July 25, 2025 • 39 mins
In this episode, we continue our conversation with Dave Kupiec, CPA, JD, and Natalie Martin, JD, of Kupiec & Martin, LLC, for a deep dive into Illinois tax law. We break down the often-overlooked Illinois franchise tax—a complex and frequently misunderstood area of state taxation. We explore how this tax impacts businesses, particularly during audits in Chicago and Cook County, and highlight the hidden risks that can catch taxpayers off guard.
You’ll gain key insights into potential liabilities and learn proactive strategies to stay ahead of compliance issues. The conversation also underscores the importance of strong collaboration between legal and tax teams to navigate the shifting terrain of Illinois tax law.
Key Takeaways:
- Franchise tax in Illinois is easy to overlook: Many businesses don’t fully understand it, which can lead to problems.
- Audits in Chicago and Cook County are high risk: These areas are more likely to trigger issues if your filings aren’t solid.
- Legal and tax teams need to work together: Teamwork helps catch mistakes and stay compliant.
- Plan ahead to avoid trouble: A proactive approach can save time, money, and stress later.
Chapters
00:00 - Intro
00:29 - Understanding the Franchise Tax: Key Insights
13:30 - Registration and Liability in Business Transactions
21:23 - Chicago's Taxation Challenges
31:05 - Navigating State Tax Regulations
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:34):
Welcome to SALTovation. TheSALTovation sho 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 back to Saltivation.We're continuing our conversation
with Dave Kupiak and NatalieMartin. Diving deeper into Illinois
tax complexities. Today we'lltackle the elusive franchise tax,
(00:56):
its hidden pitfalls, and whattaxpayers need to know about navigating
audits in Chicago and CookCounty. From surprise liabilities
to proactive tax strategies.
Let's dive in.
So let's maybe talk about thefranchise tax, maybe Senate Bill
2325 and what that proposal iskind of what's going on in the franchise
(01:22):
tax space right now.
Sure. So the franchise tax isa very kind of esoteric tax in Illinois.
It's based on your paid incapital and it has an allocation
factor which is unique and notlike your Illinois sales factor.
So if you think that it reallyleverages off the income tax, it
does not. It's a for theability to transact business in Illinois.
(01:46):
It is administered by theIllinois Secretary of State, not
the Department of Revenue.They are completely separate entities.
It has been repealed, broughtback from the well, it's been, it's
been scheduled to be repealed.The repeal has been repealed. So
it still exists. Long andshort. I don't think it will ever
(02:08):
die. Truly. The main crux ofthe franchise tax is to remain in
good standing in Illinois.This often comes up when you are
having a merger, having,having a bond issuance, doing some
stock issues and some bank orsome entity said, can I have your
(02:29):
Illinois good standingcertificate? And you say what? And
you say, oh, franchise tax,that's the main kind of club that
they have over this.
And licensing, too.
Licensing and licensing. Ifyou want to have a state contract,
they're going to look for yourgood standing certificate. That often
happens as well. As I said,it's administered by the Secretary
(02:51):
of State. So they currentlyhave a $10,000 exemption. So about,
I think about 90% of theentities in Illinois now are not.
They have to file the return,but they avail themselves of the
exemption and owe $75.Interestingly enough, LLCs, it's
(03:11):
a flat rate. You're notsubject to all the things that corps
are subject to. So it really,you know, skews towards LLC in Illinois
if you have a choice ofentity. So now that we have 90% of
the small entities, the LLC,things like that, exempt from it,
you're really focused on largecorporations that don't necessarily
(03:36):
have a vote in Illinois forthe politics of it. And you know,
it still brings in a couplehundred million dollars. So it's
not a. Something that they canget rid of easily. And there's a
little bit of a power strugglebecause the secretary of state does
administer it. It's not justanother tax administered by the Department
(03:56):
of Revenue.
There's less than 20 people inthe department that handles over
a hundred thousandcorporations. So for those 20 people
are generating a couplehundred million dollars of revenue.
It's politically, they don'twant to give it up. They really don't.
