Chicago Sets Safe Harbor Rules for Local Taxes—but Not Without Controversy
The U.S. Supreme Court’s seminal decision in South Dakota v. Wayfair, Inc. (Wayfair) essentially authorized economic nexus statutes for sales and use tax purposes as long as the taxpayer has a “substantial nexus.” Although South Dakota’s thresholds of $100,000 of sales or 200 transactions is viewed as a guide, it is still unknown if the thresholds lesser than those employed in South Dakota would be substantial.
To promote certainty, the City of Chicago issued an information bulletin on January 21, 2021, employing a safe harbor regarding some of its local taxes. Specifically, an out-of-state entity that receives less than $100,000 in revenue from Chicago customers during the most recent consecutive four calendar quarters will not be expected to collect the following taxes from its Chicago customers during the current calendar quarter:
- Chicago’s amusement tax, Chapter 4-156 of the Municipal Code of Chicago, as applied to amusements that are delivered electronically, such as video streaming, audio streaming, and online games
- Chicago’s personal property lease transaction tax, Code Chapter 3-32, as applied to nonpossessory computer leases
The safe harbor will only apply prospectively beginning July 1, 2021.
However, if the safe harbor does not apply, the City of Chicago may still determine an out-of-state entity has nexus. The information bulletin pointed out that Wayfair quoted Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009) where the U.S. Supreme Court held the quantity of business activity must be “substantial” before nexus is created. In performing its analysis, the City of Chicago will consider whether an out-of-state entity meets the economic thresholds that apply to Illinois; however, that factor will not necessarily be treated as determinative, unless the safe harbor applies. If the safe harbor does not apply, the City of Chicago may consider other factors, such as agreements the entity has with other businesses in Chicago; activities the entity’s employees or other agents perform on the entity’s behalf in Chicago; any physical presence the entity has in Chicago; advertising directed at Chicago customers; and any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago.
A few observations are of note. First, if an out-of-state entity merely advertises to Chicago customers, could that activity alone generate nexus? A careful reading of prior U.S. Supreme Court cases would seem to answer in the negative. While advertising alone may satisfy the Due Process Clause, it would not satisfy the Commerce Clause. Second, if the safe harbor is not met but the out-of-state entity advertises and makes sales to Chicago customers, what volume of sales or how much advertising is enough to generate nexus? Overall, there is still no clear guidance on the essence of “substantial” in making a nexus determination.
For additional guidance on the City of Chicago’s new safe harbor, contact your BKD Trusted Advisor™ or submit the Contact Us form below.