How do I know if the new economic nexus sales tax rules in Illinois apply to my business?
Illinois recently implemented new sales tax rules for businesses that have economic nexus in the state. These rules are broadly applicable to all remote sellers, and so if any direct-to-consumer (DtC) wine shipper meets the general economic nexus thresholds on their sales to the state, then they will need to comply with these new requirements. Like most states, Illinois has defined economic nexus as making either over $100,000 in gross receipts or 200 separate transactions within the previous 12 months. The state requires remote sellers to review their previous 12 months of sales on a quarterly basis, as once they reach either of these thresholds, they will need to register with the state for Retailer’s Occupational Tax effective in the first quarter.
Illinois has had economic nexus rules in place for a few years now, so really the major change is that going forward, remote sellers with economic nexus (including DtC wine shippers) will be required to collect and remit all local sales tax based on the effective rate at the destination address for their shipments, whereas before they could collect and remit at the 6.25% state tax rate alone. DtC shippers who do not meet either of the economic nexus thresholds will not see any changes to their tax liability in the state and can continue to collect and remit the state tax alone under their Use Tax Registration.
It’s been over a year since the Supreme Court’s Tennessee Wine and Spirits ruling, which we thought was going to settle the legal discussions about DtC shipping of alcohol by retailers. Are there any updates regarding the jurisprudence of retailer DtC shipping?
While Tennessee Wine and Spirits was being argued before the Supreme Court, a set of lawsuits were put on hold that were related to the question of DtC shipping by retailers and whether states could establish permissions for in-state retailers but not for out-of-state retailers, which would seem to discriminate against those out of state interests. Then, when the Supreme Court ruled in Tennessee Wine and Spirits that states could not enforce beverage alcohol laws that discriminated against out of state businesses without providing clear, demonstrable proof that such laws were narrowly tailored to upholding the principles of protecting the health and safety of their residents, we figured it meant those lawsuits were very likely to be settled in favor of the out-of-state retailers.
However, things have not really played out as expected. In one high-profile case, Lebamoff v. Whitmer, the 6th Circuit Court of Appeals ruled that Michigan’s seemingly discriminatory law was valid, despite the Tennessee Wine and Spirits ruling. This case has been appealed to the Supreme Court, and there have been signs that make it seem like the Court will hear it. If it does, that will preempt any complications if other appeals courts make a different ruling from the 6th Circuit in their own lawsuits (cases challenging similar laws in Illinois and Missouri are also pending and likely to go before appeals courts in the coming months).
It’s rather unclear how the Supreme Court might rule on the 6th Circuit’s Lebamoff case if it chooses to hear it. In Tennessee Wine and Spirits (and in Granholm before it), a majority of the Court did find discriminatory rules to be invalid and gave less credence to state claims that the 21st Amendment allowed them to regulate alcohol in any way they saw fit, even if it violated other parts of the Constitution (primarily the Dormant Commerce Clause). However, several Justices (Justice Gorsuch, in particular) seemed reluctant to permit what they called an “Amazon for alcohol,” and so they may try to find a way to allow states to prohibit interstate shipping of alcohol by retailers without contradicting their previous rulings invalidating discriminatory state laws on alcohol sales. How they will square that circle, though, and what impacts it might have on other aspects of DtC shipping by suppliers, is a very big unknown. We will be paying very close attention to whatever comes out of the Supreme Court in the coming months and recommend anyone else with an interest in this market to do the same.
Are you seeing any or many COVID-era loosening of restrictions becoming permanent?
During the COVID crisis, a number of temporary provisions were enacted. Many of these were related to providing emergency relief to businesses struggling in the moment, including delaying license expirations, delaying filing deadlines, and offering payroll support. But many states also extended greater permissions to beverage alcohol suppliers, distributors, and retailers in an effort to shore up their businesses during a very difficult time. A very common provision was permitting more deliveries and curbside pickups, and allowing on-premise retailers to sell alcohol to-go (generally requiring they accompany orders for food). Generally, these did not legalize these activities per se, but more the case that the state would not enforce restrictions on these activities that would normally apply.
But we have seen a few states move forward and make these temporary provisions permanent. Again, they are largely focused on granting more permissions to local businesses, primarily on-premise retailers who have been particularly harmed by the necessary COVID-related social distancing restrictions. For instance, Colorado passed legislation to extend its to-go sales of alcohol permission through at least July 2021, and there are efforts to make that permanent.
One area that we are hopeful for permanent change will be in regards to states’ DtC shipping laws and extending more permissions for breweries and distilleries to ship their products DtC. Currently, they face a rather small list of states (about 10 and six, respectively) compared to wineries (who can ship to 46 states). But there has been a tremendous surge in interest among consumers for increased DtC shipping, so it’s possible there will be a groundswell in the coming months and years to allow more DtC shipping of alcohol even after this time when social distancing is so important.
Learn how Sovos ShipCompliant can help you with your beverage alcohol compliance needs by getting get in touch with an expert today.