Yeah, right. Currently, theinterest is the, one of the most
onerous parts of this. It's 2%per month. 2%, 2%. 2% added up, put
(04:21):
it all together. We oftentimessee bills that the interest is two
and three times the tax.Because once again, if you think
you're looking back from anincome tax perspective, if you have
an unreported merger, I thinkour record is the 50s, 1950s, that
there were unreported mergersfor one of our clients. There's no
(04:43):
statute of limitations forthem with regards to unreported mergers.
So you're going back, sayyou're going back to. Commonly we
have ones that go back to2006, 5. You're looking at 20 years
of 2% per month interest. Sothe bill that's currently up is to
kind of realign interest, tolike a realistic interest. You know,
(05:09):
they often, they just, theirposition is it's statutory interest.
We can't, we have to. That'sjust how we have to compute it. So
this would change it, but itwould only change it going forward
in our minds, at least it'ssomething. You know, half of something
is better than zero ofsomething. Would we like it to go
back? Sure. But as written, itgoes forward. The interests change.
(05:34):
Yeah.
We have a lot of cities inColorado from a home world perspective
that do one percent per monthor one and a half percent per month.
So like in the city and countyof Denver, if you're doing like a
three year VDA, right. You'relooking at 36% interest on just a
sales tax. Maybe you've got ause tax that goes back seven years
and it's a Friday afternoonand I don't feel like thinking hard
(05:55):
to figure out to get seventimes 12. Correct.
Right.
Like that's a lot. That's abig interest number.
Right, right. And oftentimeswhat happens in these mergers is
that they're kind ofcompilation of paid in capital. So
you have your Paid in capitaland then you merged someone in with
their paid in capital. Sounbeknownst to you, you have all
(06:18):
of this outstanding liability.You know, and let's be realistic.
The franchise tax doesn'toften reside in the tax department.
Sometimes it resides in thelegal department. The legal department
doesn't understand the nuancesof what the base is. They don't what's
paid in capital. Theyoftentimes we see they take stock
times par is $100. You know,that's, that's the information that
(06:43):
they know. They don't knowthat on a federal return you have
$3 billion sitting inadditional paid in capital. That
that's what the Secretary ofState considers it to be. So it's
often a hot potato because itdoesn't reside in a place in companies.
It's often or it should residein multiple places and it's like
not me. And it just resides nowhere.
(07:04):
Then is Illinois capped likeDelaware is, or is it just like apic?
There is a cap on the annual,but there is not a cap on your additional.
So when people talk about the$2 million cap, it's a $2 million
cap on your annual tax. But ifyou've had the transactions from
1950, the additional paid incapital is.0015. The annual tax is
(07:30):
0.001. So you could have a $3billion base and you're at your $2
million cap. But unbeknownstto you, you have $5 billion that
you didn't add correctly.They're going to go back and there's
no limit on that $5 billion onthat. It's the Form 1430, which is
(07:52):
the increase in capital formthat you see that does not have a
cap. And they also argue thatthat does not have a statue.
Yeah.
Well, that makes, you know,Delaware is what, 250. 250,000 look
like, you know, sweet. I'llpay that.
We're just getting a potatoes.
Yeah.
A ton of common stock.
(08:13):
Just like so like, like I wasalluding to earlier, we talk about
the Department of Revenue. Wealso have to talk about this if you're.
And a lot of times sometimesthe registration is done by someone
in legal that says, oh yeah,we want to transact in business in
Illinois.
Sure.
Check. Right. Unbeknownst towhat the impact of it is.
(08:33):
Right, right. Because theydon't understand what goes into any
kind of computation.
Exactly.
On a state basis. Right,right. Because I mean, a lot of other
states. Right. Are just like,hey, give us your 50 bucks per year
or Whatever, Right. And youknow, you go, but there are the Illinois,
the Delawares that, you know,some of these other states that know
(08:55):
you have some financialinformation that you have to provide
and there could be someadditional tax involved.
