July 11, 2025 • 44 mins
In this episode, we’re joined by Dave Kupiec, CPA, JD, and Natalie Martin, JD, of Kupiec & Martin, LLC, for a deep dive into Illinois tax law. Drawing on their extensive experience with the Illinois Department of Revenue and major corporations, they unpack the recent Pepsi case, offering insights into the state’s Tax Tribunal and appellate process.
We explore the importance of strong documentation, how administrative decisions can impact taxpayers, and key strategies for navigating Illinois’s complex tax landscape.
Key Takeaways:
- The Pepsi case shows how complex Illinois tax disputes can be.
- Good documentation is essential for dealing with audits and legal decisions.
- Illinois tax rules are always changing and can greatly affect businesses.
- Knowing how Illinois tax law works helps with better planning and staying compliant.
Chapters
00:00 - Intro
03:49 - Understanding the Illinois Tax Tribunal
14:00 - Importance of Documentation in Tax Cases
31:21 - The Evolution of Sales Tax Legislation in Illinois
41:20 - Taxation and Remote Sellers: An Unusual Amnesty Proposal
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:35):
Welcome to SALTovation. TheSALTovation show is a podcast series
featuring the leading voicesin SALT where we talk about the issues
and strategies to help youmake sense of state and local tax.
Welcome to Saltovation. Todaywe're diving into all things Illinois
with special guests DaveKupiak and Natalie Martin, who bring
deep insights from theirexperience at the Illinois Department
(00:56):
of Revenue, majorcorporations, and their own firm.
Kupiak and Martin join us aswe unpack recent Illinois tax cases,
explore the state's complexcourt system, and discuss strategies
every taxpayer should know.Let's get started. All right, everyone,
thank you for joining us onanother Saltivation podcast. Today
(01:17):
we are with David Kupiak andNatalie Martin, and we are going
to talk about kind of allthings Illinois. So, Dave, Natalie,
thank you so much for beingwith us today on the Saltivation
podcast.
Thank you for having us.
Thank you for having us.
And so if you all can duke itout, but if you all want to just
(01:37):
give us a background on whoyou are, kind of what you do, where
you are and how you got there,that would be excellent for our listeners
to get to know you before wedive in.
Great. I can go first. Afterlaw school, I went to work for the
Illinois Department of Revenuein Springfield as an attorney. And
after working there for a fewyears, I went to work for Arthur,
(01:58):
and that's where we met Stacy.And then after Arthur Anderson, one
of our clients was ComEd, whohad just merged with Pico Energy
to form Exelon, so went towork for exelon, and after six years
there, we started Kupiak andMartin in 2008. So we have a little
bit of state industry and CPAexperience. Natalie could go into
(02:21):
her background, too.
But very similar, verysimilar. After law school, I worked
for the state of California. Iwas a criminal prosecutor. So I'd
like to say that I hope Inever use that background with any
of my tax cases, but it doesexist. I then went to Arthur Anderson.
I went to Deloitte for a bitafter Arthur Anderson, and then I
(02:41):
joined David Exelon, and thenwe've had Kupiak and Martin since
2008 as well. So like Davesaid, we like to pride ourselves
in having a little bit of aunique perspective, meaning that
Dave's been at the time, samestate. I've been at the state. We've
worked for an accounting firm,we've worked in house, and we've
now worked at a law firm. Sowe've kind of had all the perspectives
(03:04):
so that we find that a littlebit unique. And very helpful to most
of our clients.
Yeah. And most of our clientsare people we've worked with over
the years in some of thoseareas. It's kind of funny, especially
as you guys know in publicaccounting and in an industry, people
kind of move all over theplace. So I tell people, be nice
to people because you neverknow when your path is going to cross
again. And they do multipletimes, such as them.
(03:25):
Right. Don't burn thosebridges. Right. Maybe at a happy
hour at a cross Conference inSt. Louis. Who knows? Maybe. Yes.
Well, I love that. Andcongratulations on your all's kind
of professional relationshipand enduring and being partners for
so long together. That'samazing. And you know something for
(03:46):
those listeners who keepcoming back, you know, we talk a
lot about relationships onthis podcast. And as state tax professionals,
you can't know everythingeverywhere. And so that kind of your
relationship, either betweenyour clients or yourselves has just
kind of continued on in thevarious components of where you're
(04:06):
at. Love that and glad that wecan celebrate that with you. So thank
you. As we dive in, we kindof, we did a little bit of pre homework
this episode and so we wantedto kind of talk through some things.
There is kind of a recentcourt decision related to Pepsi.
(04:28):
What is the issue in this caseand what did the court decide? And
maybe even give us a littlebit of background about how Illinois
and their court system set up.
Yeah. And Pepsi is a perfectexample. It's an income tax 8020
case. And the IllinoisAppellate Court just issued a decision
last month, March 19th. Butwhat's interesting about this one
(04:50):
is Pepsi has been litigatingthis issue for a number of years.
And there's various buckets.This started with an audit obviously
of Pepsi. And the only issuethat's being litigated is the 8020
company issue. But what'sinteresting is the the first audit
was directly appealed to theIllinois Tax Tribunal. And for those
(05:11):
of you who aren't familiarwith the Tax Tribunal, it's been
around a little over 10 years,actually. Natalie and I were involved
when it was started throughthe Illinois Bar association and
CPA societies. There was theperception that Illinois wasn't fair
because AdministrativeCarrying Division was kind of under
the umbrella of the Departmentof Revenue. And circuit court can
sometimes be a little tediousand you have to a lot of times pay
(05:32):
to play with the moniesprotest act. So around 11 or 12 years
ago, everybody got togetherand they formed the Tax Tribunal
for matters that were over$15,000. So as long as you have at
least $15,000 at issue. Youcould go before the Tax Tribunal.
The good thing about it is itonly costs $500, the filing fee.
It's a somewhat formalprocedure in that, you know, you
(05:54):
do have, you know, a protestto file. The protest applications
are online, and you can kindof see how everybody else has filed
them. You do not have anyprivacy. Your name has to be published.
You can redact some of thespecific facts, but it gives you
an option because you don'thave to pay going to the Tax Tribunal
other than the $500 filingfee. And then if you lose at the
(06:16):
Tax Tribunal, you could appealto the Illinois Appellate Court and
then the Illinois SupremeCourt. You also still have the circuit
court system as an optionafter your audit, but in that situation,
you have to make the paymentto the money's protest act before
you go to the court. Sosometimes people don't want to do
that, especially if it's alarger dollar case. I think, to quote
(06:37):
someone who I'll know fromCosta, Mr. Paul Frankel, don't pay,
don't pay, don't pay. It'sharder to get the money back once
you give it to the state. Sowhat's nice about the Tax Tribunal,
and Natalie and I have hadsuccess in it, is even if you don't
want 100% of the issues, whenyou're negotiating, you're giving
them money. So it's. You'rebasically giving them something that.
So you do still have a littlebit of the power in that process.
(06:59):
Whereas if they have all themoney, it's kind of shifts the power
advantage a little bit.
I think also. Sorry, I wasgoing to say, I think also just the
Tax Tribunal, it only dealswith tax issues. And a lot of our
problems at Circuit Court wasthat there wasn't necessarily necessarily
a real expert at tax. Soyou're only dealing with judges that
(07:22):
are dealing with tax matters.So there is kind of also that ability
to maybe perhaps get a betterdecision with a little more reasoning
to go to the appellate court,if you so choose.
Yeah. And what we found out isbeneficial in the Tax Tribunal is
both judges are veryexperienced both in litigation and
(07:44):
in the tax area. And there isan underlying undertow both by the
judges and the way this systemis set up to resolve the cases. What
you'll see is I think you haveless than 20 decisions over the last
10 years because a lot of thecases are either withdrawn or settled.
And it basically saves ourclients money, too, because you don't
(08:06):
have to go through a lot ofthe extensive formal discoveries
that are involved in circuitcourt court, there's an informal
process where if you want topull the case out from the judge
that's hearing your case, youcould have this one formal mediation
with the other judge and thestate to kind of look at where your
case is at. And what we findextremely advantageous about it is
the judges are very open as towhere they're deciding. We were just
(08:28):
in a recent case in which thejudge told the department, I don't
see your case here. So whenyou have the judge say that in early
on phase of the statushearings, I think that kind of gives
you a little more power toresolve the case. And at the same
time, if he says it to us, wehave to present more evidence to
support our position.
Yeah. And that being said,too, I think the Pepsi case also
(08:51):
shows that even withinIllinois, if you're going to circuit
court, there's a little bit ofvenue shopping. Some people prefer
Cook county, which is Chicago,and some people go to Sangamon county,
which is Springfield, thecapital. So. So the court system
in Illinois is intricate andkind of interesting. So Pepsi kind
(09:13):
of shows that. Dave, do youwant to just go into just a bit about
what an 8020 is, just in casethere's a listener that isn't familiar
with Illinois? Well, before wedo that, can I just.
I just want to get some clarity.
Around kind of the. You know,it seems like there could be a fork
in the road.
Right.
You could go circuit court oryou could go tax tribunal, but not
both.
Correct, Correct.
(09:33):
Okay.
And so because of the.
The tax tribunal being inplace and with some of these tax
cases, it sounds like thatwould be the more potentially advantageous
road to go. So that you aregetting a. Judges that know tax rules
are able to opine better andhear those cases better is kind of
(09:57):
what I'm hearing from you guys.
