Board Policy
Illinois Chamber Tax Institute Tax and Fiscal Policies

adopted June 2006

The Illinois Chamber of Commerce Tax Institute believes that Illinois’ fiscal policy and business tax laws should actively promote economic growth in Illinois by encouraging increased capital investment, productivity, and the creation of new job opportunities for the citizens of Illinois, by decreasing the overall tax burden and costs of doing business, particularly those costs associated with unnecessary and burdensome tax administration at the federal, State or local level.

To ensure economic growth and a fair and competitive tax climate for our members, the Illinois Chamber of Commerce Tax Institute strongly recommends adoption of the following pro-business Illinois tax policy:

Business Sales Tax

We strongly oppose the repeal of the current sales and use tax exemption for custom and licensed computer software.

Business Perspective: The Illinois Chamber of Commerce remains opposed to the concept of taxing software licenses and custom software. Our concerns regarding proposed taxation of software licenses and custom software reflect both tax policy and legal issues.

The Illinois business community is the primary user of custom or licensed software and such a proposal would translate into yet another new and expensive tax increase on Illinois businesses and a further increase in the cost of doing business in Illinois. It would also make Illinois a less desirable location in which to locate information technology jobs.

Proponents state that their intent in proposing the new software tax is to bring business taxes in line with individual taxes. That is, businesses should have to pay tax when they buy software just as individuals pay sales tax when they buy software. The problem is that current law already requires businesses that buy software to pay sales tax just like individuals.

Businesses, however, do not pay sales tax when they lease/license the software from a vendor. That is because the state of Illinois does not tax leases in general. Claims that 45 other states tax leased software is really a statement that 45 other states have a sales tax that applies to lease transactions in addition to sale transactions. Illinois sales tax does not apply to lease transactions. The proposed tax on licensed computer software is not a loophole, but an expansion of the sales tax base to a lease transaction for the first time.

Many businesses update their software more than once a year. A new sales tax on software and software upgrades will make new purchases and upgrades more costly causing businesses to stay with old software longer at the expense of efficiency and competitiveness.

Illinois may be fairly unique among the states in its taxation of licensed computer software, but that very fact is a competitive advantage for out state. At a time when the competition for jobs between the states is extremely competitive, it makes no sense to eliminate a competitive advantage for the development of technology jobs here in Illinois.

We urge caution in considering any proposal to adopt the national Streamlined Sales Tax Project (SSTP). Adoption of the national Streamlined Sales Tax Project will mandate a number of fundamental changes in Illinois sales tax administration and will necessarily impact state and local tax revenues and state tax compliance. The Illinois Chamber strongly recommends that thoughtful consideration and study of all aspects of SSTP be undertaken in order to determine whether adoption of SSTP best meets the needs of Illinois and that full consideration be given to the impact of SSTP on the Illinois business community and on local government revenues before any implementing legislation is proposed or considered by the Illinois General Assembly.

Business Perspective: Members of the Illinois Chamber Tax Institute agree that any State efforts to simplify sales and use tax laws should result in a system that is revenue neutral and easily administered by participating businesses and taxing authorities. Such efforts must protect the sovereignty of lawmakers to consider and act upon tax policy unique to Illinois and guard against elimination of any tax benefits already established in the law. Prior to implementation, such a system should be widely advertised to and understood by consumers. It must also utilize compliance and remittance technologies that are accessible and affordable to all levels of business and commerce. We believe that the business community as a whole should be an active participant in any State tax simplification efforts.

Given these principles, Chamber members continue to be concerned about any implementation plans of the Illinois General Assembly and the opportunity that will be afforded the business community to participate in the legislative process in a timely manner so as to be able to provide an appropriate response to what could involve substantive and fundamental changes in the way Illinois businesses collect tax and are taxed.

Substantial compliance with the national SSTP Agreement in Illinois will create a number of fundamental changes in Illinois tax administration and will impact state tax revenues, local tax revenues, and state tax compliance. Thoughtful consideration of all of the following issues and an ongoing dialog with the Illinois business community and local governments is necessary before any implementing legislation is proposed or considered by the Illinois General Assembly.

A working group of the Illinois Chamber Tax Institute has reviewed the national SSTP Agreement and identified a series of issues that should be addressed prior to consideration of implementing legislation in Illinois.

Converting the Retailers’ Occupation Tax Act (ROTA) to a sales tax is necessary to avoid Constitutional challenges resulting from the mandated use of the SSTP destination sourcing rule. The SSTP’s sourcing rules require that sales that are not delivered at a seller’s place of business be sourced or taxed at the rate of tax in effect at the buyer’s location. This is contrary to the Illinois Retailers’ Occupation Tax Act (commonly referred to as a sales tax), which requires the tax rate in effect at the seller’s location be applied to a given sale. The ROTA is a tax on the occupation of selling at retail and it is not a general tax on sales. As a result, the location at which the retailer carries on his business generally determines the correct rate of tax under current law. Implementing SSTP under the current ROTA would result in a retailer being “taxed” in jurisdictions where it does not do business or carry on an occupation. For example, a Springfield retailer that mails a purchase to Chicago would be taxed on that sale at the Chicago rate of tax despite the fact that the Springfield retailer does not carry on his occupation in the City of Chicago. Implementation of the SSTP destination sourcing rule under the existing ROTA will result in legal challenges. Converting to a tax on sales would eliminate this issue, but would require a significant and thoughtful re-write of Illinois’ sales tax laws. The Working Group has concluded that there is no Constitutional impediment to an Illinois sales tax.