Exactly. And from a legalperspective, one of the abilities
is the ability to use thecourt system, meaning you become
the plaintiff. If you're notregistered, then there is an argument
that you are not able to availyourselves of the court. So legal
departments oftentimes willregister everywhere, right. They
(09:19):
say, we might, I might sneezein Illinois someday. I want to just
be registered just in case.Right. And they don't understand
the impact. And then they getit. And then they say, hey tax, can
you give me these numbers toapportion this? And it's like, holy
cow, what is this? And thenthey wonder the minute that you file,
(09:40):
they're like, where have youbeen all my life? Right. And they
will, you know, well, and.
Then if you want to withdraw,good luck.
Good luck. You gotta getcaught up. It's a very hard thing
to say. I'm no longertransacting business in Illinois.
Right.
Well, and then if you haven'tbeen paying correctly.
Yes.
And you want to withdraw, youhave to get caught up and you know.
(10:03):
Get yourself in good standing.Right. And like I said, there's a
lot of these stock times, parvalue on my base is 100. There's
a, there's a check mark on theform that says I'm just gonna elect
to pay on everything to makeit easy. Then I don't have to fill
out those numbers, I don'thave to apportion it. And if you
do that, it is a world of hurtto try to go back then and say, whoops,
(10:27):
I shouldn't have done that. Sooftentimes we'll see a hundred dollars,
check the box, go on my merryway. Someone wants to merge and they
say, let me see your franchisetax return. And it becomes part of
the due diligence of a mergerthat you have been way under reporting
for years.
And what's really unfortunateis sometimes you have these self
(10:50):
created problems where peoplewill say, you know what, we have
all these shell corporationsor empty non doing business corporations,
let's merge them together,clean them up. We've seen a situation
where someone took a $100filer that had zero factor in Illinois
and put it with another entitythat had 100% factor. And by putting
the two together, they createda $2 million liability. And all they
(11:13):
were supposed to do was getrid of these Entities that were paying
$75 a year. Unfortunately,when we got involved, they had already
dissolved the other company.If they hadn't dissolved the company,
we could have done it. Andwhat did the person at the Secretary
of State say, Natalie?
Yeah, they said, oh, that'sinteresting. I'm saying interesting.
I think they said, funny. Ididn't find it funny. If you would
(11:33):
have done it the other way, itwould have still been $75.
Yeah. So $2 million. Can youimagine the person at the company
who had to go and tell the CEOand CFO we have to pay $2 million
because we merged this thewrong way?
Nope.
I would have quit. I wouldhave quit first, found a new job.
Entities. Talk to your legalgroup. If you're in the tax department,
(11:54):
talk to your legal group andsay, hey, on this entity, can you
just give me an idea of wherewe are and where we're registered
for your purposes? Because Iwant to pair it up with where I'm
at. Do you what returns? Youknow, we often tell our clients,
you know, having a pointperson in other departments is really
(12:14):
important, that you can justbounce something off and say, hey,
tax person, you're not soscary. Let's go to lunch. And then
I know now when I have a taxquestion, I have someone or, hey,
legal person, I don't everwant to get in litigation. But. But
if I have a question aboutthis, it's really imperative to talk
amongst yourselves and shareinformation. And it oftentimes prevents
(12:38):
these things. Or if you get onthe front end, we're buying someone.
How is that structure going tohappen? Because we've seen it where
we get involved and we say,okay, you've got it structured this
way. I just want you to knowit's going to cost $500,000 a bill
on my franchise tax. If youguys need the structure, you just
(12:59):
need to bake in this cost.Because the last thing that a lot
of our clients want aresurprises if they're doing a major
transaction that is importantfrom the business operations perspective.
I'm not going to. I'm notgoing to hold it up for franchise
tax. I just want to includethe cost so that they know. Right.
Because as tax people, youdon't want to be the one that comes
in and says, whoops.
(13:21):
Right? Yeah. And if you starta new job or in a position where
you have just got there rightafter the merger, you want to make
sure you look at the franchisetax. Because like Natalie's alluding
to, there might be somereserve set aside for These tax issues
that won't hit your budget. Soif you could get the franchise tax
issue addressed with thereserve from the merger, all the
better. And then you can claimresponsibility going forward.
(13:45):
Man, a lot of cautionary tales here.
Right?
Afternoon. Afternoon. Sorry.But right.
