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Illinois Legislative Update

During the seven-month period from August 2007 to January 2008, the governor signed three tax bills into law, which will affect businesses. The original bill (Public Act 095-0233) was signed into law on August 16, 2007. Again in January 2008, the governor signed two additional bills into law (Public Act 095-0707 and Public Act 095-0708) providing for additional tax law changes, technical corrections to the previous bill and additional tax increases for the bailout of the mass transit system. The following is a brief summary of some of the changes included in these bills:

1. Public Act 095-0707 (enacted on January 11, 2008) Technical Corrections and Changes
   1. Sales tax exemption for manufacturing and assembly machinery and equipment expanded to include production-related tangible personal property.
      
      Public Act 095-0707 expanded the machinery and equipment exemption to include "production-related tangible personal property" purchased on or after July 1, 2007 and before June 30, 2008. The exemption is subject to several limitations, one of which is the $10 million maximum exemption allowed for all qualifying property purchased for use in Illinois by all businesses.
      
      The Illinois Department of Revenue (IDOR) is still grappling with how to implement this portion of the law due to its retroactive nature and overlap with the manufacturer's purchase credit (MPC). The IDOR has indicated that all businesses should continue to pay sales tax to their vendors on these qualifying purchases. After June, taxpayers can submit a claim for a refund directly to IDOR. After accumulating the refund claims, the IDOR will allocate the $10 million refund among the various businesses based on their relative claim to the total claims filed.
      
      The items qualifying for the expanded exemption are the same items that a business can use their MPC to offset. MPC is earned by purchasing exempt machinery and equipment. If the taxpayer uses their MPC to reduce the tax on purchases of production-related tangible personal property they cannot claim the refund under Public Act 095-0707.
      
      We will provide additional guidance after the IDOR determines how it will implement the new law.
   2. Income Apportionment for Services and Intangible Property
      
      Prior to the change made by Public Act 095-0233 in August, gross receipts from services and intangibles were sourced to the state with the greatest cost of performance. This provision was changed for taxable years ending on or after December 31, 2008. The August law provides that services will be sourced to the state where the benefit of the service is received or where the use of the intangible is realized. For example, if the services are performed for the benefit of a customer's Illinois location, it is an Illinois sale, regardless of where the work was performed. If the benefit or use of a service or intangible asset cannot be determined, it is excluded from both the numerator and denominator of the sales factor.
      
      In January, Public Act 095-0707 made additional changes to the sourcing rules for services and intangibles. In the case of interest, net gains and other income from intangible personal property, the state has reverted to greatest cost of performance provisions (different rules apply for dealers of intangible property).
      
      In addition, Public Act 095-0707 modified the sourcing rules for receipts from the performance of services. If the taxpayer provides services to a corporation, partnership or trust, the taxpayer must have a fixed business location in the state where the benefit of the service is received in order for the receipt to be sourced to that state. If the service is received by a corporation, partnership or trust in a state in which the customer does not have a fixed place of business or if it is not readily determinable what state received the benefit of the service, the services will be deemed to be received at the location of the customer's office that ordered the services. If the ordering office cannot be determined, the services will be sourced to the customer's billing address. Finally, if the taxpayer is not taxable in the state to which the services are sourced, then the sale is excluded from both the numerator and denominator of the sales factor.
   3. Nonresident Withholding
      
      In the August legislation, Illinois joined a growing list of states that require flow-through entities to withhold income tax from its nonresident owners based on their share of the entity's profits. Publicly traded partnerships and nonresident owners included in a composite return were excluded from this withholding requirement.
      
      Public Act 095-0707 added investment partnerships and tax-exempt entities under IRC 501(a) to the list of entities that are exempt from the new withholding requirements. The bill also provides that nonresident owners (other than individuals) can provide the flow-through entity with a withholding exemption certificate in the form and manner prescribed by IDOR. IDOR can revoke this certification and notify the flow-through entity if the nonresident owner is not abiding by the terms of the certificate.
2. Public Act 095-0708 (enacted on January 18, 2008) Illinois Mass Transit Bill
   
   The bill authorizes the RTA Board to impose an increase to the Regional Transportation Tax portion of the state's sales and use tax. For Cook County, the rate would be increased from 1% to 1.25%, and in the collar counties of DuPage, Kane, Lake, McHenry and Will, the rate would increase from .25% to .75%.
   
   This increase applies to all sales of tangible personal property subject to the Retailer's Occupation Tax or Service Occupation Tax including food and drugs. The increase also applies to the privilege of using titled property in Cook or any of the collar counties. For example, in Chicago the sales tax rate collected by retailers and registered service providers will increase from 9% to 9.25%. The rate for sales of food and drugs will increase from 2% to 2.25%. As a second example, in Glen Ellyn (DuPage County) the current rate of 6.75% will increase to 7.25%, and the rate for food and drugs will increase from 1.25% to 1.75%.
   
   The new tax rates will be effective on April 1, 2008.
   
   It should also be noted that Cook County recently passed a 1% sales tax increase as part of its budgeting process. The effective date of this increase is yet to be determined.
3. Other Changes If you have specific questions on how the new law will affect your business, contact Deb Rood at 312-980-2995 or your Blackman Kallick representative.
   1. Sourcing rules for telecommunications, financial organizations and trucking industries (Public Act 095-0707).
   2. Sourcing rules for broadcasting, cable, advertising, publishing, utilities, etc. will be prescribed by IDOR (Public Act 095-0707).
   3. A number of changes were also made in the area of real estate investment trusts to close down perceived loopholes.
   4. Changes concerning the penalties for failure to file returns or statements with respect to reportable transactions.

If you have specific questions on how the new law will affect your business, contact Jason Parish at 312-980-2959 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.