Illinois Enacts Major Tax Laws Affecting Income and Sales Taxes
Between February and August 2019, Illinois passed a series of bills that make significant updates to the state’s income and sales tax provisions. The key income and wage changes include:
- The approval of a 2020 ballot measure to move from a flat individual income tax rate of 4.95% to graduated rate brackets
- An increase in the corporate income tax rate to 7.99% in 2021 (if the ballot measure passes)
- A phase-out of the corporate franchise tax from 2020 to 2024
- A tax amnesty program that runs from October 1, 2019, to November 15, 2019
- An increase in the state’s minimum wage, a corresponding withholding credit for small employers, and a new wage withholding rule for nonresidents working in the state
Sales tax changes include
- Expansion of the state’s exemption for machinery and equipment to include production related tangible personal property that is used during the manufacturing process
- New local tax sourcing rules for remote sellers
- A motor vehicle trade-in tax credit of $10,000 starting January 1, 2020
- A new parking excise tax that begins January 1, 2020
Income tax updates
Up for a vote: graduated personal income taxes and a corporate income tax increase
Illinois currently imposes a flat individual income tax rate of 4.95% under the state’s current constitution. The new legislation places a measure on the November 2020 ballot that would amend the Illinois Constitution to allow a graduated personal income tax. If the amendment passes, the new graduated rates will be effective for tax years beginning on or after January 1, 2021, and will range from 4.75% to 7.99%.
This new legislation would also increase the corporate income tax rate from a flat 7% rate to a flat 7.99% rate, also effective for tax years beginning on or after January 1, 2021. Like the income tax rate changes, the corporate rate will only become effective if Illinois voters approve the ballot measure in 2020.
Franchise tax phase out from 2020 to 2024
For many years, Illinois has imposed its franchise tax on domestic and foreign corporations for the authority to transact business in Illinois. The tax is measured by a corporation’s paid-in capital after apportionment to Illinois, and unlike Illinois’ other taxes, it is administered by the Illinois Secretary of State rather than the Department of Revenue.
S.B. 689 phases out the Illinois franchise tax from 2020 to 2024. The phase-out exempts increasing amounts of a taxpayer’s franchise tax liability as follows:
|For Tax Years Beginning||Amount of Exempt Tax Liability|
|On or after January 1, 2020, and before January 1, 2021||$30|
|On or after January 1, 2021, and before January 1, 2022||$1,000|
|On or after January 1, 2022, and before January 1, 2023||$10,000|
|On or after January 1, 2023, and before January 1, 2024||$100,000|
|On or after January 1, 2024||No tax due|
Tax amnesty coming October 1 – November 15
Illinois’ recent legislation includes a tax amnesty period that runs from October 1, 2019, to November 15, 2019. The amnesty covers taxes originally due from periods ending after June 30, 2011, and prior to July 1, 2018. It also covers the Illinois franchise tax for taxable periods after March 15, 2008, through June 30, 2019.
Taxpayers who voluntarily come forward to disclose tax liabilities will have applicable penalties and interest abated. Unlike some amnesty programs, the new law does not provide any “post-amnesty penalty” for eligible taxpayers that do not participate.
New 30-day wage rule for nonresidents working in Illinois
Historically, Illinois has used a localization test for determining whether a nonresident individual was subject to Illinois’ individual income tax upon his or her wage income. This approach is highly unusual because, while most tax an employee’s wage income only if the related work was physically performed there, Illinois’ historical approach taxed 100% of the wages of an employee whose services are “localized” in the state, even for work physically performed outside of Illinois.
Under S.B. 1515, signed into law on August 26 and effective for tax years ending on or after December 31, 2020, Illinois replaces its localization test with a new 30-day rule. Under this new law, nonresident individuals owe Illinois’ individual income tax on all wages for any tax year if they perform services in Illinois for more than 30 working days during that tax year.
A day is counted as working in Illinois if the employee spends more time working while physically present in Illinois that day than working in other states. Time spent travelling in Illinois counts, but services performed due to a disaster or emergency do not.