If you wanted, let's say youdidn't really, you know, under the,
under the definitions of whatit is with the Secretary of State
transact business in Illinois.But if, let's say you wanted to take
(14:05):
something to court forwhatever reason, could you then just
go register with the Secretaryof state and then kind of file within
the court system? Or do youhave. Is there like a kind of a,
a waiting period from, likethe date of registration to, you
know, when you could kind ofutilize the court system?
Yeah, there's just a authorityto transact business. It's just something
(14:27):
you go to them with and yousay you fill out a lot of information.
There is a question on there.When did you start transacting business
in Illinois? So that's often avery kind of squishy answer from
our perspective. But youcould. We have clients that go backward
and say, oh, we have been intheory doing it since 2020. Or you
(14:49):
could say today or, you know,it varies. And then you pay kind
of in advance. And thatestablishes what's called your measurement
date, which is also kind of aweird concept. Your filing date is
based on when you first forthat authority to transact business.
So I'll send. You could have ameasurement date of 731 and then
(15:12):
your return is due 60 daysafter that. So that's then due 10
1. That's why you. There's norhyme or reason to your reporting
period. So mirror that up thenwith your federal return and everything
else. It makes it reallycomplicated. And the Secretary of
State doesn't reallyunderstand the concept of. I don't
know what my pick is as ofJuly 31, because that's not really
(15:36):
a date in my world. Yeah.Reporting date. Right. So oftentimes
we, we tell our clients, getas close as you can. Right. I mean,
if you don't have a magic7:31, you, you have a second quarter
if your, your calendar year.Yeah, yeah. But. But that, that's
kind of the nuance of how youget these strange reporting periods
(15:56):
and how that complicatesthings as well because they don't
line up nicely with the incometax. Yeah.
And we've also helped a coupleof corporations convert to LLCs if
they have. To your pointearlier about the cap, if you're
paying Over a million dollarsa year consistently. But you don't
have to be a C corp, you know,you're not publicly traded or anything.
Just convert to an llc. Thengoing forward, like Natalie said,
(16:17):
you only have to pay the $200.You don't have to worry about any
of this anymore.
Is that your legal status? Soyou could be an LLC from a corporate.
From an incorporationstandpoint, but with the irs, you
could have checked the box.
And still we're talking aboutlike a C corp that.
Yeah, yeah.
Right. But let's say you were.
But like if you were an LLCand you wanted to.
(16:38):
Right. Be.
If you checked. Yeah. Ifyou're treated as the C corp with
your nlc, it doesn't subjectyou to the.
So any kind of election thatyou've made with the IRS doesn't
your.
Yeah. The legal form of theentity as opposed to how it's taxed.
The irs state purpose.
Yep.
Correct. Correct.
But Stace, I stand by herstatement. And I'm even further in
(16:59):
saying, hey, Secretary ofState, we can kind of help you calculate
it, but we're not going toadvise you on that because.
That'S more of a legal issue.And that's, that's why we get.
Especially with Illinois, I'mgonna stand by that statement.
Most of anyone in Illinois,the franchise tax oftentimes because
people don't really enjoy it.Not that you would enjoy tax all
(17:21):
the time, but it's a veryesoteric tax. So. And it does. It
really lends itself to a lotof legal issues embedded. It's really
a legal filing in most cases.Yes. So we definitely work with accounting
firms because they usuallyhave the data. Right. But they don't
necessarily want to getinvolved. And oftentimes too, there's
(17:43):
a legal group in the Secretaryof State that is the only opportunity
for any negotiation. And onceyou start talking to a lawyer there,
you have to be a lawyeryourself or you're representing the
client. So oftentimes this ismore of a legal type filing than
a traditional income sales tax return.
(18:06):
Yeah. No, and I think, I meanthose of us that are the due state
tax. Right. I do think that,you know, we, we tend to get. Our
clients will be like, well,this is tax on it. So therefore here,
tax person, you deal with it.
Right.
But I mean, but I think thekind of takeaway here is that this
tax can be a gotcha.
(18:29):
That a.
Lot of taxpayers may fullyappreciate that.
Exactly.
