Chicago’s Safe Harbor Threshold: Understanding Nexus Updates for Out-of-State Sellers

By Jonathan Kraft
January 29, 2021
News and Insights , SALT

After receiving numerous inquiries about nexus after the Wayfair decision, The City of Chicago Departments of Finance and Law issued an Information Bulletin (January 21, 2021) to address the City’s analysis of the nexus issue.

The Bulletin addresses a “safe harbor” threshold they plan to employ related to the Amusement Tax and Personal Property Lease Transaction Tax.  These are also known as the “streaming tax” and “cloud computing or nonpossessory computer lease tax,” respectively.

Why Chicago Is Unique

Like just about every state, Illinois has enacted legislation that implements a dollar and transaction threshold similar to South Dakota as a result of the Wayfair decision. However, according to the Illinois Constitution, Chicago is a home rule unit, which gives it the right to exercise its own powers different from the State, including tax.  As a result, up until this point, Chicago was not required to or has not followed the Illinois transaction thresholds for out-of-state sellers.

Chicago and Out-of-State Sellers

As addressed in the Bulletin, the City has decided to employ a threshold for out-of-state sellers.  But keep in mind that this will not be the only factor determining if an entity has nexus with Chicago.  If the safe harbor does not apply, the City will look at other factors such as employee activities in the City, any physical presence, and agreements with other entities within the City, to name a few.

The safe harbor employed by the City will be related to out-of-state sellers that receive under $100,000 in revenue from Chicago customers during the most recent consecutive four calendar quarters.  These entities will not be expected to collect the Amusement Tax or Personal Property Lease Transaction Tax.

Chicago’s Nexus and Safe Harbor Conditions

This safe harbor is relevant with the following conditions*:

  1. An entity has no other significant contact with Chicago.
  2. It is applied on a prospective basis, beginning July 1, 2021. There will be no refunds or credits granted for taxes paid or remitted prior to this date.
  3. If an entity initially qualified for the safe harbor but no longer does, they must register with the City Department of Finance within 60 days and begin collecting within 90 days, and collect for a minimum of twelve months.
  4. The safe harbor is only addressed if a provider has the duty to collect taxes from a customer, not whether a customer has a duty to pay the taxes. Exemptions from these taxes may apply depending on the transaction.

The City has stated, an entity should review its situation and transactions on a case-by-case basis.  This will help an entity determine if it complies with all City tax ordinances, not just those affected by the safe harbor.

*Source: https://www.chicago.gov/content/dam/city/depts/rev/supp_info/TaxSupportingInformation/January%202021%20Information%20Bulletin%20-%20Nexus%20and%20Safe%20Harbor.pdf

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