Lauren A. Ferrante is a tax partner in the Chicago office of Akerman LLP, David C. Blum is co-chair of the tax practice group in the firm’s Chicago office, and Stefi N. George is a tax partner in the firm’s New York office.
In this article, Ferrante, Blum, and George argue that the Illinois Department of Revenue’s recent expansion of marketplace facilitator legislation to existing state law is yet another example of a state tax agency stealthily applying Wayfair doctrine without legislative consent.
Copyright 2023 Lauren A. Ferrante, David C. Blum, and Stefi N. George.
All rights reserved.
Almost five years out, we know that the U.S. Supreme Court’s ruling in Wayfair1 prompted almost every state to not only enact legislation requiring out-of-state sellers to collect sales or use tax on sales for delivery into the state (when specific dollar or transaction thresholds are met), but likewise to require the same of out-of-state marketplace facilitators regarding their own sales and those sales they facilitate on behalf of third-party sellers.2
Illinois followed this model, enacting Wayfair and marketplace facilitator legislation effective October 1, 2018, and January 1, 2020, respectively.3 This fall, however, the Illinois Department of Revenue (DOR) went a step further, stealthily expanding the marketplace facilitator approach to the Automobile Renting Occupation and Use Tax Act (ART). Under this new guidance, set forth in a DOR publication,4 peer-to-peer car sharing platforms must collect and remit ART on car sharing transactions facilitated through their platforms. ART, imposed at the state and local levels on the short-term (one year or less) rental of automobiles, is collected from the rentee by the rentor and remitted to the DOR.5
At first glance, the publication appears fairly innocuous: It is titled “Automobile Renting Occupation and Use Tax” and segmented into three main sections on registration, compliance, and recordkeeping. But two sections contain a brief note instructing “an automobile rental company operating a peer-to-peer motor vehicle sharing platform” that it is subject to ART as a marketplace facilitator.
As a preliminary matter, what is the basis for this supposed obligation? Neither Wayfair nexus standards nor marketplace facilitator definitions are expressly included in the statute or regulations for ART. In some instances, other tax agencies simply adopted a Wayfair-like nexus standard by issuing nonbinding guidance and without relying on any authorizing law.6 Here, however, the publication relies on the ART’s incorporation by reference of the Illinois sales and use tax provisions regarding Wayfair and marketplace facilitator laws.7
While the DOR’s position that non-Illinois peer-to-peer car sharing platforms must collect and remit ART on rental transactions they facilitate is not entirely without statutory support (as noted, the ART incorporates by reference Illinois law), it does raise a number of concerns. First, the use of “stealth nexus” is problematic for taxpayers seeking to comply with the law. Nexus in particular is a threshold matter, and accordingly, the standards governing whether a purported taxpayer has a tax return filing and payment obligation should be clearly set forth in the law as a matter of sound tax policy and administration. Attempting to impose tax return filing and payment obligations on a new group of purported taxpayers regarding a new tax without clear, express statutory language is a gotcha at best and violation of taxpayers’ rights at worst.
Second, and relatedly, does the publication constitute sufficient notice to purported marketplace facilitator taxpayers of a new tax obligation? DOR regulations provide that publications are “designed to provide general information about the department and various topics of general interest to taxpayers and tax practitioners” and do “not represent binding positions of the Department of Revenue.”8 The publication itself cites a DOR private letter ruling, in which the department states — for the first time — that “it is the Department’s opinion that when a car rental facilitation company operates a peer-to-peer motor vehicle sharing platform it is acting as a marketplace facilitator under marketplace facilitator provisions of the Automobile Renting Occupation and Use Tax Act, as incorporated from the Retailers’ Occupation Tax Act.”9 A private letter ruling, by its nature, does not bind the DOR regarding taxpayers other than the requesting taxpayer.10 Thus, it appears that the department is turning a nonbinding ruling into informal guidance, none of which represents official, binding guidance on the taxpayer.
Also, what are the effective dates of the relevant sales and use tax statutes for purposes of incorporation into the ART? The ART’s language incorporating the relevant statutes became effective over 30 years ago, predating even Quill,11 which was overturned by Wayfair.12 Accordingly, the DOR would need the answer to this question to be “as amended from time to time” and thus on a rolling basis to support its position that Illinois’s Wayfair and marketplace facilitator laws create nexus for peer-to-peer car sharing platforms for ART purposes. Ironically, if such a platform seeks to comply with the publication, it may find it difficult, because the department’s regulations implementing the Wayfair and marketplace facilitator laws (Ill. Admin. Code tit. 86, section 131.101 et seq.) are not incorporated into the ART.13
In fact, months after the Court issued Wayfair, Illinois Gov. Bruce Rauner (R) vetoed a bill that would have amended the ART to impose a state tax collection obligation on peer-to-peer car sharing platforms, an action inconsistent with the publication’s position that those platforms are subject to the tax.14 The fact that this legislation failed to pass demonstrates that the DOR is trying to overreach by implementing this tax collection obligation unofficially and without authority in the face of a veto. Coherent tax policy dictates that the department should not act to make an end run around a gubernatorial veto.