Correct. Especially if youknow that they've decided a specific
issue in a specific way. Andas Natalie alluded to, now, if you
know that they've decided anissue against another taxpayer, you
probably want to do whatNatalie just suggested, venue, shop
and go to Springfield. Andthat's actually what.
Paying is the big thing, too.If you have a. If you have a notice
(10:18):
of deficiency, that's multiplemillions of dollars, it makes it
very easy to go to the taxtribunal for $500. Yeah.
And that's kind of where wewere with Pepsi. They basically had
a multimillion dollarassessment. For those of you who
don't know Illinois for incometax purposes, is a unitary state
and you include everybody inthe unitary group. But there is an
(10:39):
exception for companies thathave more than 80% of their property
or payroll outside the UnitedStates. So what Pepsi did here was
they basically set up aspecific entity. They put all their
expatriates that were doingwork under internal agreements overseas
at different internationaloffices. And this one entity kind
of was under Frito lay'sdivision. So they were basically
(11:02):
excluding all the Frito Layincome and receipts from the Illinois
unitary group, which created anice state tax benefit. Actually,
based on the court documents,it brought Pepsi's Illinois income
tax down to zero. So you sawthis huge shift and in doing so,
it pretty much. I hate to saythis, but you pretty much guarantee
an audit. When you go frompaying millions of dollars to zero,
(11:25):
the state's going to kind ofsay, okay, what's going on here?
And that is kind of alluded toin the audit comments. They said
they specifically lookedduring the audit as to what changed.
And they saw this huge shiftof income not only from this entity,
but from other entities thathad foreign relations into this one
specific entity to make surethat entity made the 8020 test. And
(11:46):
that's what the auditor isfocused on. The taxpayer immediately
went to the tax tribunalwhere, as we said, they only had
to pay the $500. They didn'thave to pay the multiple millions
of dollars. But unfortunatelyfor Pepsi in this case, the judge
who heard this case reallylooked at this issue and said under
the economic substancedoctrine, had no substance, and basically
(12:11):
said that these people werenot reporting to anyone internationally.
They were reporting to peopleinternationally, but they weren't
reporting to anyone in thisspecific subsidiary. So there's no
control there. If you lookedat them as employees, they weren't
really employees of thisentity because they weren't hired
by this entity. They kind ofdiscounted the intercompany employment
agreements, saying that yes,they said they were going to do something,
(12:31):
but they really had no controlover them. And they basically said
no. They out used theirexecutors. They likened it to a sham.
And I think one of the quotes,the judge says, you can't remove
millions of dollars of taxwith one strike of the pen. So in
doing this, Pepsi says, okay,that initial tax tribunal decision
(12:53):
was on summary judgment. Theythen appealed the protests or not
the penalties and interests.And then I hate to say this, but
the judge even basically underthe next order, basically said, you
know what, you have to havereasonable cause here. You guys should
have known what you're doingwas wrong. You don't have any third
party support for this. Youdidn't have any CPA or law degrees
(13:15):
providing anything. So theydenied the penalty relief. And that's
something that Natalie and Iare seeing more and more, is that
the auditors are really tryingto get aggressive with penalties.
Historically, Illinois hasbeen pretty good about that. You
can get the penalties waivedduring the audit by sometimes by
the field auditors. Now that Ithink cases like this are giving
the department a little morestrength in their positions and saying,
(13:37):
you know what, we're going togo after people for penalties and
hopefully the pendulum willsweep back where they're going to
be a little more reasonable.But by having the judge say that
we're not going to abate thepenalties, that didn't help. So then
Pepsi says, okay, next audit'sup, we're going to try something
different. We're going to golike Natalie alluded to, we're going
(13:57):
to go forum shop and we'regoing to go to the circuit court
and Sangamon County. Well,unfortunately, the circuit court
just issued an opinion acouple months ago saying, you know
what we kind of agree with thetax Tribunal said nothing has really
changed from the first audit.And so the circuit court decided
against them. To my knowledge,they haven't appealed that case yet
to the appellate court. Andthen the third audit, which is kind
(14:20):
of upright, the last, what'sinteresting, the circuit court was
actually the most recent year,so there's a circuit court opinion
on that. There's also a middleperiod too, which is still in the
Tax Tribunal. So that's kindof pending, and I think that's up
for status in June. So inshort, Pepsi has an appellate court
decision affirming the taxTribunal saying, you're not an 8020
(14:42):
company. You have to put theincome in and pay the tax. And unfortunately,
you don't get penaltyabatement. Then you have a circuit
court judge saying the samething for the most recent years,
which they can appeal. Wehaven't heard anything yet. And then
you still have those middleyears. What's interesting about this
is the whole underlyingpremise here is the judge in almost
(15:03):
each one of these cases hasbasically looked for external documents
or external support to say,what did this entity do that supports
its economic presence? Andduring the initial tax tribunal arguments,
one of the former VPs of thetaxpayer basically testified, you
know, what the substance was.But the judge wanted more documentary
(15:25):
support and said, you know,unless we could show documentary
support to support thistestimony, we're not going to give
it the Support it needs to getyou to that 80, 20 test. So it kind
of shows the importance ofhaving the documents internal and
external. And both judges, theappellate court and the circuit court
and tax tribunal kind of madereference to external documents.
(15:46):
So one thing, one common thingwe're seeing now not only in this
case, but other cases, is ifyou're taking a position that's not
clear, you might want to havesomething from either your CPA firm
or an accounting firm or alawyer law firm just to kind of support
that position. Or a letterrolling, get a letter rolling from
the state to kind of give yousome support. Because they're kind
of saying that they want morethan a testimony.
(16:07):
Yeah, and I think, I thinkdocumentation is probably a big issue
that we're seeing in Illinois.There's another case, the lowest
case, which recently came outas well, and that really talks about
documentation that you couldhave that you have some kind of a
burden to update. And you alsohave a burden to review documentation
(16:29):
that the Department of Revenueis providing you as well. In the
lowest case, that dealt withconstruction contractors, which we
don't need to get into in toomuch detail, but the overall promise
was that there was a bulletinissued by the Department of Revenue
explaining what is and is nota construction contractor in pretty
(16:51):
specific terms. There wasperhaps a little wiggle room, but
they had noticed that theissue was a gray area and they were
trying to provide explanationand some examples and what have you.
In the lowest case, reallywhat happened was lows didn't necessarily
(17:12):
follow that and they didn'talso have. They had. They had relied
on a third party review beforethis document, this bulletin came
out. So the judge didn'tparticularly like that. They didn't
then have a outside thirdparty review that document to opine
(17:33):
if they would have changedtheir opinion. So I think the lowest
case has a lot of levels toit. One of them is like, be careful
with all of us living in sameas last year. Right. And relying
on what happened last yearbecause circumstances change, rulings
change, you really have tokeep up on documentation. And then
(17:55):
secondly, even like Davealluded to in the Pepsi case, keeping
contemporaneous third partydocumentation about your positions
is really important becauseit's not necessarily what your opinion
was. Maybe there's a littlebit of a burden now to go out and
get someone to opine on whatyour position is. So, you know, Dave
(18:18):
and I are finding that a lot.The Department of Revenue now has
some more penalties too, aboutrecordkeeping requirements. We haven't
necessarily seen them comeinto practice yet, but they have
been talking, and I don't wantto say threatening, but it's a club
that they have because likeDave alluded to also penalties are
just getting really onerousand they're getting almost automatic
(18:41):
now. So people are much morecognizant to them. So documentation
is really important. Kind of abest practice, too, is when we talk
about documentation. Let'sface it, we all live in 2025, but
we're working in 2018, right?Or, you know, way back. So what you
(19:01):
have today is not necessarilywhat you're looking at. You're going
backward in time. So systemschange, people leave, paper files
are gosh knows where. So, youknow, documentation is becoming more
important. And it's somewhatharder now that we don't have the
(19:21):
big old files that we used tohave where you had your tax returns
and your work papers and your,you know, comments and all of that.
So we're really seeingdocumentation become more and more
important. And as part ofthat, just your record keeping requirements
with regards to yourdocumentation. I also found the Lowe's
(19:43):
case interesting.
From, like, it was how the case.
Even came about, right? How itwas a competitive disadvantage, right,
to another company. And soit's also kind of a little bit of
a, hey, be careful out therefor, you know, even big companies,
(20:03):
right? Because if, if, ifyou've got smaller guys out there
saying, hey, you guys aren'tdoing this right, and we know it,
right? Let's face it, that'show that, that's how that came about.
I probably didn't go to Lowe'sto save sales tax, right? We always,
we tell our clients, like,sales taxes, you want to get it right,
(20:23):
because most of the time it'snot going to impact a transaction,
but boys are going to impactyou if you didn't charge it. And
five years later, you getaudited and you have to pay it out
of your pocket. So let's faceit, I mean, Lowe's probably was taking
a position, but would I go tobuy a dishwasher from Lowe's? Because
I knew that they weren't goingto charge me sales tax because they
(20:45):
were concerned, consideringthemselves a construction contractor.
I probably not. So it was, youknow, once again, sales tax. Just
try to get it right becauseit's unlike income tax. You're not
going to probably go back andtry to recoup sales tax from all
of the people that you shouldhave charged it. And in Illinois,
we probably shouldn't call itsales tax. We should call it Retailers
(21:06):
occupation tax, because it'sreally born on you anyway, but you
pass it through to yourcustomer. So. Yeah. And I also think
the interesting thing aboutLois, too is Illinois is unique in
the Ki Tam kind of Fair FalseClaims Act. They allow it to be for
tax. A lot of states don't. Soyou're going to see these cases where
(21:30):
it becomes, did you charge methe correct sales tax? Did you overcharge
me? Did you undercharge me?And the competitive disadvantage
and boy, the penalties withregards to that are a whole new level.
