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How local taxes can impact small businesses

Local taxes are difficult and time-consuming to track, and often comprise a small percent of taxes a business has to account for, according to the Sales Tax Institute. But local tax laws can differ from state-level obligations, creating tax liability for small companies that haven't taken local taxes into account. 

The following case studies from Illinois are excerpted from a Sept. 17 release by Sales Tax Institute illustrate. They illustrate the impact local taxes can have on the rates small businesses charge. To read the full article, go to the Sales Tax Institute.    

 

Illinois has local Retailer’s Occupation Tax (sales tax) but not local use taxes. Since Illinois is an origin state, it has special rules regarding the sourcing of local Retailer’s Occupation Tax. The special rules look at the composite of the selling activities that comprise a retailer’s business in order to determine the jurisdiction in which the retailer must collect local Retailer’s Occupation Tax. If the composite of the selling activities occur within Illinois then the Retailer’s Occupation Tax will apply, which includes the appropriate local taxes.

Per the rules, there are 5 primary selling activities. If the retailer conducts at least 3 of these activities in the same location, then that location is where the transaction will be sourced. If within Illinois, then this is the location for determining the local tax under the Retailer’s Occupation Tax. If outside of Illinois, then the Use Tax will apply and local tax will not apply. The 5 primary activities are:

  • Location of sales personnel exercising discretion and authority to solicit customers on behalf of a seller and to bind the seller to the sale;
  • Location where the seller takes action that binds it to the sale, which may be acceptance of purchase orders, submission of offers subject to unilateral acceptance by the buyer, or other actions that bind the seller to that sale;
  • The location where payment is tendered and received, or from which invoices are issued with respect to each sale;
  • Location of inventory if tangible personal property that is sold is in the retailer’s inventory at the time of its sale or delivery; and
  • The location of the retailer’s headquarters, which is the principal place from which the business of selling tangible personal property is directed or managed. In general, this is the place at which the offices of the principal executives are located. When executive authority is located in multiple jurisdictions, the place of daily operational decision making is the headquarters.

Note that if a retailer performs 2 or less of the above primary activities in the same location, then 6 secondary rules come into play. And as you might expect there are exceptions and special sourcing rules for some types of businesses including internet sellers.

So what impact can these rules have on your business? Let’s look at 3 examples:

#1: A Retailer Located in Illinois Making Sales in and Headquartered Chicago.

Let’s say you are a retailer located in Illinois making sales in Chicago. Since you are located in Illinois, if you conduct at least 3 of the above 5 activities in Chicago, then you are required to charge Retailer’s Occupation Tax for Chicago at the rate of 10.25% on the sales regardless of where in Illinois you might ship the product..

#2: A Retailer Located in Illinois Making Sales in Chicago.

Now let’s say that you are a retailer located in Springfield, Illinois making sales to a customer in Chicago but you are conducting less than 3 of the above activities in Chicago. In this case, you would not charge the 10.25% Retailer’s Occupation Tax for Chicago. Instead, you would charge use tax at the lower rate of 6.25% that applies in Springfield.

#3: A Retailer Located Outside of Illinois Making Sales in Chicago

Let’s say that you’re a retailer located outside of Illinois making sales to customers in Chicago. You have a sales person in Illinois but all other sales activities are taking place outside the state. Per the Illinois rules, local Retailer’s Occupation Tax would not apply. Rather, use tax would apply. So you would charge use tax at the lower rate of 6.25%.

It’s plain to see how you could easily get tripped up when trying to determine the correct rate of tax to apply to your sales. If you weren’t aware of the specific rules for Illinois and erroneously charged the 10.25% tax, you could be overcharging your customers a whopping 4% in tax.

That adds up quick! And you don’t want to make a tax determination error like this come audit time. Not to mention, your customers might be a little angry that you were overcharging them 4% sales tax!

For these reasons, it is crucial that you are aware of local tax rules among the different jurisdictions where you operate. These sorts of special rules and idiosyncrasies abound throughout local jurisdictions. And as always, ignorance of the rules is no excuse if your company gets audited. 

Source: Case Study: How Local Taxes Can Impact Small Businesses
 

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Specialties: #stateandlocaltax, #salesanduse