Illinois Study Questions SSTP

Published December 1, 2004

Supporters of a plan to require out-of-state retailers to collect sales tax from Illinois customers to send back to Illinois say the state and local governments could gain $500 million of revenue, but a report by a Chicago-based government research group says the state stands to lose $295 million.

On October 18, The Civic Federation, a nonpartisan organization that focuses its activities on the Chicago region, issued “The Potential Impact of the Streamlined Sales and Use Tax Agreement on Illinois,” a report criticizing the Streamlined Sales and Use Tax Project (SSTP). The SSTP is a national effort sponsored by retail industry groups and the National Conference of State Legislatures to simplify and make uniform the sales- and use-tax statutes of most states. This is being done, supporters say, to encourage the taxation of Internet, catalog, and other sales by out-of-state retailers.

All states but four collect sales and use taxes, and many of those that do collect the taxes exempt or reduce taxes on certain items, such as food or medicine. Local governments in states with sales taxes also collect their own sales taxes on top of the state taxes. Only states that enact the SSTP agreement would be subject to the out-of-state collections.

Under the proposed changes, sales taxes would be collected based on where a buyer takes possession of an item, instead of where the sale is made. As a result, a Chicago resident who bought an item over the Internet from an out-of-state retailer would be charged the sales tax rate that applies in Chicago.

Currently, in most instances that sales tax would not be charged at all.

Questions about Expected Benefits

The Civic Federation report says the expected benefits for Illinois would not materialize because of unrealistically high projections of revenue increases and underestimation of compliance costs, including loss of lease tax revenue in Chicago and shifting of sales taxes from one jurisdiction to another.

Illinois does not tax receipts from lease payments on personal property. “Instead, the lessor is considered the end-user of the goods and is taxed on the sales price of the goods when they are purchased,” the report notes. “Compliance with the Agreement may require that Illinois begin taxing the lease payments rather than the purchase price of the goods. …

“Changes to the taxation of leased property would also affect the City of Chicago’s Personal Property Lease Transaction Tax,” according to the report. “Currently, Chicago utilizes its home rule authority to tax lease payments at a rate of 6 percent under a local ordinance that is independent of the sales tax. Because the Agreement requires state and local sales tax bases to be identical by December 31, 2005, the City of Chicago would probably have to repeal its Lease Transaction Tax, at least to the extent that it applies to tangible personal property.”

The organization projects Illinois could have realized $86 million in additional sales tax revenue during fiscal year 2001 and $81 million in fiscal year 2002 from taxing remote retail sales. Local governments could have realized $21 million in fiscal 2001 and $20 million in fiscal 2002, according to the study. After totaling expected revenue increases and compliance costs, however, the Civic Federation report projects “a potential for the State of Illinois to lose $295 million more than it gains from making the changes necessary to join the Streamlined Sales and Use Tax Agreement.”

David Vite, president and chief executive of the Illinois Retail Merchants Association and a delegate to the SSTP, said the Civic Federation report is wrong on several counts.

“The City of Chicago will not lose $100 million, as they say,” Vite said. “I talked to the co-chairman of the SSTP, and the agreement allows for lease tax payments to continue to be collected up front.”

Vite also argues the Civic Federation’s analysis of business-to-business transactions is wrong. The group claims such sales account for the bulk of remote transactions and already result in sales tax collections.

Vite acknowledges businesses usually do pay taxes on all transactions, because they are audited.

“However,” said Vite, “businesses are pretty sophisticated. There is a 2 percent difference [in sales tax rates] between Chicago and outside the city. Many Chicago businesses have set up purchasing corporations outside of the city to purchase goods. Because there is not a corresponding use tax, they end up not paying 2 percent to the city.

“If the streamlined sales tax comes, they will pay that 2 percent, because it’s based on point of delivery instead of point of purchase,” Vite said.

Some Municipalities May “Cry and Scream”

The Civic Federation says Illinois sales tax receipts have remained stable, despite growing Internet retail sales, indicating the state is not losing sales tax money. But Vite argues that if Internet and catalog retailers were collecting sales taxes based on where purchased items are delivered, the state’s sales tax receipts would be climbing.

Vite notes, however, that some municipalities probably would “cry and scream” at the idea of point-of-delivery rather than point-of-sale taxation.

“Those municipalities would be ones that have had the benefit of primarily big-ticket item companies, like lumberyards or window manufacturers or things like that,” Vite said. “A truck from that window manufacturer might deliver product to every municipality in Illinois, but the one city gets the benefit of all those purchases. Under SSTP, if windows are delivered to Woodstock or McHenry [suburban Chicago communities], those towns will get the benefit of those sales.”

The SSTP was created in 2000 to develop measures to design, test, and implement a system that simplifies sales and use taxes. Thirty-four states and the District of Columbia approved the Streamlined Sales and Use Tax Agreement that year.

In early 2003, legislation designed to conform state sales and use tax statutes to the agreement began to be introduced in state legislatures. The agreement says it will go into effect when 10 states representing at least 20 percent of the population of the states that currently impose a sales tax come into compliance. It would apply only in states that approve the SSTP agreement.

As of July 1, 2003, 20 states representing 31.7 percent of the U.S. population in states with sales and use tax levies had enacted legislation implementing the SSTP agreement, according to Taxware Resources, a developer of global, transaction-based tax calculation and compliance systems. However, two of those states, Texas and Washington, did not enact legislation implementing destination sourcing, and most observers believe this will prevent them from being in compliance.

Ohio adopted destination sourcing with an effective date of January 1, 2004, but later enacted legislation delaying the effective date to January 1, 2005. As a result, the 20 percent threshold for implementation of the SSTP will not be reached until the early part of 2005, according to Vite.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.