We've had clients that werethreatened to have to stop doing
business in Illinois becausetheir License was being held up because
of this. We've had bondinsurances that were held up. We've
had lending. Someone wasactually going to lease a building
in the city of Chicago and thelandlord wouldn't grant them the
(18:49):
lease until they got theletter of good standing. So we kind
of act as intermediary saying,you know, we've done enough of these
that we're working on it forour client. You know, we could basically
say that we know that they'llget back in good standing. Just the
best practice would be don'tgive anything to the Secretary of
State if you don't know whatthey're going to use it for. Especially
federal consolidated returns.
(19:10):
I mean, on that point, they'llask for federal consolidated returns.
They don't necessarilyunderstand the concept of a federal
consolidated return. This taxthe owner franchise taxes entity
by entity. So they don'tnecessarily understand consolidation.
Right. And our other takeawayfrom that is they don't have the
(19:33):
same non disclosure that theDepartment of Revenue do with regards
to confidentiality. A FOIArequest to the Secretary of State
may allow them to give outyour federal return. So we often
tell our clients, just don't.They are not the Department of Revenue.
The confidentiality that youhave with the IRS and Department
(19:54):
of Revenue does notnecessarily exist with them. They
will put things into the legalgroup so that it becomes more privileged,
but it's not the same. So ifyou ever get in and they routinely
do this, give us your federalconsolidated return. First off, it's
boxes. Right. This is notsomething I can just like send down
(20:15):
to you, scan it and send it toyou. It's boxes of material. And
there's a whole bunch ofentities in there that you're not
privy to because I'm talkingabout A, not A, B, C, and what have
you. So if you get one ofthose requests, take a pause and
talk to someone before you do.
Yeah. Don't give it to them.
(20:35):
Yeah, yeah.
Speaking to the third bucketof kind of jurisdictions talked about
the state and we kind ofSecretary of State is kind of the
offshoot. But then, you know,we brought up Chicago and Cook County.
So any. What's going on inChicago? Anything. Anything fun happening?
(20:59):
What's not going on in Chicago other.
Than Cubs opening season?
Yeah.
It's opening day here for theRockies. Yeah.
It's, you know.
Is that what you're wearingyour blue jacket, Natalie?
I was just. Yes.
Yeah.
Thinking the same thing.
(21:19):
You're supporting your cups.
Yes.
Right.
I mean, my mom grew up southside, so that's why maybe I'm wearing
the gray.
Okay, well, Dave and I. AndI'm a Cubs fan and he's a Sox fan,
so it can't happen.
It was very tough last year, right?
Yeah. Yeah, it was not so goodlast year.
(21:39):
It's generally not easy to bea Chicago sports fan.
Yeah.
It doesn't matter which team. Yeah.
It's just. I don't know why.It's just. Yeah, we're jealous to.
It's not easy to be a Chicagotaxpayer either. So there you go.
Let's bring it all back.
Yeah.
So what do we got going on inthe city?
So in the city, they'relooking for a billion dollars. That's
(22:01):
their budget shortfall forthis year. They did some borrowing,
but it still didn't get themthere. So they're being a little
more aggressive in theiraudits. And what's amazing is a lot
of the clients we talk to havebeen audited multiple times by the
city over the last 10, 20years. And this most recent audit,
the auditors are bringing upnew things, so especially on the
lease tax side. And it just.We feel bad for them because usually
(22:23):
if you have an audit history,there's some kind of understanding.
If you didn't bring it up thelast audit, you know, you're going
to be. And the old person,who. I shouldn't say old. The prior
person in charge of the cityfinance department was a very good
prospective person. He's like,okay, if we missed something last
time and you missed it, we'regoing to do a perspective only. And
everybody was happy with thatbecause, you know, like, you. It
gives you some education andallows it. But now it seems like
(22:46):
they're going back, thatperson retired. And now they're dealing
with this on a. You know, wegot you. And we're seeing mostly
on the lease tax side.
