Chicago Clarifies Economic Nexus Requirements and Safe Harbor in a Post-Wayfair World

Chicago has clarified that a business will only need to collect and remit sales tax in Chicago if they make more than $100,000 in sales in the most recent four consecutive calendar quarters. Businesses will not have nexus in Chicago simply by crossing the economic nexus threshold in the state of Illinois. This assumes that the business does not have other contacts with the state of Chicago. Businesses must collect and remit tax in Chicago for a period of at least 12 months after cross the safe-harbor provision threshold. More details can be found in the City of Chicago’s Information Bulletin 1/21/2021. 

To promote certainty, the City will employ a safe harbor. Specifically, an out-of-state entity that received under $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:

(i) Chicago’s amusement tax, Chapter 4-156 of the Municipal Code of Chicago (“Code”) as applied to amusements that are delivered electronically, such as video streaming, audio streaming and on-line games; and

(ii) Chicago’s personal property lease transaction tax, Code Chapter 3-32, as applied to nonpossessory computer leases. This safe harbor is extended with the following conditions and qualifications:

a. It will apply only to an entity that has no other significant contacts with Chicago, such as those listed in Section 3 above.

b. It will apply on a prospective basis, beginning July 1, 2021. No refunds or credits will be granted for taxes paid or remitted before that date.

c. If an out-of-state business initially qualified for the safe harbor but no longer does, it must (i) register with the City’s Department of Finance within 60 days, (ii) begin collecting Chicago taxes within 90 days, and (iii) continue collecting Chicago taxes for at least twelve months.

d. The safe harbor concerns only the issue of whether a provider has a duty to collect taxes from its customers; it does not affect the issue of whether a customer has a duty to pay those taxes.

Unless the safe harbor set forth in Section 4 above applies, the City expects any business that does business in Chicago to comply with its tax ordinances. Whether the City has the authority to require a given business to collect its taxes is a combined question of law and fact. Most of the applicable law is expressed in federal and state case law, some of which is discussed above. The facts must be analyzed on a case-by-case basis. The Departments of Finance and Law are happy to discuss individual cases with any business or its authorized representatives, including accountants and attorneys. Where appropriate, this may include the issuance of a private letter ruling, pursuant to Uniform Revenue Procedures Ordinance Ruling #3.