Right. So we also tell ourclients it becomes important to get
sales tax as right as you canand not overcharge because it opens
(21:53):
up a whole other world oflitigation that most tax folks are
not used to or don't want todelve into yet.
Natalie, can you or Dave feelfree to jump in, kind of talk through,
through that keytam concept,because we've. I don't one thing,
I don't think we've actuallyreally talked about it much in on
(22:16):
the podcast. You know, it'scome up as just kind of identifiers
of things to think about kindof for like, from a sales tax perspective.
But it does come up when, youknow, we might talk to a new client
or it's like, well, can't Ijust charge like 7% across the board
board or something like that?And it's, you know, some are going
to be over, some are going tobe under, but from my perspective,
(22:38):
it's a wash. But you can't dothat. You can, you know, not all
states are going to have kindof a key TAM concept, but it sounds
like maybe Illinois does, andmaybe it's on as like an outlier,
maybe a little aggressive orlives in a different part of statute
or whatever. So can we maybesegue a little bit and just talk
(22:59):
about the KTAM concept for alittle bit?
Yeah. Basically it's Illinoislaws on the sales tax side allow
a third party to step in onbehalf of the Department of Revenue
and basically file a suit incourt claiming that the right amount
of tax wasn't collected. Andusually it's a lot of these are when
people charge tax or don'tcharge tax on delivery. And, you
(23:21):
know, so you'll have one ofour clients was subject to one of
these suits. And I remembertheir first comment was, we don't
mind that we're subject to thesuit, but the fact that they bought
the cheapest item on ourwebsite kind of really offends them
because in order to getstanding, you have to have purchased
something. And one of theother cases, I think someone bought
like a trampoline, Natalie.And one of the Walmart cases, and
(23:43):
there's a bunch of differentthings. So some people will send
out their administrativeassistants or secretaries to the
local mall or something, tryto buy something online. And if the
tax isn't calculatedcorrectly, that gives them the basis
to open the door to file aclass action suit not only on behalf
of their purchase, but tobring in all these purchases. And
what makes this really bad isit's a fine based on a per transaction
(24:06):
basis. So you could really runup the numbers. It's not just the
tax they're going after.They're going after these fines,
which could be very excessive.
And most cases end up largedamages. There's attorneys fees.
So the play is not really the10 cents, the they're overcharging
tax. It's really all the otherassociated fees that are able to
come in. And by way ofbackground, I mean, our Department
(24:28):
of Revenue, Illinois does notlike these. Right. They really want
to be the arbiter of salestax. They don't really want a third
party plaintiff's firm to comein and be talking about the sales
tax and how it should orshould not be, you know, done. So
(24:49):
the department doesn't evenlike this. Taxpayers don't like this.
So it's kind of a uniquething. And as I said, they, they
do allow it. A lot of stateswill carve out tax because they will
say there is a department thathas specialized knowledge on this.
I think a lot of states havethese because perhaps the state attorney
(25:10):
general doesn't have theexpertise in a particular area. And
there would be a plaintiff'sfirm that would have more expertise.
In Illinois, the Department ofRevenue has the expertise, but it's
still allowed under our FalseClaims act for these third parties
to come in.
Once again, just on the salestax side, the income tax side, the
statutory support isn't thereto allow it. And that was kind of
(25:32):
going back to Natalie's pointis with sales tax, if you do it correctly,
it shouldn't cost youanything. You could pass on the tax
to your customer andeverything. But this is where it
gets really tricky is ifthere's a gray area kind of with
a lot of two in the Lowe'scase is if you do or don't tax it,
and if you're over taxing orunder taxing, could be subject to
one of these lawsuits. So it'sactually in some of these cases we're
(25:53):
seeing Settled. That's whatwe're going to talk about on the
marketplace side. It's almostlike you don't want a decision against
you that you don't owe the taxthat you might have charged because
now you might be subject tothis other lawsuit outside of the
department. And it kind ofcreates a very uncertain position
on some of these tax cases.
Yeah. And then, let's face it.Oh, go ahead.
(26:14):
I was just going to say, goahead. I'll come back.
I was just going to say, let'sface it, we all like, do the best
we can, but sales tax is sointricate and so hard and there's,
there's going to be errors.That's why there are error rates
applied. Right. Because no oneis perfectly perfect on every transaction
and the laws are gray. So it'sjust a really tough place to be.
(26:37):
You just, we just tell ourclients to try to be as, as good
as you can and get as close asyou can, but no one's 100 perfect.
Yeah. When we were at Masadalast year or the year before, the,
the director was kind ofcomplimenting her how nice it is
for the, the gaming andindustry because the taxes they received
on those are real time taxes.So when someone places a bet or uses
(26:59):
a machine, the stateautomatically gets the time of the
tax instantly. And he's like,wouldn't it be great if we could
do sales tax like thatinstant? And everybody in the audience
who was not a state employeejust had this look of horror on his
face. Can you imagine doingtext real time.
For sales tax 20 days afterthe close of the month? Right. Impossible.
A lot of times real time wouldbe, I mean, a lot of the times too.
(27:22):
I think the departments ofrevenue, they understand the law
and they understand,understand what clients do, but they
don't understand theintricacies of what lives between
the sale and the remittanceand all of the difficulty and all
of the systems and everythingthat happens in between and the millions
(27:45):
and millions of transactions.Right. No, I can't pull this particular
transaction up and callsomeone or I can't, you know, the
nuance is not that, oh, I canhave some system look that up real
time to determine thetaxation. Right. I mean, it's that
there are millions goingthrough every day and then they're
all getting ferreted into asystem and then they're trying to
(28:06):
get into your system,Department of Revenue, to give the
tax to you correctly. So it's,it's a real disconnect in reality
of how things happen. And onceagain, we're looking at like 19 and
20. So what was happening thenis different than even our system
now. So it's hard totransition between the two.
(28:27):
Well, not to mention evenjust. And, you know, maybe this will
be a way to kind of transitionto sales tax and talk about marketplace.
But even just from that, like,logistics concept, we're also government
prepaying you for. On fundsthat we may or may not have received.
Right. We're going to send youan invoice for, for maybe $3 million
(28:48):
for a large software licensethat may or may not be, you know,
where the five prong test isgonna be applicable.
Right.
So maybe it is, maybe itisn't. But now, you know, going from
6.25 to, you know, we're goingfull rate everywhere, right? To up
to 10, 11%. We're, you know,writing you a giant check for potentially
(29:11):
one transaction that we may ormay not recoup or may or may not,
you know, somewhere down the line.
So that's an incredible point.
Don't forget that.
Trying to get that money back.Right. Once you pay it, it's really
hard because now you have toalmost argue a negative to say we
owe this or we, you know,didn't know this.
Right. Yeah. But also kind ofgoing back to that full rate.
(29:31):
I don't know if you guysrealize, but, you know, we, we used
to here in Colorado think thatour sales tax return was like the
worst.
I think you guys win. I thinkwe have won now because not only,
you know, the interestingthing too is Illinois, the Department
of Revenue collects it all andthen remits it to the various counties.
So you have how many hundredsof counties and taxing jurisdictions,
(29:55):
and the vendor is supposed toknow all of those, know exactly what
rate to charge and where andto whom, and then give it to the
Department of Revenue. Andthen the Department of Revenue is
supposed, their systems aresupposed to be perfect with giving
it out to the jurisdictions.Jurisdictions get their money, they
spend it, and then, oops, weshouldn't have given that to you.
(30:18):
Or, oops, it should have gonesomewhere else, too. So it's not
only like our logistics, it'sfrom the sale all the way to where
it eventually should have beenowed and who spent it at that end.
So it's just, it encompassesso much and it's so intricate that
it's very hard to get it allcorrect all the time.
(30:39):
Well, and doesn't Illinoisreport kind of when you take in,
when you report your grosssales, isn't that like inclusive
of tax. And then you have tokind of deduct tax to get to your
kind of modified, almost likemodified gross receipts. And then
it's like, do you have anyother exemptions?
Or there's like two pages ofdeductions. Yeah.
(31:01):
And so it's like, you know, I.
Mean, no matter what in all ofthose jurisdictions. So if I sell
something to Naperville, I'vegot DuPage county and I've got Naperville
and I've got the state. I haveto report all of those as gross and
I have a deduction at each ofthose components that like, I can't
file this return. I can't filethis return. I can't.
Right. And that manually is impossible.
(31:23):
It is.
They don't even allow it. Butnow they have this drop down with
like, you're supposed to knowall the jurisdictions and all the
rates and. Great. I, I applaudyou for providing guidance, but that's
not that easy. Right. It justisn't like what they think it is.
And that's. It's notintuitive. Yeah, exactly. It's not
(31:44):
intuitive. So Dave, you wantto talk a little bit about since
we're talking about sales taxfully segue. Yeah.
Well, and I'll start off, butNatalie and I had the honor and pleasure
and the, we really tried in2019 and 2020, we helped the state
(32:06):
and IRMAA and another agencydraft the new legislation for the
2020 and 2021 legislation. Andwe really tried to simplify it and
really tried to make it fairand. But just to give you a little
bit of background and Stacy,your state kind of is a little bit
about order acceptance. Andthat's where we started in the 1930s.
