Illinois Department of Revenue Summarizes Nexus Inquiry

Thursday, April 14, 2011

With the issuance of a recent General Information Letter (GIL), the Illinois Department of Revenue has summarized the principles it uses in determining whether a retailer has nexus in Illinois. When a retailer has nexus in Illinois, the retailer is subject to Illinois tax laws and, therefore, must collect and remit sales tax. Illinois divides retailers into three categories: (1) Illinois retailers--those who either accept purchase orders in Illinois or maintain an inventory in Illinois from which the retailer fills its Illinois orders; (2) retailers who maintain a place of business in Illinois; and (3) out-of-state retailers. The first two types or retailers, Illinois retailers and retailers who maintain a place of business in Illinois, have nexus in Illinois, but the third type—the out-of-state retailers—lack sufficient nexus with Illinois to be subject to its state tax laws. The key is the distinction between the second and third categories, or in other words, whether the retailer maintains a place of business in Illinois or is instead an out-of state retailer. Under both U.S. constitutional and Illinois law, this determination is a question of nexus, and, so, it turns on whether the retailer has a physical presence in Illinois. Physical presence is not limited to having a physical building in Illinois; instead, any type of physical presence in Illinois, including a retailer’s delivery and installation of its product on a repetitive basis, will trigger a finding that the retailer has nexus in Illinois.

In addition, Illinois recently amended its law to expand nexus to reach many Internet-based retailers that lack a traditional physical presence in Illinois. This law, commonly referred to as an "Amazon Law,” becomes effective July 1, 2011.

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