This new guidance reflects the recent trend of quiet expansion of Wayfair. We have seen states and localities broadly expand upon the Wayfair ruling in numerous ways, including the enactment of marketplace facilitator provisions to target sales of non-titled tangible personal property and Wayfair thresholds to require collection of taxes other than sales and use taxes on sales. In the publication, the DOR is purporting to vastly expand Wayfair’s reach to require the collection of a non-sales and use tax for facilitation of the rental of titled personal property.15
As this analysis demonstrates, the Wayfair creep is troubling. In this instance, it occurred without any action by the legislature (and in the face of a veto of legislation on this very issue),16 raising significant concerns regarding sound tax administration and sufficient taxpayer notice. Of course, as the economy and technology change over time, new ways of doing business may not fit within current law, and state legislatures must ensure that the law evolves as the world changes. However, when a state wishes to impose an obligation on a new industry to collect a new tax, responsible tax policy requires transparency so that the obligation is explicitly set forth in the law. Let’s hope that occurrences like the DOR’s publication become isolated, and Wayfair’s stealthy creep stops.
FOOTNOTES
1 South Dakota v. Wayfair Inc., 585 U.S. ___, 138 S. Ct. 2080 (2018).
2 See Jerome R. Hellerstein, Walter Hellerstein, and Andrew Appleby, State Taxation, at Part V, ch. 19, paras. 19.04[1][a]-[b], 19.08[7][a]-[b] (2001 with updates through Aug. 2022).
3 See Public Act 100-0587, Ill. Gen. Assemb.; Public Act 101-0009, Ill. Gen. Assemb. While Illinois originally amended its Use Tax Act (UTA) to add Wayfair and marketplace facilitator nexus laws to its taxing regime (see prior citations), since those amendments, the Retailers’ Occupation Tax Act (ROTA and Illinois’s version of a sales tax) has been amended to add analog laws. Public Acts 101-0031 and 101-0604, Ill. Gen. Assemb. This patchwork of laws is controversial and outside the scope of this article. See, e.g., Keith Staats, “Oops, They Did It Again,” Illinois CPA Society (Winter 2019). Even in the absence of these laws, however, Illinois’s sales and use tax regime appears inconsistent with the Wayfair Court’s emphasis on standardization and state adoption of the Streamlined Sales and Use Tax Agreement. 138 S. Ct. at 2099-2100. See also id. at 2103-04 (Roberts, C.J. dissenting) (“Over 10,000 jurisdictions levy sales taxes, each with different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction. A few examples: . . . Illinois categorizes Twix and Snickers bars — chocolate-and-caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently.”) (citations and quotations omitted).
4 Illinois Department of Revenue, Publication 114, “Automobile Renting Occupation and Use Tax” (Sept. 2022).
5 See 35 Ill. Comp. Stat. 155/2, 155/3; Publication 114, supra note 4.
6 See, e.g., City of Chicago, “Information Bulletin — Nexus and Safe Harbor” (Jan. 21, 2021).
7 See 35 Ill. Comp. Stat. 155/3 (incorporating by reference 35 Ill. Comp. Stat. 120/1 and 120/2 of the ROTA, among many other ROTA provisions); 35 Ill. Comp. Stat. 155/4 (incorporating by reference 35 Ill. Comp. Stat. 105/2 of the UTA, among many UTA provisions). Interestingly, 35 Ill. Comp. Stat. 105/2d of the UTA, imposing the nexus thresholds triggering a tax collection obligation on a marketplace facilitator, is not incorporated by reference into the ART.
8 Ill. Admin. Code tit. 2, section 1200.130(b).
9 Illinois DOR, ST-22-0002, at 8 (Feb. 1, 2022).
10 Ill. Admin. Code tit. 2, section 1200.110(a).
11 Quill Corp. v. North Dakota, 504 U.S. 298, 307 (1992).
12 See Public Act 86-1475, Ill. Gen. Assemb., 1990 Ill. Legis. Serv. P.A. 86-1475 (West) (language incorporating relevant sales/use tax provisions in effect before statutory amendments effective Jan. 10, 1991).
13 See Ill. Admin. Code tit. 86, sections 180.145, 190.175.
15 Accordingly, Ill. Admin. Code tit. 86, section 131.130(c), relied on by the DOR in the publication to support the DOR’s position that the sale of titled property (motor vehicles) facilitated over a marketplace is subject to tax, is not technically incorporated into the ART. See Publication 114, supra note 4, at 11; see supra note 13.
16 See supra note 14 and related text.
END FOOTNOTES