Yeah. So a lot of Chicago hasthis, like, personal property lease
transaction tax. It's a niceway of saying, like, cloud computing
and anything you use on yourlaptop. Right. I mean, let's not
talk about a personal propertylease transaction. They've had like,
(23:08):
all of these bulletins wherethey say, we're clarifying, we're
clarifying. You're. They wereclarifying from 1980 before any of
this exists, but that's kindof an aside. So that's where Chicago
is unique to Illinois.Illinois might give you the five
prong or the mic, do this, andyou're on your way. Chicago is going
to tax like your SAP, yourAlexis, your Bloomberg, your. Any
(23:32):
Type of service, any type ofthose computer services that you're
using. 10.25%, right. This isnot like low numbers.
Yeah. And they just raised itto 11% this January. And there used
to be a differential betweendata storage and used to be at a
lower 5%. Not anymore. It'sall 11%. So it's really a very aggressive
(23:54):
tax. And when people, if youthink about it, especially on the
IT side, some of thesecontracts you're signing are pretty
large contracts. And so whenyou get hit with 11% tax on something
you didn't know about, the onenice thing about the city is they
say, we'll collect it fromeither the supplier or the taxpayer.
So if your supplier has beencharging you, that's a good thing.
(24:15):
A lot of times the suppliersdon't charge it. There was even a
situation where a lot ofsuppliers entered into an agreement
where they weren't collectingit, but then on a going forward basis,
they stopped collecting it. Soa lot of the clients thought they
were paying it and they'renot. There's also one nice thing
about the city is they say,we're going to apportion or allocate
it. So they're only going tocollect it based on your usage in
(24:37):
the city of Chicago. So thisis great during COVID because a lot
of the employees weren't inthe city, so a lot of people were
able to reduce their exposurehere. But now that that's over, you
have to kind of do this on anannual basis, figure out how many
of your employees are actuallyusing this in Chicago. And if they
use it in Chicago more thanthey don't, then that employee is
counted as a Chicago user.
(24:59):
And we see it a lot where theentity will say, I'm not going to
necessarily only tax you on25%. I'm going to either zero tax
you and you have to assessyour own use tax, or I'm going to
100% tax, like you mentionedearlier. And then you're going to
provide the affidavit and I'mgoing to ask you to claim a refund
(25:20):
from the city. So it really ismessy. You know, it's kind of what
you prefer. If you can selfassess and you set up a direct pay,
that's probably the easiestway. But some companies don't like
that. They feel like, I don'tknow if I'm going to trust you, but
then they'll say, I'm onlygoing to assess you 100%. And you're
(25:42):
like, well, wait a minute,it's 25. So I'm now going to go through,
give you my affidavit ofapportionment. You have to claim
the refund because you're thepayer, not me. And it's a whole issue.
Yep.
And you know, logisticallyspeaking. Right. A multiple points
of use is great in theory, butin order to actually get that, to
(26:04):
show up on an invoice and tolike, implement the ability to do
that is not easy.
Right.
Because we've had thisconversation. Stacy might be thinking
of the same client because weare actually doing a. They're a SaaS
company. A refund claim for.It was actually an insurance company
that was like, hey, I know Ipaid this, you know, ppl, the lease
(26:25):
transaction tax years andyears and years ago, but here's my
exemption certificate. Goback, get me, you know, my money
back. It's for like 10 grand.So they've probably paid us more
money to actually get therefund because now we're going through
like a mini audit for thatreturn period. And it's like, okay,
well, I need to see all ofyour transactions. I need to see
all of your exemptioncertificates. I need to see all of
(26:46):
this and all of this. And it'sjust, it's, it's very cumbersome.
And, you know, the contrary istoo. If you're going to take. And
we kind of talk with ourclients about this from an NPU perspective.
Okay. If we're, if you'regoing to apportion things out of
the city, what about the otherclients you have that you probably
(27:08):
need to be putting into thecity from a usage perspective? So
where do you want to go withthat? Because this, the same client
was like, hey, we only havelike four users in New York. Everyone
else is, you know, Washington,Texas. It's like, okay, cool, we're
licensed there too. But now Igot, I got to charge you sales tax
in Texas and Washington andall the other places. So you're not
(27:30):
really getting the arbitrageyou want.
Yes, right.
And we had a client who, wejumped on this one a little later.