Changing to a destination sourcing rule, as required by the national SSTP agreement could significantly impact local government revenue sources. Any proposed Illinois SSTP legislation should address such potential municipal revenue shortfalls and make every effort to hold local governments harmless. Tax revenues currently collected based on the retailer’s location could now be sourced to the purchaser’s local government. This rule would apply on all purchases that are not delivered at the retailer’s physical location. Local retailers collecting tax based on the rate in effect at the delivery location will result in a re-distribution of local sales tax revenues from one jurisdiction to another and could have serious fiscal consequences for some local governments. Any Illinois SSTP legislation should address this shift in local tax revenues and make every effort to hold local governments harmless. Other local government issues should also be addressed, including how changes in the local sales tax base will impact municipal bonded indebtedness.

Implementation of a Destination Sourcing rule as required by the national SSTP would result in increased compliance costs for Illinois retailers who would have to revise their tax collection systems to apply the rate of tax in effect at the buyer’s delivery location. Any proposed legislation for the implementation of SSTP in Illinois should allow adequate time to revise business tax collection systems and recognize the increased compliance costs for retailers. Several states (with a similar tax sourcing issue) have moved to adopt the SSTP destination sourcing rule prematurely and have met with significant resistance from retailers who were required to convert tax collection systems and change their methods and rates for collecting tax within an unreasonably short time period. Several states have had to resort to revisory legislation that either repealed the destination sourcing rule (which means they are not in compliance with the national SSTP program) or delayed implementation for one or more years. Any Illinois SSTP legislation should allow adequate time for retailers to implement a new collection system.

SSTP requires participating states to adopt the same product definitions used by other states to assure consistency between states. Illinois defines several products differently than the SSTP and adoption of the SSTP definitions will result in either more or fewer products being subjected to the Illinois tax and/or will result in the elimination of local sales taxes on a number of items that are currently exempt from the state portion of the tax (further impacting local government revenues). Legislators should be made aware of the items that will be taxed differently under the new law so that informed decisions can be made with regard to the taxation of each category.

Once SSTP is adopted, the State of Illinois will no longer be able to amend any of the adopted definitions to include or exclude specific items if doing so would be inconsistent with the national definitions. Matters of interpretation will be resolved by the national SSTP governing board, not the State of Illinois. Illinois Legislators should be made aware that future product taxability decisions will be waived with final decisions made by the SSTP governing board.

Adoption of SSTP will fundamentally change how Illinois taxes service transactions. The SSTP Agreement requires each state to maintain a uniform base for state and local tax purposes and prohibits multiple rates of tax. Adoption of SSTP would eliminate two of the four methods now allowed for computing Illinois’ Service Occupation Tax. The first method would allow non-registered Illinois taxpayers to pay tax to their suppliers of tangible personal property on the cost of materials purchased for transfer to their customers. Taxpayers that are registered under the service occupation tax or retailers’ occupation tax, however, would be required to use method two. The second allowable method would require the serviceman to separately state his actual cost of the tangible personal property transferred to his customer in his bill to his customer. Failure to separately state his cost of the tangible personal property would result in service occupation tax becoming due on the full billing amount to the serviceman’s customer. Since many businesses that perform services are registered under the retailers’ occupation tax or service occupation tax, they will be required to separately state their cost of materials or to collect tax on the full amount of the service transaction resulting in additional cost to their customers. This could result in a substantial increase in tax to many consumers of services, as many servicemen will be unwilling or unable to separately state their actual cost of property transferred as part of the service. In fact, the two additional methods of computing service occupation tax were implemented specifically to avoid having to separately state the actual cost of property transferred.

Adoption of SSTP could change how lease transactions are taxed in Illinois to impose the sales tax on individual lease payments. The SSTP defines a “sale at retail” to mean “any sale, lease, or rental” and contemplates assessment of sales tax on individual lease payments. The SSTP also provides “sourcing rules” so that the proper local sales tax rate can be applied to each rental payment. Illinois currently does not apply its sales tax to lease payments, but imposes the sales tax upfront on the purchase price of the property acquired for leasing purposes. If Illinois makes a legislative change to tax lease payments, tax revenues from the purchase of property for leasing would necessarily decrease in the initial year as the tax dollars would be collected in smaller increments over time with each lease payment. If Illinois maintains its current method of taxing the lessor at the time the property is purchased for rental purposes, we may not be considered in “substantial compliance” with the national SSTP agreement.

Numerous tax administration issues will be raised if Illinois adopts the SSTP Agreement. Given current State budget constraints, adequate funding needs to be made available to ensure that the Department of Revenue has the technology necessary for SSTP implementation.

Participation in SSTP would require Illinois to defer to the judgment of the participating states/SSTP Governing Board on a great number of issues and many critical issues have yet to be decided by the SSTP participating states (who will later comprise the governing board.) While we recognize that these issues cannot be decided on a state-by-state basis, the lack of answers as we actively consider implementing legislation here in Illinois is of great concern to our members. Participation in SSTP would require Illinois to defer to the judgment of the participating states on issues such as:

Accordingly, full participation and input from the Illinois business community is essential in considering any proposal to adopt the national Streamlined Sales Tax Project (SSTP), and before any such efforts move forward, additional cost/benefit studies should be conducted to determine if SSTP is the right course of action for Illinois.