To implement this new law, employers are required either to track the number of days that their nonresident employees spend in Illinois each year, or to obtain a written assertion from each nonresident employee of the number of days the employee expects to work in Illinois during the year.
Foreign-derived intangible income add-back
The 2017 Federal Tax Cuts and Jobs Act created a deduction for 37.5% of foreign derived intangible income (FDII) for federal income tax purposes. Effective for tax years beginning on or after December 31, 2018, Illinois S.B. 689 requires corporations to add back any federal deduction for FDII.
Sales, use, and excise tax changes
New manufacturing machinery and equipment sales tax exemption
Historically, Illinois manufacturers have been allowed a sales tax exemption for only the purchase of manufacturing machinery and equipment. But effective July 1, 2019, Illinois expanded the exemption to include tangible personal property related to production — if the property is primarily used or consumed in the manufacturing process.
According to an Illinois Department of Revenue Q&A on this topic, the term “primarily” means an item that is used over 50% of the time in manufacturing and/or assembly. The manufacturing process is defined to include research and development, preproduction material handling, receiving, quality control, inventory control, storage, and staging and packaging for shipping and transportation purposes.
The expanded exemption includes tangible personal property that is purchased by a manufacturer or construction contractor for incorporation into real estate within a manufacturing facility for use in a production-related process.
In addition, a limited list of supplies and consumables fall under the definition of production-related tangible personal property, including fuels, coolants, solvents, oils, lubricants, adhesives, hand tools, protective apparel, and fire and safety equipment. Companies that purchase items that will be used more than 50% of the time in a manufacturing facility within the scope of manufacturing (receiving of raw materials all the way to shipping) should take a close look at this new exemption. Below are some situations that a manufacturer may want to consider when evaluating this exemption:
- Material handling equipment, forklifts, conveyors, golf carts, bins, and containers are likely exempt if used in shipping, receiving, the plant floor, research and development, and quality control
- Pallets are likely exempt even if they are only used to store finished goods in a warehouse
- Cleaning chemicals may be exempt if used to clean manufacturing equipment and manufacturing facilities
- Tools and tooling may be exempt if used more than 50% in a manufacturing process
- Materials, supplies, and consumables are likely exempt if used to maintain machinery and equipment or if they are consumed in the manufacturing process
- Personal protective equipment such as ear and eye protection, face shields, masks, hard hats, gloves, hair nets, gowns, aprons, and other protective clothing may be exempt
- Safety equipment could be exempt even if not required by law and not attached to manufacturing machinery and equipment
To claim the exemption, the purchaser must maintain records to prove or support that the machinery, equipment, supply, or consumable is used more than 50% of the time in an exempt process. Manufacturers can take advantage of the exemption by providing Form ST-587 to their vendors, which is the exemption certificate specific to manufacturing, production agriculture, and coal and aggregate mining. Currently there is no blanket certificate box to check for manufacturing, and thus the exemption certificate must be provided for each purchase. The Illinois Department of Revenue is in the process of drafting emergency regulations.
Local tax rates apply for remote sellers that meet economic nexus thresholds
Under prior law, as of October 1, 2018, remote retailers who met Illinois’ sales tax economic nexus thresholds ($200,000 in annual Illinois gross receipts or 200 separate transactions per year with Illinois purchasers) were only required to collect Illinois’ state-level sales and use tax. Previously, remote retailers who did not have a place of business in Illinois were not required to collect local sales and use tax on sales delivered to Illinois customers. This had the effect of allowing out-of-state retailers to charge lower tax rates on sales to Illinois customers than their in-state counterparts.
However, 46 states have enacted legislation by this point in 2019 following the Wayfair decision, and Illinois is one of them. Effective July 1, 2020, remote retailers that exceed the above economic nexus thresholds will be required to collect both the state-level and local-level sales tax on their sales to Illinois customers. Illinois accomplished this result by changing from an origin-sourcing rule to a destination-sourcing rule for remote retailers who exceed the state’s economic nexus threshold.