We started off with this orderacceptance thing where you basically
(32:27):
sourced to where a personaccepted the order. And as you guys
know, there's a lot ofmanipulation around because you could
pretty much accept the orderanywhere. And so then Hartneek came
around in the Illinois SupremeCourt in 2013 where they said, well,
no, order acceptance isn'treally fair. You can't rent a hardware
store in the middle of markIllinois and pay someone $20 a week
(32:49):
to pick up the mail and savebillions of dollars. So they basically
said, the Illinois SupremeCourt says we're going to occupation
of selling. And we have thesefive primary tests and these six
secondary tests, which made iteven more complicated because now
it's just like one test. Nowyou have these 11 things that you
might have to look to. Andthen Wayfair came along in 2018 gave
us the $100,000 in the 200items, which made it a lot more simpler.
(33:11):
But in Illinois, there wasstill a huge political undertow that
really wanted this orderacceptance. And that's kind of alluded
to. Natalie said for the falseclaims case, we were very political
in Illinois and it doesn'ttake a lot to stop someone from doing
something. That's right. Wereally tried in 2020 to do what Colorado
had done when they went tomarketplace to make things a little
(33:33):
more simpler. But thepolitics, political pushback was
just too great and it just, itdidn't happen. So what we ended up
was with the marketplace usetax provisions for 2020, and that
was kind of viewed as atransition year. So for 2020, any
people outside of Illinois whomet the $100,000 gross sales and
(33:54):
the 200 transactions wouldbasically source using a use tax
provision to Illinois if youhad no presence in Illinois. But
then the next year, the levelof playing field, as we kind of allude
to in this conversation, someof the neighborhoods were like, well,
wait a minute, Amazon'sselling over there, they're getting
all the tax dollars. We're notgetting anything, even though our
people are the ones buying it.So they came up this level in the
(34:14):
playing field legislationwhich basically put everybody in
a quasi rot type destinationwith certain exclusions. And now
those exclusions is what kindof led to some of the litigation
in some of the recentlegislation. If you are a remote
seller, you went from payingYouth tax in 2020 to rot destination
(34:36):
in 2021 if you had no presencein Illinois. Now, if you're a remote
seller and decided, hey, I'mgoing to create a little small office
in, you know, Hinsdale,Illinois, therefore I can still do
youth tax. Well, you couldtell the people who are outside Illinois
with no presence are basicallysaying, why are we going on destination?
And why does someone who justruns an office in Illinois, you get
(34:59):
to do use tax? So that led tosome litigation. That was the Pet
Med case. That's kind of thegist of it is basically saying you're
unconstitutionally treatingout of state taxpayers differently
by themselves. And even if youown a little piece of property or
lease something thatconstitutionally doesn't get you
to where you want to be. Sothat case settled. But as a result
(35:20):
of it, there was somelegislation that was enacted this
year, effective January 1st of2020, 25, that basically. And that
was Public Act 103983, thatsaid if you're a remote retailer
outside of Illinois with noproperty in Illinois, you're still
going to have to do the rot.However, if you are a remote retailer
(35:43):
with just some presence inIllinois, but your sourcing of sales
is still for a locationoutside of Illinois to an Illinois
customer, you're also notgoing to go to rot. So you no longer
have that use tax option. Soinstead of getting a benefit for
the retailers who didn't haveanything here and let them go back
to use tax, Illinois said, nowwe're going to make everybody rog,
which kind of gives everybodyto what we were just talking about,
(36:05):
how now you have thesecomplicated forms to fill out. And
so it didn't make it anybetter for anyone, but it's now at
least consistently worse foreverybody, if that makes sense. And
now it kind of now we get tothe next phase of the Illinois Department
of Revenue saying, you knowwhat, we had a lot of people register
to collect use tax in 2020,but guess what? When they were supposed
(36:27):
to change over to rot in 2021,they didn't. So now we have all these
people incorrectly flexing useand remitting use tax when they should
be doing rot. So that's wherethis new amnesty program is being
proposed. And what'sinteresting about it is, well, there's
two interesting things aboutit is they're basically applying
a universal rate of 9% insteadof the 6.25% state use tax rate or
(36:53):
the higher rate based on thelocalities adding on there, you use
a six point or, sorry, 9% ratefor everybody under amnesty. And
they said that's similar tothe rate they use when a taxpayer
doesn't provide records duringa sales tax audit. They kind of use
a blended rate between the usetax and the rot. So they're going
to apply this 9% rate to allthose sales. If you're selling anything
(37:14):
that's subject to the lower 1%food tax or medicine, you know, exclusion
tax, they'll allow you to usea 1.75% rate. And this would be from
August 1st of 2026 to 1031 of26. So it's not even this year, it's
next year. And it covers theperiod of 1:1, 21 through 6, 30,
26. So it's not taking placefor another year, which kind of had
(37:38):
a lot of people wondering, whyare you doing this now? Especially
when talk about the generalstuff. At the end of this conversation,
you're going to see that theremight be another amnesty this summer
for all sales and income tax.So there's kind of a lot of confusion
as to why they are proposingthis. But at the same time I think
they feel that they need tosomehow catch up these remote retailers
(37:59):
to where they should be. Andthey don't want to hit them with
a club during audit and assesshigh taxes and high penalties and
interest. And a lot of themdon't have the record keeping to
support where these salesactually should be sourced. So they
think this 9% will kind of getthem where they might want to be.
It's a long way to say.
Yeah. I think the interestingthing too is like Illinois, the use
(38:21):
tax versus the rot. So a usetax is a 6.25%, 1.25% of that is
split by over thejurisdictions, right. In kind of
a blended way. Whereas if youhave ROT, you're getting the 6.25
plus the localities rates orthe RTA or what have you and they
(38:44):
get that percentage, the biguse tax, the big portion of that
1.25 goes to Chicago. Solittle localities really lose out
in a use tax scenario too. Soyou have, you're kind of creating
winners and losers by thedifference between use tax and rot
as well. So I think thedepartment is trying to get that
(39:06):
evened out, meaning the 9%.Perhaps then that 2.75% differential
will have a little bit more tospread around as opposed to that
1% that they spread around offof the use tax.
If Illinois is willing to kindof do like a, call it like a consolidated
rate like you can make forlike a remote seller for Texas, like
(39:30):
or Alabama or some of those.Do you think that might be a long
term solution for some ofthose filers that may just say hey,
this return is not worth it.I'm allowed to do this. Here's 9%.
I'm now just like slapping onerate on it and I don't have to do
all this jurisdictionalnonsense. Do you think they're exploring
that or is it just like thisis just an easy way to get taxpayers
(39:53):
and it's not going to be along term.
That's an excellent questionand I think it is a little bit of
both. I think they'rebasically saying we have so much
confusion. We're not justtalking about a couple hundred, we're
talking about tens ofthousands of taxpayers that they
know are doing this wrong andlittle ones, right people.
That I can't go out and buy asystem. I'm not going to get Avalara
(40:14):
because I am selling out of mybasement. Right. I'm trying to do
the Best I can. Right. So itgives them the option. So I could
see it maybe if there'sthresholds or something like that,
because oftentimes that's thebig rub with sales tax is that it's
just so incredibly difficultpost Wayfair for these little sellers
(40:37):
to get it right, too. So I'dlike to say yes, but I'm not sure.
And I think a 9% rate, I thinkit gets around some of the constitutional
challenges because you're notgiving them a benefit because obviously
they're going to be paying andcharging more tax than some. The
only thing that would kind ofworry us would be the False Claims
act case if someone could say,you know, look, you're charging me
(40:57):
this blended rate. You're onlysupposed to be charging me this 6
to 5%. So if we could get thelegislation to also include a reference
that, that carves it out ofthat category. Yeah, I think that
would be very helpful.
And. Or how the 9% isallocated in it. If it makes everyone
happy. If it, you know, theRTA doesn't get their point, they're
going to say, well, I'mChicago and the collar counties,
(41:18):
and we're supposed to get0.25, right? Where is it? Or Chicago
says, I'm losing because Ithink the 10. There's a lot more
10.2 fivers in here than thereare nine. So it does that 9% make
most of the taxingjurisdictions happy, TBD. So if they
(41:38):
pass an amnesty, is it. Isthat more procedural or administrative
in.
Nature as opposed to statutory?
How does Illinois do that forthose kind of programs?
Yeah, it would be a, it wouldbe a statutory provision. And then
you have these specific dates.It's usually 60 days that you could
file them in. But like I said,what's really unusual, this one's
(42:00):
for August of 2026, and I'venever seen one that far down the
road, especially when youmight have. And that's for remote
sellers. And then if you haveone before that for pretty much everybody,
that just kind of. It seemsodd for a lot of different reasons.
You would think that at aminimum they would lump the two of
them together. You know, itjust makes more sense.
Yeah. And let's remember like,like we talked about earlier. You
(42:24):
know, Illinois resides as astate, and then you have Cook county
and then you have Chicago. Sowhat may alleviate state. Some things
on the state side might notalleviate all of the taxes that you
have, too. So I always like tosay Illinois, perhaps you're sitting
in Chicago, you're reallysubject to three different jurisdictions
(42:47):
that you think all might thinkalike. They don't, they don't necessarily
have reciprocity with eachother and they don't really most
of the time care what theother one's doing because they just
want their piece of the pieceof. So you know, I don't want to
just focus on the Departmentof Revenue because and there's also
the franchise tax which is notpart of the Department of Revenue
(43:10):
which is also a tax inIllinois. So when we talk about taxing
in Illinois we have to talkabout various jurisdictions that
because one has amnesty thatdoesn't mean that that impacts the
other ones. So we have to bereally careful about that as well.