They're not located inChicago, but they had customers in
Chicago. And this is, and I'lljust say this because you guys have
probably seen it both on thelawyer side, the CPA side, the consultant
(27:53):
side. People hire people whodon't know state tax. And the first
attorney they hired basicallylitigated that they were trying to
apply the Hertz case when thisclient had customers in the city
and had equipment in the city.And we're like the Hertz case doesn't
apply. And unfortunately, bythe time we got involved, the city
was really angry at thembecause they spent a lot of time
(28:14):
in litigation over somethingthat shouldn't have been in litigation.
And so we kind of had to firstcalm the city down on behalf of our
client and just kind ofexplain that, you know, we see this
all the time, and that's whatwe try to explain to people, is,
you know, you don't hire, youknow, a general practitioner to do
brain surgery. You need tohave someone who's familiar with
the different areas just toget the best answers. And a lot of
(28:35):
times when we get involved onthe second or third time, our clients
are really frustrated thatthey've already paid so much fees
to get nowhere. And it kind ofputs all of us at a disadvantage
because we're trying to helpthem, but they're angry because they've
already paid all this moneyand fees to get nowhere. So we just
strongly recommend whoeverpeople use that they try and find
someone who's familiar withthe issue that's before them because
(28:57):
it just makes it worse or evenyet. We've seen so many situations
where they give the wronginformation to the jurisdiction.
And now all of a sudden youwere dealing with one issue. Now
you have three or four issuesbecause this information is confusing
everybody. So anything youcould do to basically make it easier.
And one thing we that Chicagoalso, Chicago is a home rule unit,
so they can basically createany tax they want in Illinois. You
(29:18):
have to have above a certainnumber of people in it. They have
an amusement tax as well. Andwithin the last couple years, they've
gotten a lot of attentionnationally because of their streaming
and gaming electronic, youknow, streaming audio services. But
a lot of the other smallervillages and communities have started
to impose these amusement tax.And Natalie and I were asked by one
(29:38):
client who received a noticefrom the city of Evanston who just
enacted it. And we basically,on behalf of the client, worked with
the city of Evanston to makesure that their tax was constitutional,
to fix it, because our clientdidn't want to pay an unconstitutional
tax and then have a claim tax.
I know what I'm trying to getat, but this isn't doing it correctly.
(30:00):
Right? And once again, like, Idon't want to go through protracted
litigation for them to say,oh, I'm going to amend ordinance
now 10 years later and gothrough all these court things because
I have an obligation to chargemy clients correctly. I don't think
this. I don't think thiscurrently enacted ordinance works,
but I know how it could workor I know how it doesn't work. And
(30:24):
you know, that's the thingtoo, like cut and paste. They'll
say, oh, well, we took it fromChicago and we took this little piece
or this little piece. And thenyou have like large multi state organizations
that have their own type oflegislation that they want to see
enacted. And they'll be like,oh, well, I took a piece there and
(30:44):
I took a piece here. So longand short. Chicago Amusement Tax,
too, is another kind of alittle bit of a trap. Cook county,
then they're their own fiefdomas well. So they'll say, I have parking
issues. I have, you know, myown taxes in Cook County. So, you
know, we once had someone thatwas interested. They were a company
(31:07):
from Italy and they wereinterested in coming over and they
had picked Chicago. And we'relike, we love it, it's our home.
But it's incredibly difficult.You have a VAT over there, right?
And that's all you do. Right.And then you come here and you're
like, wait a minute, I havethe irs, I have the Department of
Revenue, I have Cook County, Ihave the city and I have the Secretary
of State. Like, can't theyjust fill out one form and can't
(31:29):
they share it? You know, nosuch luck. So. And under, you know,
and that's like a bestpractice also, like understand your
footprint. Right? You thinkyou're only in Chicago or you think
only someone visits there, orI don't have nexus or what creates
nexus anymore. Just kind ofsegue into it like a larger discussion
(31:51):
on state tax. You know, youreally have to keep up to date with
where you are now, whereyou're availing yourself of. You
don't even have to be thereanymore, necessarily where your customers
are. It's just, it's just muchmore complicated.
