed on persons who purchase natural gas from outside of Illinois for their own use (not for resale). Purchasers may pay the gas use tax to their distributor or elect to become a self-assessor. Some municipalities, including the City of Chicago, impose a corresponding local gas use tax. Public utilities must also collect an energy assistance charge and a renewable energy charge monthly from their customers.

Other taxes

Do any other taxes apply to businesses in your state? If so, please include applicable tax bases, rates, exemptions/deductions, and filing formalities.

The City of Chicago imposes a number of additional taxes of which businesses should be aware, including a use tax on both non-titled and titled personal property and a personal property lease transaction tax. The city’s taxes are set forth in Chapter 3 (Revenue and Finance) of the Chicago Municipal Code. Cook County also imposes an array of taxes, which are set forth in Chapter 74 (Taxation) of the Cook County Code of Ordinances.

In Summer 2015 the Chicago Department of Finance issued two rulings which officially extended the city’s 9% personal property lease transaction tax to most online services. The Personal Property Lease Tax Ordinance was subsequently amended to include a narrowly-defined exemption for small businesses and a reduction of the rate for cloud-based services where the customer assesses its own data, as well as to codify the applicability of the Illinois Mobile Telecom Sourcing Rules. In contrast, the State of Illinois generally does not tax cloud-based services.

At present, neither the City of Chicago nor Cook County imposes a tax on sugared beverages. Cook County’s sweetened beverage tax was repealed effective December 1, 2017.

Incentives

Incentive schemes

Does your state offer any tax incentive schemes to attract businesses and promote investment?

Yes. Illinois’ Incentives and Tax Assistance Programs are administered by the Department of Commerce and Economic Opportunity (DCEO). For a full list of the various programs, see the DCEO website. One of the most popular programs is the Economic Development for a Growing Economy Tax Credit Program (EDGE). The EDGE program provides incentives to businesses to support job creation, encourage capital investment, and improve the standard of living for Illinois residents. The program offers a non-refundable corporate income tax credit calculated as a percentage (not to exceed 100%) of the expected income tax withholdings of new jobs created in the state. Tax credits are available to qualifying companies, equal to the amount of state income taxes withheld from the salaries of employees and newly-created jobs. Non-refundable credits can be used against corporate income taxes to be paid. EDGE credits are processed on an annual basis, for up to 10 years, based on employment ramp-up plans outlined by the business and agreed to by the department. For more information, contact ceo.edge@illinois.gov.

Planning considerations

Compliance

What tax compliance procedures and best practices should businesses operating in your state be aware of?

With respect to income tax, businesses should be aware that for taxable years beginning on or after December 31, 2017, Illinois amended its definition of “unitary business group” to eliminate the non-combination rule for group members (e.g., financial organizations, transportation companies, and insurers) that use different apportionment methods. The Department of Revenue is expected to issue regulations that will address the methodology that businesses will be required to file in combining group members using different apportionment methods in a unitary return.  In the interim, the department’s subgroup schedule (UB), available on the department’s website, provides guidance on the computation.

With respect to sales/use tax, businesses should be aware that the Illinois General Assembly has passed an amendment to the Retailers’ Occupation and Use Tax Acts that would adopt an economic nexus standard similar to that imposed by South Dakota, now pending before the U.S. Supreme Court in South Dakota v. Wayfair, Inc. (Docket No. 17-494) (HB 3342, effective October 1, 2018, now pending before the Illinois Governor for signature).

With respect to audit practices, businesses should be aware that the Illinois Department of Revenue, when requesting an extension of the statute of limitations period, commonly will ask taxpayers to sign an extension marked as “for the convenience of the taxpayer” rather than “for the convenience of the Department.” When a taxpayer signs an extension request marked for the taxpayer’s convenience, interest continues to run during the extended period. In contrast, if the extension is granted for the convenience of the department, interest does not run during the extended period. Businesses should consider negotiating this point with the department before agreeing to sign any extension agreement.

Strategic planning

What strategic planning considerations should businesses operating in your state bear in mind to optimize tax efficiency?

Businesses intending to organize in Illinois should consider corporate formation as a limited liability corporation in order to avoid the Illinois franchise tax.

Businesses intending to organize or expand their Illinois operations should contact the state’s Department of Commerce and Economic Opportunity for information regarding whether they may qualify for any of the state’s incentive programs.

The Illinois tax burden for businesses located in the City of Chicago or Cook County is substantially higher than elsewhere in the state, given the municipal, county, and regional transportation charges imposed. Businesses should consider these taxes, as well as the likely property tax burden, in evaluating the likely tax burdens to be imposed based on their choice of location.

Retailers intending to conduct business in Illinois should reference the state’s local sourcing regulations, which are summarized and linked to the Illinois Department of Revenue’s website.

Retailers intending to conduct business in Illinois also should be aware of the Illinois False Claims Act (740 ILCS 175/1, et seq., a qui tam statute modeled on the Federal False Claims Act). The False Claims Act permits a whistleblower to bring claims against taxpayers alleging the knowing failure to remit any state tax other than income tax. If a violation of the act is established, taxpayers can be subject to the payment of three times the tax in question, plus substantial penalties and attorneys’ fees for the complaining party. The act has been the subject of extensive litigation in Illinois, as well as a number of Illinois Appellate Court rulings (see, e.g., State ex rel. Beeler, Schad and Diamond, P.C. v. Target Corp., 367 Ill. App. 3d 860 (1st Dist. 2006); State ex rel. Beeler, Schad and Diamond, P.C. v. Burlington Coat Factory Corp., 369 Ill. App. 3d 507 (1st Dist. 2006); State ex rel. Beeler Schad and Diamond, P.C. v. Ritz Camera Centers, Inc., 377 Ill. App. 3d 990 (1st Dist. 2007); People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999; and People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2017 IL App (1st) 152668).