That's an excellent point.
This podcast is foreducational purposes only and is
(43:33):
not intended nor should it berelied upon as legal tax, accounting
or investment advice. Youshould consult with a competent professional
to discuss specifics of yoursituation and the applicability of
the information presented.
Welcome to SALTovation. TheSALTovation show is a podcast series
featuring the leading voicesin SALT where we talk about the issues
and strategies to help youmake sense of state and local tax.
Welcome to Saltovation. Todaywe're diving into all things Illinois
with special guests DaveKupiak and Natalie Martin, who bring
deep insights from theirexperience at the Illinois Department
(00:56):
of Revenue, majorcorporations, and their own firm.
Kupiak and Martin join us aswe unpack recent Illinois tax cases,
explore the state's complexcourt system, and discuss strategies
every taxpayer should know.Let's get started. All right, everyone,
thank you for joining us onanother Saltivation podcast. Today
(01:17):
we are with David Kupiak andNatalie Martin, and we are going
to talk about kind of allthings Illinois. So, Dave, Natalie,
thank you so much for beingwith us today on the Saltivation
podcast.
Thank you for having us.
Thank you for having us.
And so if you all can duke itout, but if you all want to just
(01:37):
give us a background on whoyou are, kind of what you do, where
you are and how you got there,that would be excellent for our listeners
to get to know you before wedive in.
Great. I can go first. Afterlaw school, I went to work for the
Illinois Department of Revenuein Springfield as an attorney. And
after working there for a fewyears, I went to work for Arthur,
(01:58):
and that's where we met Stacy.And then after Arthur Anderson, one
of our clients was ComEd, whohad just merged with Pico Energy
to form Exelon, so went towork for exelon, and after six years
there, we started Kupiak andMartin in 2008. So we have a little
bit of state industry and CPAexperience. Natalie could go into
(02:21):
her background, too.
But very similar, verysimilar. After law school, I worked
for the state of California. Iwas a criminal prosecutor. So I'd
like to say that I hope Inever use that background with any
of my tax cases, but it doesexist. I then went to Arthur Anderson.
I went to Deloitte for a bitafter Arthur Anderson, and then I
(02:41):
joined David Exelon, and thenwe've had Kupiak and Martin since
2008 as well. So like Davesaid, we like to pride ourselves
in having a little bit of aunique perspective, meaning that
Dave's been at the time, samestate. I've been at the state. We've
worked for an accounting firm,we've worked in house, and we've
now worked at a law firm. Sowe've kind of had all the perspectives
(03:04):
so that we find that a littlebit unique. And very helpful to most
of our clients.
Yeah. And most of our clientsare people we've worked with over
the years in some of thoseareas. It's kind of funny, especially
as you guys know in publicaccounting and in an industry, people
kind of move all over theplace. So I tell people, be nice
to people because you neverknow when your path is going to cross
again. And they do multipletimes, such as them.
(03:25):
Right. Don't burn thosebridges. Right. Maybe at a happy
hour at a cross Conference inSt. Louis. Who knows? Maybe. Yes.
Well, I love that. Andcongratulations on your all's kind
of professional relationshipand enduring and being partners for
so long together. That'samazing. And you know something for
(03:46):
those listeners who keepcoming back, you know, we talk a
lot about relationships onthis podcast. And as state tax professionals,
you can't know everythingeverywhere. And so that kind of your
relationship, either betweenyour clients or yourselves has just
kind of continued on in thevarious components of where you're
(04:06):
at. Love that and glad that wecan celebrate that with you. So thank
you. As we dive in, we kindof, we did a little bit of pre homework
this episode and so we wantedto kind of talk through some things.
There is kind of a recentcourt decision related to Pepsi.
(04:28):
What is the issue in this caseand what did the court decide? And
maybe even give us a littlebit of background about how Illinois
and their court system set up.
Yeah. And Pepsi is a perfectexample. It's an income tax 8020
case. And the IllinoisAppellate Court just issued a decision
last month, March 19th. Butwhat's interesting about this one
(04:50):
is Pepsi has been litigatingthis issue for a number of years.
And there's various buckets.This started with an audit obviously
of Pepsi. And the only issuethat's being litigated is the 8020
company issue. But what'sinteresting is the the first audit
was directly appealed to theIllinois Tax Tribunal. And for those
(05:11):
of you who aren't familiarwith the Tax Tribunal, it's been
around a little over 10 years,actually. Natalie and I were involved
when it was started throughthe Illinois Bar association and
CPA societies. There was theperception that Illinois wasn't fair
because AdministrativeCarrying Division was kind of under
the umbrella of the Departmentof Revenue. And circuit court can
sometimes be a little tediousand you have to a lot of times pay
(05:32):
to play with the moniesprotest act. So around 11 or 12 years
ago, everybody got togetherand they formed the Tax Tribunal
for matters that were over$15,000. So as long as you have at
least $15,000 at issue. Youcould go before the Tax Tribunal.
The good thing about it is itonly costs $500, the filing fee.
It's a somewhat formalprocedure in that, you know, you
(05:54):
do have, you know, a protestto file. The protest applications
are online, and you can kindof see how everybody else has filed
them. You do not have anyprivacy. Your name has to be published.
You can redact some of thespecific facts, but it gives you
an option because you don'thave to pay going to the Tax Tribunal
other than the $500 filingfee. And then if you lose at the
(06:16):
Tax Tribunal, you could appealto the Illinois Appellate Court and
then the Illinois SupremeCourt. You also still have the circuit
court system as an optionafter your audit, but in that situation,
you have to make the paymentto the money's protest act before
you go to the court. Sosometimes people don't want to do
that, especially if it's alarger dollar case. I think, to quote
(06:37):
someone who I'll know fromCosta, Mr. Paul Frankel, don't pay,
don't pay, don't pay. It'sharder to get the money back once
you give it to the state. Sowhat's nice about the Tax Tribunal,
and Natalie and I have hadsuccess in it, is even if you don't
want 100% of the issues, whenyou're negotiating, you're giving
them money. So it's. You'rebasically giving them something that.
So you do still have a littlebit of the power in that process.
(06:59):
Whereas if they have all themoney, it's kind of shifts the power
advantage a little bit.
I think also. Sorry, I wasgoing to say, I think also just the
Tax Tribunal, it only dealswith tax issues. And a lot of our
problems at Circuit Court wasthat there wasn't necessarily necessarily
a real expert at tax. Soyou're only dealing with judges that
(07:22):
are dealing with tax matters.So there is kind of also that ability
to maybe perhaps get a betterdecision with a little more reasoning
to go to the appellate court,if you so choose.
Yeah. And what we found out isbeneficial in the Tax Tribunal is
both judges are veryexperienced both in litigation and
(07:44):
in the tax area. And there isan underlying undertow both by the
judges and the way this systemis set up to resolve the cases. What
you'll see is I think you haveless than 20 decisions over the last
10 years because a lot of thecases are either withdrawn or settled.
And it basically saves ourclients money, too, because you don't
(08:06):
have to go through a lot ofthe extensive formal discoveries
that are involved in circuitcourt court, there's an informal
process where if you want topull the case out from the judge
that's hearing your case, youcould have this one formal mediation
with the other judge and thestate to kind of look at where your
case is at. And what we findextremely advantageous about it is
the judges are very open as towhere they're deciding. We were just
(08:28):
in a recent case in which thejudge told the department, I don't
see your case here. So whenyou have the judge say that in early
on phase of the statushearings, I think that kind of gives
you a little more power toresolve the case. And at the same
time, if he says it to us, wehave to present more evidence to
support our position.
Yeah. And that being said,too, I think the Pepsi case also
(08:51):
shows that even withinIllinois, if you're going to circuit
court, there's a little bit ofvenue shopping. Some people prefer
Cook county, which is Chicago,and some people go to Sangamon county,
which is Springfield, thecapital. So. So the court system
in Illinois is intricate andkind of interesting. So Pepsi kind
(09:13):
of shows that. Dave, do youwant to just go into just a bit about
what an 8020 is, just in casethere's a listener that isn't familiar
with Illinois? Well, before wedo that, can I just.
I just want to get some clarity.
Around kind of the. You know,it seems like there could be a fork
in the road.
Right.
You could go circuit court oryou could go tax tribunal, but not
both.
Correct, Correct.
(09:33):
Okay.
And so because of the.
The tax tribunal being inplace and with some of these tax
cases, it sounds like thatwould be the more potentially advantageous
road to go. So that you aregetting a. Judges that know tax rules
are able to opine better andhear those cases better is kind of
(09:57):
what I'm hearing from you guys.
Correct. Especially if youknow that they've decided a specific
issue in a specific way. Andas Natalie alluded to, now, if you
know that they've decided anissue against another taxpayer, you
probably want to do whatNatalie just suggested, venue, shop
and go to Springfield. Andthat's actually what.
Paying is the big thing, too.If you have a. If you have a notice
(10:18):
of deficiency, that's multiplemillions of dollars, it makes it
very easy to go to the taxtribunal for $500. Yeah.
