Use Taxes On Out-Of-State Purchases

Contrary to popular belief, the mere fact that Illinois consumers purchase goods outside the state does not mean that they are not subject to the Illinois use tax imposed upon the purchase of personal property for use in Illinois. Recently, a Missouri furniture store, with over 30% of its sales to Illinois residents, was required to collect Illinois use tax on those sales despite contrary opinions from the Illinois Department of Revenue. This issue is of particular concern to Illinois businesses and consumers, as well as to businesses in the states bordering Illinois.

Four-Part Test

The United States Supreme Court has held that a state tax is not an unconstitutional burden on interstate commerce if it satisfies a specific four-part test. The tax must be applied to an activity that has a substantial connection with the taxing state, and the tax must be fairly apportioned. The tax cannot discriminate against interstate commerce, and, finally, the tax must be fairly related to the services provided by the state.

For the first part of the test, a vendor must have a physical presence in the taxing state. The presence does not have to be substantial, but must be more than slight. Such a physical presence may be demonstrated by the presence of the vendor's property in the taxing state or by the fact that the vendor conducts economic activities in the taxing state either through its personnel or on its behalf.

The Illinois Supreme Court found that significant product deliveries in Illinois (942 in a 10-month period, or a minimum of about one every other day) were more than a slight physical presence in the state. Other states hold that the delivery of tangible personal property -- other than by mail or another common carrier (i.e., United Parcel Service or Federal Express) -- more than 12 times during a calendar year subjects a vendor to use tax collection. Extensive advertising in Illinois constitutes direct and active solicitation and procurement of the consumer market in Illinois, which also establishes a substantial connection with the state.

A tax must also be fairly apportioned to prevent multiple taxation by ensuring that each state taxes only its fair share of an interstate transaction. Illinois addresses this issue by granting an exemption from use tax for tangible personal property that has been subjected to sales, purchase, or use taxes in other states. Additionally, the state taxes only the deliveries made in Illinois, and does not attempt to tax deliveries to non-Illinois customers.

Illinois imposes a tax on its own retailers at the same rate as its use tax of out-of-state vendors. Thus, requiring an out-of-state vendor to pay the same tax as an in-state vendor does not discriminate against interstate commerce. The court and the legislature simply evened the playing field by requiring out-of-state vendors to collect the same tax from Illinois consumers as they would have to pay if they had made their purchases in Illinois. This clearly benefits Illinois businesses by discouraging out-of-state purchases for the mere purpose of avoiding Illinois tax.

The requirement that the measure of the use tax must be reasonably related to the taxpayer's presence or activities in the state does not mean that the state is required to provide a detailed accounting of the services it provides to the taxpayer on account of the activity being taxed. Such services as public roads, police protection, a judicial system, and all other advantages provided by the state's maintenance of a civilized society have been held to be sufficient.

Under Illinois law, a taxpayer or retailer charged with collecting the tax cannot necessarily rely on the information given to it by employees of the State Department of Revenue. Even if the Department's employees make a mistake or give the wrong information regarding tax liability, this does not prevent the imposition of the tax by the Department. Consequently, retailers should seek proper tax advice based upon a detailed analysis of their specific business as applied to the above four-part test.

This website is not intended to constitute legal advice or the provision of legal services. By posting and/or maintaining the website and its contents, Lucas Law does not intend to solicit business from clients located in states or jurisdictions outside of Illinois wherein Lucas Law or its individual attorney(s) are not licensed or authorized to practice law.