Illinois Use Tax: A New (and Aggressive) Focus on an Old Tax
March 1, 2011
As a result of Illinois’ budget woes, Illinois has taken a renewed and aggressive interest in collecting state Use Tax. Both businesses and individuals are subject to Use Tax. This year, Illinois took an unprecedented step by requiring individuals to report and pay Use Tax on their state income tax returns. In addition, Illinois recently promulgated a Use Tax Amnesty Program, the first of any state, to collect Use Tax from prior years.
What is Use Tax?
Use Tax is a complement to the state’s sales tax and is imposed on the “privilege of using or consuming” tangible property in Illinois for which sales tax was not paid. What this means is that if you bought something (either within or outside of Illinois), used, consumed or merely possessed the item in Illinois, and did not pay sales tax when you bought it, you likely owe Illinois Use Tax.
For example, if you made purchases on the internet or through mail order and did not pay sales tax, those items will likely be subject to Illinois Use Tax. Also, if you bought something while out of state and had it shipped to your home, you will again likely owe Use Tax on those purchases. Even if you paid sales tax on an item purchased out of state, you will owe Illinois Use Tax on the differential if the state you bought it in had a lower rate of sales tax.
While Use Tax on incidental items may not be significant, the imposition of Use Tax on bigger ticket items such as computers, electronics, furniture, art and jewelry may be quite substantial – especially if you bought several of these items throughout the year.
Illinois Pursuing Unreported Transactions
Illinois has begun to aggressively increase Use Tax collection efforts. Other states share sales information with Illinois and Illinois may send bills to residents for unpaid tax, plus penalties and interests. Additionally, Illinois gathers information on overseas purchases from the U.S. Customs Service, and may likewise issue use tax bills from that information as well.
As mentioned above, one of the ways Illinois is attempting to increase taxpayer compliance is by requiring annual reporting on your state income tax return. Starting this year, a new line is added to the Illinois Form 1040 that requires taxpayers to disclose their Use Tax obligations. This line cannot be left blank. Taxpayers must disclose and pay Use tax on their actual purchases or use a specified estimating convention.
Consequences of Not Paying Use Tax
Failure to report and pay Use Tax can result in several consequences. First, with respect to Use Tax reported on your personal income tax return, keep in mind that you are signing the return under penalties of perjury. Second, if it is determined that you owe Use Tax, the State will assess penalties and interest in addition to the tax due. Finally, the state may well audit prior tax years, further compounding any tax, interest and penalties due.
Illinois Use Tax Amnesty Program
To encourage taxpayers to report and pay prior years' Use Tax obligations (and to collect additional revenue), Illinois has enacted a Use Tax Amnesty Program for individuals. This program started January 1, 2011 and runs through October 15, 2011. It allows individuals to file and pay unreported Use Tax liabilities for the taxable years ending after June 15, 2004 and before January 1, 2011. The benefit of this program is that you will not incur interest or penalties for prior periods, which could be substantial. This program can be attractive if you made large purchases (e.g., art, jewelry, furniture, electronics, boats, etc.) and did not pay sales tax at the time of purchase.
Individuals who are under a Use Tax audit or who have been contacted by the State of Illinois regarding Use Tax will not be eligible for the Amnesty Program. In addition, individuals who are a party to a pending criminal investigation or civil litigation are not eligible for the Amnesty Program.
Business Voluntary Disclosure
Although businesses cannot qualify for the current individual Amnesty Program, a business may be able to take advantage of Illinois’ Voluntary Disclosure program to address any unpaid Use Tax liabilities. If eligible, the Voluntary Disclosure program is beneficial because it could limit a business’ obligations for prior years.
These materials have been prepared by Levenfeld Pearlstein, LLC for informational purposes only. These materials do not constitute legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Receipt of this information does not create an attorney-client relationship. No reproduction or redistribution without written permission of Levenfeld Pearlstein LLC.