And that's kind of where wewere with Pepsi. They basically had
a multimillion dollarassessment. For those of you who
don't know Illinois for incometax purposes, is a unitary state
and you include everybody inthe unitary group. But there is an
(10:39):
exception for companies thathave more than 80% of their property
or payroll outside the UnitedStates. So what Pepsi did here was
they basically set up aspecific entity. They put all their
expatriates that were doingwork under internal agreements overseas
at different internationaloffices. And this one entity kind
of was under Frito lay'sdivision. So they were basically
(11:02):
excluding all the Frito Layincome and receipts from the Illinois
unitary group, which created anice state tax benefit. Actually,
based on the court documents,it brought Pepsi's Illinois income
tax down to zero. So you sawthis huge shift and in doing so,
it pretty much. I hate to saythis, but you pretty much guarantee
an audit. When you go frompaying millions of dollars to zero,
(11:25):
the state's going to kind ofsay, okay, what's going on here?
And that is kind of alluded toin the audit comments. They said
they specifically lookedduring the audit as to what changed.
And they saw this huge shiftof income not only from this entity,
but from other entities thathad foreign relations into this one
specific entity to make surethat entity made the 8020 test. And
(11:46):
that's what the auditor isfocused on. The taxpayer immediately
went to the tax tribunalwhere, as we said, they only had
to pay the $500. They didn'thave to pay the multiple millions
of dollars. But unfortunatelyfor Pepsi in this case, the judge
who heard this case reallylooked at this issue and said under
the economic substancedoctrine, had no substance, and basically
(12:11):
said that these people werenot reporting to anyone internationally.
They were reporting to peopleinternationally, but they weren't
reporting to anyone in thisspecific subsidiary. So there's no
control there. If you lookedat them as employees, they weren't
really employees of thisentity because they weren't hired
by this entity. They kind ofdiscounted the intercompany employment
agreements, saying that yes,they said they were going to do something,
(12:31):
but they really had no controlover them. And they basically said
no. They out used theirexecutors. They likened it to a sham.
And I think one of the quotes,the judge says, you can't remove
millions of dollars of taxwith one strike of the pen. So in
doing this, Pepsi says, okay,that initial tax tribunal decision
(12:53):
was on summary judgment. Theythen appealed the protests or not
the penalties and interests.And then I hate to say this, but
the judge even basically underthe next order, basically said, you
know what, you have to havereasonable cause here. You guys should
have known what you're doingwas wrong. You don't have any third
party support for this. Youdidn't have any CPA or law degrees
(13:15):
providing anything. So theydenied the penalty relief. And that's
something that Natalie and Iare seeing more and more, is that
the auditors are really tryingto get aggressive with penalties.
Historically, Illinois hasbeen pretty good about that. You
can get the penalties waivedduring the audit by sometimes by
the field auditors. Now that Ithink cases like this are giving
the department a little morestrength in their positions and saying,
(13:37):
you know what, we're going togo after people for penalties and
hopefully the pendulum willsweep back where they're going to
be a little more reasonable.But by having the judge say that
we're not going to abate thepenalties, that didn't help. So then
Pepsi says, okay, next audit'sup, we're going to try something
different. We're going to golike Natalie alluded to, we're going
(13:57):
to go forum shop and we'regoing to go to the circuit court
and Sangamon County. Well,unfortunately, the circuit court
just issued an opinion acouple months ago saying, you know
what we kind of agree with thetax Tribunal said nothing has really
changed from the first audit.And so the circuit court decided
against them. To my knowledge,they haven't appealed that case yet
to the appellate court. Andthen the third audit, which is kind
(14:20):
of upright, the last, what'sinteresting, the circuit court was
actually the most recent year,so there's a circuit court opinion
on that. There's also a middleperiod too, which is still in the
Tax Tribunal. So that's kindof pending, and I think that's up
for status in June. So inshort, Pepsi has an appellate court
decision affirming the taxTribunal saying, you're not an 8020
(14:42):
company. You have to put theincome in and pay the tax. And unfortunately,
you don't get penaltyabatement. Then you have a circuit
court judge saying the samething for the most recent years,
which they can appeal. Wehaven't heard anything yet. And then
you still have those middleyears. What's interesting about this
is the whole underlyingpremise here is the judge in almost
(15:03):
each one of these cases hasbasically looked for external documents
or external support to say,what did this entity do that supports
its economic presence? Andduring the initial tax tribunal arguments,
one of the former VPs of thetaxpayer basically testified, you
know, what the substance was.But the judge wanted more documentary
(15:25):
support and said, you know,unless we could show documentary
support to support thistestimony, we're not going to give
it the Support it needs to getyou to that 80, 20 test. So it kind
of shows the importance ofhaving the documents internal and
external. And both judges, theappellate court and the circuit court
and tax tribunal kind of madereference to external documents.
(15:46):
So one thing, one common thingwe're seeing now not only in this
case, but other cases, is ifyou're taking a position that's not
clear, you might want to havesomething from either your CPA firm
or an accounting firm or alawyer law firm just to kind of support
that position. Or a letterrolling, get a letter rolling from
the state to kind of give yousome support. Because they're kind
of saying that they want morethan a testimony.
(16:07):
Yeah, and I think, I thinkdocumentation is probably a big issue
that we're seeing in Illinois.There's another case, the lowest
case, which recently came outas well, and that really talks about
documentation that you couldhave that you have some kind of a
burden to update. And you alsohave a burden to review documentation
(16:29):
that the Department of Revenueis providing you as well. In the
lowest case, that dealt withconstruction contractors, which we
don't need to get into in toomuch detail, but the overall promise
was that there was a bulletinissued by the Department of Revenue
explaining what is and is nota construction contractor in pretty
(16:51):
specific terms. There wasperhaps a little wiggle room, but
they had noticed that theissue was a gray area and they were
trying to provide explanationand some examples and what have you.
In the lowest case, reallywhat happened was lows didn't necessarily
(17:12):
follow that and they didn'talso have. They had. They had relied
on a third party review beforethis document, this bulletin came
out. So the judge didn'tparticularly like that. They didn't
then have a outside thirdparty review that document to opine
(17:33):
if they would have changedtheir opinion. So I think the lowest
case has a lot of levels toit. One of them is like, be careful
with all of us living in sameas last year. Right. And relying
on what happened last yearbecause circumstances change, rulings
change, you really have tokeep up on documentation. And then
(17:55):
secondly, even like Davealluded to in the Pepsi case, keeping
contemporaneous third partydocumentation about your positions
is really important becauseit's not necessarily what your opinion
was. Maybe there's a littlebit of a burden now to go out and
get someone to opine on whatyour position is. So, you know, Dave
(18:18):
and I are finding that a lot.The Department of Revenue now has
some more penalties too, aboutrecordkeeping requirements. We haven't
necessarily seen them comeinto practice yet, but they have
been talking, and I don't wantto say threatening, but it's a club
that they have because likeDave alluded to also penalties are
just getting really onerousand they're getting almost automatic
(18:41):
now. So people are much morecognizant to them. So documentation
is really important. Kind of abest practice, too, is when we talk
about documentation. Let'sface it, we all live in 2025, but
we're working in 2018, right?Or, you know, way back. So what you
(19:01):
have today is not necessarilywhat you're looking at. You're going
backward in time. So systemschange, people leave, paper files
are gosh knows where. So, youknow, documentation is becoming more
important. And it's somewhatharder now that we don't have the
(19:21):
big old files that we used tohave where you had your tax returns
and your work papers and your,you know, comments and all of that.
So we're really seeingdocumentation become more and more
important. And as part ofthat, just your record keeping requirements
with regards to yourdocumentation. I also found the Lowe's
(19:43):
case interesting.
From, like, it was how the case.
Even came about, right? How itwas a competitive disadvantage, right,
to another company. And soit's also kind of a little bit of
a, hey, be careful out therefor, you know, even big companies,
(20:03):
right? Because if, if, ifyou've got smaller guys out there
saying, hey, you guys aren'tdoing this right, and we know it,
right? Let's face it, that'show that, that's how that came about.
I probably didn't go to Lowe'sto save sales tax, right? We always,
we tell our clients, like,sales taxes, you want to get it right,
(20:23):
because most of the time it'snot going to impact a transaction,
but boys are going to impactyou if you didn't charge it. And
five years later, you getaudited and you have to pay it out
of your pocket. So let's faceit, I mean, Lowe's probably was taking
a position, but would I go tobuy a dishwasher from Lowe's? Because
I knew that they weren't goingto charge me sales tax because they
(20:45):
were concerned, consideringthemselves a construction contractor.
I probably not. So it was, youknow, once again, sales tax. Just
try to get it right becauseit's unlike income tax. You're not
going to probably go back andtry to recoup sales tax from all
of the people that you shouldhave charged it. And in Illinois,
we probably shouldn't call itsales tax. We should call it Retailers
(21:06):
occupation tax, because it'sreally born on you anyway, but you
pass it through to yourcustomer. So. Yeah. And I also think
the interesting thing aboutLois, too is Illinois is unique in
the Ki Tam kind of Fair FalseClaims Act. They allow it to be for
tax. A lot of states don't. Soyou're going to see these cases where
(21:30):
it becomes, did you charge methe correct sales tax? Did you overcharge
me? Did you undercharge me?And the competitive disadvantage
and boy, the penalties withregards to that are a whole new level.
Right. So we also tell ourclients it becomes important to get
sales tax as right as you canand not overcharge because it opens
(21:53):
up a whole other world oflitigation that most tax folks are
not used to or don't want todelve into yet.