Trade-in credit for motor vehicles capped at $10,000
Illinois law has historically excluded the value of tangible personal property from the sales tax base when it is traded in as part of a sale of property of a like kind or character. Beginning January 1, 2020, the trade-in credit for motor vehicles designed to carry no more than 10 persons is limited to a maximum of $10,000. The value of such a traded-in vehicle above $10,000 will be included in the sales price of the purchased vehicle and will thus become subject to tax.
New parking excise tax
Tax reform changed the federal tax rules for businesses who provide parking for their employees and Illinois has also updated their rules. Illinois S.B. 690 enacts a new excise tax beginning January 1, 2020, that requires parking space and garage owners and operators to collect a 6% excise tax on the purchase price of parking spaces rented on an hourly, weekly, or daily basis, and 9% of the price for parking spaces paid for monthly or annually.
The tax does not apply to residential parking provided in a lease, hospital parking for employees, or parking areas with fewer than three spaces.
Minimum wage increase and withholding tax credit
Minimum wage increases for regular and youth wage
Under S.B. 1, Illinois’ minimum wage will gradually increase to $15 per hour using a series of adjustments over a six-year period, starting on January 1, 2020.
Prior to the enactment of S.B. 1, the regular minimum wage (for workers at least 18 years old) had remained at $8.25 since July 2010. Under S.B.1, the regular minimum wage will first increase from $8.25 to $9.25. After six months, the hourly minimum wage will rise to $10 per hour through the end of 2020, and will then increase one dollar per hour per year until it reaches $15 per hour on January 1, 2025.
For youth employees (those under age 18) who work fewer than 650 hours per calendar year, S.B. 1 mandates a lower rate of hourly wage increases.
Below is a summary of the minimum wage increases mandated by S.B. 1:
|Period||Regular Minimum Wage (Individuals Age 18 or Older)||Youth Wage (Individuals Under 18 Who Worked Under 650 Hours for Employer)|
|1/1/2020 – 6/31/2020||$9.25||$8.00|
|7/1/2020 – 12/31/2020||$10.00||$8.00|
|1/1/2021 – 12/31/2021||$11.00||$8.50|
|1/1/2022 – 12/31/2022||$12.00||$9.25|
|1/1/2023 – 12/31/2023||$13.00||$10.50|
|1/1/2024 – 12/31/2024||$14.00||$12.00|
|1/1/2025 and later||$15.00||$13.00|
What is the withholding tax credit and who qualifies for it?
S.B. 1 includes payroll withholding tax credits to help smaller businesses offset the cost of these minimum wage increases. Employers with 50 or fewer Illinois full-time employees who make minimum wage may qualify for this credit. An employer must aggregate its employees to determine the threshold if the employer either operates more than one franchise or is part of a unitary business group.
The credit excludes employees who have worked fewer than 90 consecutive days before the reporting period, though credits can accrue during that 90-day period for future reporting periods.
Not all small businesses will be eligible to claim this credit. To be eligible, an employer’s average wage paid to each employee making less than $55,000 annually must have increased over the average wage paid in the prior year for employees making less than $55,000.
How much is the credit?
The credit is not refundable, and is calculated as a percentage of the difference between qualified employees’ prior wages and increased wages under the new law.
|Maximum Amount of Allowable Credit|
|25% of the wages paid for 2020 quarterly reporting periods|
|21% of the wages paid for 2021 quarterly reporting periods|
|17% of the wages paid for 2022 quarterly reporting periods|
|13% of the wages paid for 2023 quarterly reporting periods|
|9% of the wages paid for 2024 quarterly reporting periods|
|5% of the wages paid for 2025 quarterly reporting periods|
|5% of the wages paid for 2026 quarterly reporting periods (but only for employers with more than five employees|
|5% of the wages paid for 2027 quarterly reporting periods (but only for employers with five or fewer employees)|
How we can help
While these changes are significant, you don’t have to feel overwhelmed by all of the tax law updates. CLA’s state and local tax professionals can help you determine how the Illinois changes affect your business, and how to better take advantage of opportunities available under the new laws.