TaxJar

How to File Sales Tax Under Illinois’ Tricky Marketplace Facilitator Law

by Graham Martin

TaxJar customers are reporting confusion when filing their sales tax returns after Illinois’ Marketplace Facilitator Law went into effect on January 1, 2020. 

What is going on with Illinois sales tax?

To make a long story short, Illinois state laws mandates that Amazon, eBay, Etsy, Walmart and other marketplace facilitators are required to collect state use tax on marketplace sellers’ behalf in Illinois

In most cases, this process is straightforward and works like this: You make sales on an online marketplace. Your marketplace collects and remits sales tax to the state on your behalf. All you have to do is file a sales tax return showing that the marketplace on which you sell collected and remitted sales tax on your behalf.

Typically, when a state enacts a Marketplace Facilitator law, the state expects the marketplace to collect and remit all applicable state and local taxes on behalf of their sellers. However, Amazon has announced that they are not collecting and remitting Retailers’ Occupation Tax (ROT) , and this has caused major sales tax filing headaches for Amazon sellers. Let’s break down what’s going on.

How Illinois Sales Tax Works

If a seller outside of Illinois makes a sale to a buyer in Illinois, they are required to charge the state’s flat 6.25% tax rate. Amazon’s sales tax collection engine handles this scenario correctly. 

But here’s the problem. When it comes to intrastate sales (sales from locations inside Illinois to locations also in Illinois), the Illinois Department of Revenue (IDOR) requires that sellers collect and remit an additional Retailers’ Occupation Tax (ROT). The ROT is generally 2%-4% depending on the buyer’s “ship to” address. 

Amazon and the Illinois Retailers’ Occupation Tax (ROT)

Unfortunately, Amazon has notified all Illinois sellers that they currently do not support collecting and remitting ROT on their sellers’ behalf:

Yes, even though marketplace facilitator laws typically require that they do so.

More Complications for Intrastate Marketplace Sellers

To make sense of this and what it means for sellers, TaxJar’s research team consulted the IDOR for more information. And this is where things got even more complicated for sellers. We’re breaking it down for you below, you can read the state’s official guidance on the matter here. 

According to the IDOR, in a scenario where a seller makes intrastate (Illinois to Illinois) sales and must collect the state’s 6.25% use tax plus the ROT, the marketplace should NOT remit either the use tax or the ROT to the Illinois Department of Revenue on behalf of the seller. (Remember, Amazon has reported that they are not collecting the ROT anyway.)

Instead, according to the IDOR, the marketplace should transmit  any sales tax collected in this specific intrastate sales scenario back to the seller, so that the seller can remit the tax as they are filing their own Illinois sales tax return. 

For sellers, this means that Amazon should collect all 6.25% Illinois tax on your behalf. But, for any tax collected on intrastate (Illinois to Illinois) sales, they should remit the 6.25% tax they collected on your behalf back to you. And again, they are not collecting the ROT, even though they should. 

And then, when you, the seller, file your Illinois sales tax return, you should remit that 6.25% + the 2%-4% ROT on all intrastate sales to the state. 

This means that if you are an Amazon seller, then Amazon is not currently collecting all the Illinois sales & use tax that you owe on your behalf. This further means that you are responsible for paying Illinois Retailers’ Occupation Tax (ROT) out of your own pocket until Amazon releases functionality to, in accordance with Illinois law, calculate and collect the ROT on your behalf.

When Marketplaces and States Disagree, Sellers get Caught in the Middle

It was clear both sellers and marketplaces would experience growing pains when Marketplace Facilitator laws went into effect, and this is a major one that could cost some sellers money out of their profits through zero fault of their own. 

At TaxJar, we’ve always been about putting online sellers first. We know this is bad news for sellers who are trying to do the right thing and handle their sales tax obligations.  We’ve spoken with the Illinois Department of Revenue to determine if there is a way to prevent sellers having to pay ROT out of their own pockets. Unfortunately, as we detailed above, we do not have good news to report. 

However, we can help you mitigate the damage to your bottom line as much as possible while still maintaining compliance with the law.

But first: 

Who is required to remit Illinois ROT out of pocket?

To sum it up, the affected sellers are marketplace sellers with a business presence in Illinois. This includes: 

  • Sellers based in Illinois or with an employee, warehouse, or other business presence in Illinois where the “ship from” address is also located in Illinois
  • Amazon sellers when an order’s “ship from” location is an Illinois-based Amazon fulfillment center

Keep in mind that not all orders are affected. Sellers are only required to collect Illinois ROT when shipping from an Illinois address to a buyer in Illinois. .

How does TaxJar help Illinois marketplace sellers file and remit sales tax correctly?

This is one of those no-win sales tax situations where technology and state sales tax law are at odds and sellers are stuck in the middle. But here’s how you can cope with this tax until Amazon releases a fix. 

Sign Up for TaxJar AutoFile to Stay Compliant with Illinois Sales Tax Law

TaxJar’s sales tax filing service, TaxJar AutoFile, will currently file sales tax returns in accordance with Illinois state law. This means that your interstate sales will be reported as exempt marketplace sales, and your intrastate sales will be reported as non-marketplace sales.

File your Illinois Sales Tax Return on your Own Using TaxJar Reports

If you choose to file sales tax on your own using TaxJar’s reports, you’ll see that your Illinois report is updated to comply with Illinois sales tax law by separating the interstate and intrastate sales in Illinois. That means your Illinois sales tax report in TaxJar will display a tax due amount of combined state use tax + ROT for your intrastate sales.

In this case, you’ll still report your interstate sales as marketplace sales on your Illinois sales tax return. But you’ll need to report your intrastate Illinois sales as non-marketplace sales on your Illinois sales tax return. 

This tax due amount may be higher than the amount your marketplace collected if your marketplace, like Amazon, did not collect Illinois ROT on your behalf. 

Next Steps

Have a Conversation with your Marketplace

In their letter to Illinois sellers, Amazon said that they are working to update their ability to collect Illinois sales tax correctly on behalf of marketplace sellers. If this situation has affected your business’s bottom line, we recommend letting Amazon know that you would appreciate that fix sooner rather than later. 

Unlike Amazon, Walmart, Etsy, eBay and other marketplaces have not announced whether or not they are collecting ROT on behalf of intrastate Illinois sales. However, Amazon has consistently shown themselves to have the most advanced sales tax collection engine among marketplaces. So it is quite possible that other marketplaces are also handling this tax incorrectly, which could result in sellers owing more ROT out of pocket. We recommend checking with your marketplace to ensure that they are tackling sales tax correctly on your behalf.

Consult a Sales Tax Advisor

Last but not least, if you are concerned about your sales tax collection and remittance, we always recommend consulting with a state & local tax expert (SaLT). Don’t have a sales tax advisor? Choose one from our list of vetted sales tax experts here.

The sales tax landscape for online sellers has changed dramatically since the South Dakota v. Wayfair Supreme Court decision. Unfortunately, as the new rules of sales tax shake out, some eCommerce businesses have been unfairly caught in the middle. 

Stay tuned here to the TaxJar blog as we continue to investigate these issues. To learn more about how we can simplify sales tax compliance for your business, visit www.taxjar.com/how-it-works.

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