Natalie, can you or Dave feelfree to jump in, kind of talk through,
through that keytam concept,because we've. I don't one thing,
I don't think we've actuallyreally talked about it much in on
(22:16):
the podcast. You know, it'scome up as just kind of identifiers
of things to think about kindof for like, from a sales tax perspective.
But it does come up when, youknow, we might talk to a new client
or it's like, well, can't Ijust charge like 7% across the board
board or something like that?And it's, you know, some are going
to be over, some are going tobe under, but from my perspective,
(22:38):
it's a wash. But you can't dothat. You can, you know, not all
states are going to have kindof a key TAM concept, but it sounds
like maybe Illinois does, andmaybe it's on as like an outlier,
maybe a little aggressive orlives in a different part of statute
or whatever. So can we maybesegue a little bit and just talk
(22:59):
about the KTAM concept for alittle bit?
Yeah. Basically it's Illinoislaws on the sales tax side allow
a third party to step in onbehalf of the Department of Revenue
and basically file a suit incourt claiming that the right amount
of tax wasn't collected. Andusually it's a lot of these are when
people charge tax or don'tcharge tax on delivery. And, you
(23:21):
know, so you'll have one ofour clients was subject to one of
these suits. And I remembertheir first comment was, we don't
mind that we're subject to thesuit, but the fact that they bought
the cheapest item on ourwebsite kind of really offends them
because in order to getstanding, you have to have purchased
something. And one of theother cases, I think someone bought
like a trampoline, Natalie.And one of the Walmart cases, and
(23:43):
there's a bunch of differentthings. So some people will send
out their administrativeassistants or secretaries to the
local mall or something, tryto buy something online. And if the
tax isn't calculatedcorrectly, that gives them the basis
to open the door to file aclass action suit not only on behalf
of their purchase, but tobring in all these purchases. And
what makes this really bad isit's a fine based on a per transaction
(24:06):
basis. So you could really runup the numbers. It's not just the
tax they're going after.They're going after these fines,
which could be very excessive.
And most cases end up largedamages. There's attorneys fees.
So the play is not really the10 cents, the they're overcharging
tax. It's really all the otherassociated fees that are able to
come in. And by way ofbackground, I mean, our Department
(24:28):
of Revenue, Illinois does notlike these. Right. They really want
to be the arbiter of salestax. They don't really want a third
party plaintiff's firm to comein and be talking about the sales
tax and how it should orshould not be, you know, done. So
(24:49):
the department doesn't evenlike this. Taxpayers don't like this.
So it's kind of a uniquething. And as I said, they, they
do allow it. A lot of stateswill carve out tax because they will
say there is a department thathas specialized knowledge on this.
I think a lot of states havethese because perhaps the state attorney
(25:10):
general doesn't have theexpertise in a particular area. And
there would be a plaintiff'sfirm that would have more expertise.
In Illinois, the Department ofRevenue has the expertise, but it's
still allowed under our FalseClaims act for these third parties
to come in.
Once again, just on the salestax side, the income tax side, the
statutory support isn't thereto allow it. And that was kind of
(25:32):
going back to Natalie's pointis with sales tax, if you do it correctly,
it shouldn't cost youanything. You could pass on the tax
to your customer andeverything. But this is where it
gets really tricky is ifthere's a gray area kind of with
a lot of two in the Lowe'scase is if you do or don't tax it,
and if you're over taxing orunder taxing, could be subject to
one of these lawsuits. So it'sactually in some of these cases we're
(25:53):
seeing Settled. That's whatwe're going to talk about on the
marketplace side. It's almostlike you don't want a decision against
you that you don't owe the taxthat you might have charged because
now you might be subject tothis other lawsuit outside of the
department. And it kind ofcreates a very uncertain position
on some of these tax cases.
Yeah. And then, let's face it.Oh, go ahead.
(26:14):
I was just going to say, goahead. I'll come back.
I was just going to say, let'sface it, we all like, do the best
we can, but sales tax is sointricate and so hard and there's,
there's going to be errors.That's why there are error rates
applied. Right. Because no oneis perfectly perfect on every transaction
and the laws are gray. So it'sjust a really tough place to be.
(26:37):
You just, we just tell ourclients to try to be as, as good
as you can and get as close asyou can, but no one's 100 perfect.
Yeah. When we were at Masadalast year or the year before, the,
the director was kind ofcomplimenting her how nice it is
for the, the gaming andindustry because the taxes they received
on those are real time taxes.So when someone places a bet or uses
(26:59):
a machine, the stateautomatically gets the time of the
tax instantly. And he's like,wouldn't it be great if we could
do sales tax like thatinstant? And everybody in the audience
who was not a state employeejust had this look of horror on his
face. Can you imagine doingtext real time.
For sales tax 20 days afterthe close of the month? Right. Impossible.
A lot of times real time wouldbe, I mean, a lot of the times too.
(27:22):
I think the departments ofrevenue, they understand the law
and they understand,understand what clients do, but they
don't understand theintricacies of what lives between
the sale and the remittanceand all of the difficulty and all
of the systems and everythingthat happens in between and the millions
(27:45):
and millions of transactions.Right. No, I can't pull this particular
transaction up and callsomeone or I can't, you know, the
nuance is not that, oh, I canhave some system look that up real
time to determine thetaxation. Right. I mean, it's that
there are millions goingthrough every day and then they're
all getting ferreted into asystem and then they're trying to
(28:06):
get into your system,Department of Revenue, to give the
tax to you correctly. So it's,it's a real disconnect in reality
of how things happen. And onceagain, we're looking at like 19 and
20. So what was happening thenis different than even our system
now. So it's hard totransition between the two.
(28:27):
Well, not to mention evenjust. And, you know, maybe this will
be a way to kind of transitionto sales tax and talk about marketplace.
But even just from that, like,logistics concept, we're also government
prepaying you for. On fundsthat we may or may not have received.
Right. We're going to send youan invoice for, for maybe $3 million
(28:48):
for a large software licensethat may or may not be, you know,
where the five prong test isgonna be applicable.
Right.
So maybe it is, maybe itisn't. But now, you know, going from
6.25 to, you know, we're goingfull rate everywhere, right? To up
to 10, 11%. We're, you know,writing you a giant check for potentially
(29:11):
one transaction that we may ormay not recoup or may or may not,
you know, somewhere down the line.
So that's an incredible point.
Don't forget that.
Trying to get that money back.Right. Once you pay it, it's really
hard because now you have toalmost argue a negative to say we
owe this or we, you know,didn't know this.
Right. Yeah. But also kind ofgoing back to that full rate.
(29:31):
I don't know if you guysrealize, but, you know, we, we used
to here in Colorado think thatour sales tax return was like the
worst.
I think you guys win. I thinkwe have won now because not only,
you know, the interestingthing too is Illinois, the Department
of Revenue collects it all andthen remits it to the various counties.
So you have how many hundredsof counties and taxing jurisdictions,
(29:55):
and the vendor is supposed toknow all of those, know exactly what
rate to charge and where andto whom, and then give it to the
Department of Revenue. Andthen the Department of Revenue is
supposed, their systems aresupposed to be perfect with giving
it out to the jurisdictions.Jurisdictions get their money, they
spend it, and then, oops, weshouldn't have given that to you.
(30:18):
Or, oops, it should have gonesomewhere else, too. So it's not
only like our logistics, it'sfrom the sale all the way to where
it eventually should have beenowed and who spent it at that end.
So it's just, it encompassesso much and it's so intricate that
it's very hard to get it allcorrect all the time.
(30:39):
Well, and doesn't Illinoisreport kind of when you take in,
when you report your grosssales, isn't that like inclusive
of tax. And then you have tokind of deduct tax to get to your
kind of modified, almost likemodified gross receipts. And then
it's like, do you have anyother exemptions?
Or there's like two pages ofdeductions. Yeah.
(31:01):
And so it's like, you know, I.
Mean, no matter what in all ofthose jurisdictions. So if I sell
something to Naperville, I'vegot DuPage county and I've got Naperville
and I've got the state. I haveto report all of those as gross and
I have a deduction at each ofthose components that like, I can't
file this return. I can't filethis return. I can't.
Right. And that manually is impossible.
(31:23):
It is.
They don't even allow it. Butnow they have this drop down with
like, you're supposed to knowall the jurisdictions and all the
rates and. Great. I, I applaudyou for providing guidance, but that's
not that easy. Right. It justisn't like what they think it is.
And that's. It's notintuitive. Yeah, exactly. It's not
(31:44):
intuitive. So Dave, you wantto talk a little bit about since
we're talking about sales taxfully segue. Yeah.
Well, and I'll start off, butNatalie and I had the honor and pleasure
and the, we really tried in2019 and 2020, we helped the state
(32:06):
and IRMAA and another agencydraft the new legislation for the
2020 and 2021 legislation. Andwe really tried to simplify it and
really tried to make it fairand. But just to give you a little
bit of background and Stacy,your state kind of is a little bit
about order acceptance. Andthat's where we started in the 1930s.
We started off with this orderacceptance thing where you basically
(32:27):
sourced to where a personaccepted the order. And as you guys
know, there's a lot ofmanipulation around because you could
pretty much accept the orderanywhere. And so then Hartneek came
around in the Illinois SupremeCourt in 2013 where they said, well,
no, order acceptance isn'treally fair. You can't rent a hardware
store in the middle of markIllinois and pay someone $20 a week
(32:49):
to pick up the mail and savebillions of dollars. So they basically
said, the Illinois SupremeCourt says we're going to occupation
of selling. And we have thesefive primary tests and these six
secondary tests, which made iteven more complicated because now
it's just like one test. Nowyou have these 11 things that you
might have to look to. Andthen Wayfair came along in 2018 gave
us the $100,000 in the 200items, which made it a lot more simpler.
(33:11):
But in Illinois, there wasstill a huge political undertow that
really wanted this orderacceptance. And that's kind of alluded
to. Natalie said for the falseclaims case, we were very political
in Illinois and it doesn'ttake a lot to stop someone from doing
something. That's right. Wereally tried in 2020 to do what Colorado
had done when they went tomarketplace to make things a little
(33:33):
more simpler. But thepolitics, political pushback was
just too great and it just, itdidn't happen. So what we ended up
was with the marketplace usetax provisions for 2020, and that
was kind of viewed as atransition year. So for 2020, any
people outside of Illinois whomet the $100,000 gross sales and
(33:54):
the 200 transactions wouldbasically source using a use tax
provision to Illinois if youhad no presence in Illinois. But
then the next year, the levelof playing field, as we kind of allude
to in this conversation, someof the neighborhoods were like, well,
wait a minute, Amazon'sselling over there, they're getting
all the tax dollars. We're notgetting anything, even though our
people are the ones buying it.So they came up this level in the
(34:14):
playing field legislationwhich basically put everybody in
a quasi rot type destinationwith certain exclusions. And now
those exclusions is what kindof led to some of the litigation
in some of the recentlegislation. If you are a remote
seller, you went from payingYouth tax in 2020 to rot destination
(34:36):
in 2021 if you had no presencein Illinois. Now, if you're a remote
seller and decided, hey, I'mgoing to create a little small office
in, you know, Hinsdale,Illinois, therefore I can still do
youth tax. Well, you couldtell the people who are outside Illinois
with no presence are basicallysaying, why are we going on destination?
And why does someone who justruns an office in Illinois, you get
(34:59):
to do use tax? So that led tosome litigation. That was the Pet
Med case. That's kind of thegist of it is basically saying you're
unconstitutionally treatingout of state taxpayers differently
by themselves. And even if youown a little piece of property or
lease something thatconstitutionally doesn't get you
to where you want to be. Sothat case settled. But as a result
(35:20):
of it, there was somelegislation that was enacted this
year, effective January 1st of2020, 25, that basically. And that
was Public Act 103983, thatsaid if you're a remote retailer
outside of Illinois with noproperty in Illinois, you're still
going to have to do the rot.However, if you are a remote retailer
(35:43):
with just some presence inIllinois, but your sourcing of sales
is still for a locationoutside of Illinois to an Illinois
customer, you're also notgoing to go to rot. So you no longer
have that use tax option. Soinstead of getting a benefit for
the retailers who didn't haveanything here and let them go back
to use tax, Illinois said, nowwe're going to make everybody rog,
which kind of gives everybodyto what we were just talking about,
(36:05):
how now you have thesecomplicated forms to fill out. And
so it didn't make it anybetter for anyone, but it's now at
least consistently worse foreverybody, if that makes sense. And
now it kind of now we get tothe next phase of the Illinois Department
of Revenue saying, you knowwhat, we had a lot of people register
to collect use tax in 2020,but guess what? When they were supposed
(36:27):
to change over to rot in 2021,they didn't. So now we have all these
people incorrectly flexing useand remitting use tax when they should
be doing rot. So that's wherethis new amnesty program is being
proposed. And what'sinteresting about it is, well, there's
two interesting things aboutit is they're basically applying
a universal rate of 9% insteadof the 6.25% state use tax rate or
(36:53):
the higher rate based on thelocalities adding on there, you use
a six point or, sorry, 9% ratefor everybody under amnesty. And
they said that's similar tothe rate they use when a taxpayer
doesn't provide records duringa sales tax audit. They kind of use
a blended rate between the usetax and the rot. So they're going
to apply this 9% rate to allthose sales. If you're selling anything
(37:14):
that's subject to the lower 1%food tax or medicine, you know, exclusion
tax, they'll allow you to usea 1.75% rate. And this would be from
August 1st of 2026 to 1031 of26. So it's not even this year, it's
next year. And it covers theperiod of 1:1, 21 through 6, 30,
26. So it's not taking placefor another year, which kind of had
(37:38):
a lot of people wondering, whyare you doing this now? Especially
when talk about the generalstuff. At the end of this conversation,
you're going to see that theremight be another amnesty this summer
for all sales and income tax.So there's kind of a lot of confusion
as to why they are proposingthis. But at the same time I think
they feel that they need tosomehow catch up these remote retailers
(37:59):
to where they should be. Andthey don't want to hit them with
a club during audit and assesshigh taxes and high penalties and
interest. And a lot of themdon't have the record keeping to
support where these salesactually should be sourced. So they
think this 9% will kind of getthem where they might want to be.
It's a long way to say.
Yeah. I think the interestingthing too is like Illinois, the use
(38:21):
tax versus the rot. So a usetax is a 6.25%, 1.25% of that is
split by over thejurisdictions, right. In kind of
a blended way. Whereas if youhave ROT, you're getting the 6.25
plus the localities rates orthe RTA or what have you and they
(38:44):
get that percentage, the biguse tax, the big portion of that
1.25 goes to Chicago. Solittle localities really lose out
in a use tax scenario too. Soyou have, you're kind of creating
winners and losers by thedifference between use tax and rot
as well. So I think thedepartment is trying to get that
(39:06):
evened out, meaning the 9%.Perhaps then that 2.75% differential
will have a little bit more tospread around as opposed to that
1% that they spread around offof the use tax.
If Illinois is willing to kindof do like a, call it like a consolidated
rate like you can make forlike a remote seller for Texas, like
(39:30):
or Alabama or some of those.Do you think that might be a long
term solution for some ofthose filers that may just say hey,
this return is not worth it.I'm allowed to do this. Here's 9%.
I'm now just like slapping onerate on it and I don't have to do
all this jurisdictionalnonsense. Do you think they're exploring
that or is it just like thisis just an easy way to get taxpayers
(39:53):
and it's not going to be along term.
That's an excellent questionand I think it is a little bit of
both. I think they'rebasically saying we have so much
confusion. We're not justtalking about a couple hundred, we're
talking about tens ofthousands of taxpayers that they
know are doing this wrong andlittle ones, right people.
That I can't go out and buy asystem. I'm not going to get Avalara
(40:14):
because I am selling out of mybasement. Right. I'm trying to do
the Best I can. Right. So itgives them the option. So I could
see it maybe if there'sthresholds or something like that,
because oftentimes that's thebig rub with sales tax is that it's
just so incredibly difficultpost Wayfair for these little sellers
(40:37):
to get it right, too. So I'dlike to say yes, but I'm not sure.
And I think a 9% rate, I thinkit gets around some of the constitutional
challenges because you're notgiving them a benefit because obviously
they're going to be paying andcharging more tax than some. The
only thing that would kind ofworry us would be the False Claims
act case if someone could say,you know, look, you're charging me
(40:57):
this blended rate. You're onlysupposed to be charging me this 6
to 5%. So if we could get thelegislation to also include a reference
that, that carves it out ofthat category. Yeah, I think that
would be very helpful.
And. Or how the 9% isallocated in it. If it makes everyone
happy. If it, you know, theRTA doesn't get their point, they're
going to say, well, I'mChicago and the collar counties,
(41:18):
and we're supposed to get0.25, right? Where is it? Or Chicago
says, I'm losing because Ithink the 10. There's a lot more
10.2 fivers in here than thereare nine. So it does that 9% make
most of the taxingjurisdictions happy, TBD. So if they
(41:38):
pass an amnesty, is it. Isthat more procedural or administrative
in.
Nature as opposed to statutory?
How does Illinois do that forthose kind of programs?
Yeah, it would be a, it wouldbe a statutory provision. And then
you have these specific dates.It's usually 60 days that you could
file them in. But like I said,what's really unusual, this one's
(42:00):
for August of 2026, and I'venever seen one that far down the
road, especially when youmight have. And that's for remote
sellers. And then if you haveone before that for pretty much everybody,
that just kind of. It seemsodd for a lot of different reasons.
You would think that at aminimum they would lump the two of
them together. You know, itjust makes more sense.
Yeah. And let's remember like,like we talked about earlier. You
(42:24):
know, Illinois resides as astate, and then you have Cook county
and then you have Chicago. Sowhat may alleviate state. Some things
on the state side might notalleviate all of the taxes that you
have, too. So I always like tosay Illinois, perhaps you're sitting
in Chicago, you're reallysubject to three different jurisdictions
(42:47):
that you think all might thinkalike. They don't, they don't necessarily
have reciprocity with eachother and they don't really most
of the time care what theother one's doing because they just
want their piece of the pieceof. So you know, I don't want to
just focus on the Departmentof Revenue because and there's also
the franchise tax which is notpart of the Department of Revenue
(43:10):
which is also a tax inIllinois. So when we talk about taxing
in Illinois we have to talkabout various jurisdictions that
because one has amnesty thatdoesn't mean that that impacts the
other ones. So we have to bereally careful about that as well.
That's an excellent point.
This podcast is foreducational purposes only and is
(43:33):
not intended nor should it berelied upon as legal tax, accounting
or investment advice. Youshould consult with a competent professional
to discuss specifics of yoursituation and the applicability of
the information presented.
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