Yeah. And our frustration iswhen the city will issue, the state
does this too, a nine figureassessment. Now, I don't care how
(32:13):
big you are, a nine figureassessment is a big assessment. And
we just had one from Chicago acouple years ago. It went from nine
figures to a no change letter.Can you imagine the CFO telling the
CEO and the, you know, duringyour quarterly reports, we might
owe $100 million, but we mightnot. And for it to go from $100 million
to zero, it makes us lookgood. But at the same time, you don't
(32:34):
want to be in that situationbecause it should have never been
$100 million. So you're havinga lot of people are feeling that
if they don't give anything tothe auditor the whole way. Well,
no, they're not going to.They're just going to issue these
big assessments.
And the last point on that,Illinois is notorious for responsible
officers. So sometimes theresponsible officers will get the
(32:55):
million dollar assessment whenthey're on their vacation and then
you really get a call. How.What. How does this me? Or you'll
leave a company and you'llstill be listed in Illinois as the
responsible officer. So lo andbehold, something gets assessed and
it comes to you. So, yep,check those our favorite officers
(33:16):
are. And check, you know, ifyou're leaving a company that you
leave being an officer as well.
When we were in industry,there was a Chicago police officer
who showed up on the groundfloor and says, I've been instructed
by the finance department toeither collect all the unpaid parking
tickets or come back with theofficer of the company. It's amazing
how quickly.
(33:38):
I'm sure.
Yeah, so it was very.
Sometimes our tax is notpersonal, but when it gets to the
personal level, that's when itgets really important, right?
Oh, absolutely, absolutely.Like, if you're in the tax department
of a company and you don'twant one of those corporate officers
(33:58):
showing up at your doorstepsaying, I got this.
Right in the mail. What isthis? Yeah, exactly. So as we wrap
up, is there.
Anything that you think ourlisteners should know or pay attention
to or keep their ear to theground on when it comes to Illinois?
Yeah, and I apologize. When wewere talking about the Pepsi case,
I should have said thedepartment will acknowledge 8020
(34:21):
companies if they're donecorrectly with substance in them.
We've seen a bunch of themdone that way. So you want to make
sure, don't be afraid of them.Because if you put the required substance
now, it's going to take a lotof time and you have to find business
entities and stuff like thatthat goes in it. But if you do it
right, they've accepted themunder audit. I think that there's
current legislation out therethat's trying to take away some of
the benefits of the 8020company. And I think because of the
(34:43):
Pepsi case and some otherabuses that might be out there that
people are looking at that.But hopefully there's some pushback
on that because it is. It'sgood tax policy. We're not worldwide.
You know, we're unitary, butwe're not worldwide. So, you know,
I think the 8020 company doesserve a purpose here.
And just from a bigperspective, our Budget is due by
the end of May. It currentlyso it's our legislative session.
(35:08):
We've been told and it's beentalked that there isn't going to
be a lot of tax things goingon this, this time we have a pretty,
I wouldn't say balancedbudget, but with how they move things
around, it can appearbalanced. So we're not looking for
anything. But Illinoisoftentimes floats all of these thousands
(35:31):
of bills and then you know,the 29th of May, it's an omnibus
bill that's thousands of pagesthat oh my gosh has like tax provision
in it. We're not currentlylike really looking at anything.
But that doesn't mean it can'thappen. But that's the time to be
looking at is kind of the May.They like to get out of out of Dodge
(35:51):
by the end of May. Sometimesit goes if it goes over. They also
need more votes so they need asuper majority. Although Illinois
is run by mostly Democrats, sothe governor is Democrat and Senate
and the Houses. But it stilljust adds hads an added burden that
they don't like to get to. Sojust keep your keep listening. Things
(36:14):
come out. Like Dave said,Chicago has its own separate budget.
They moved some things aroundand did some borrowing. So it's not
immediate, but they are, theyhave a kind of a strategic outlook
that they are under. Sothey're going to be looking at things
as well. So just keep your earout and you know, Department of Revenue
(36:36):
is always coming up with kindof their new issues and what they're
looking at so.
Can jump on the retaildelivery fee bandwagon.
You're welcome. Right.
There you go. Yeah, that's.Yeah. Yeah. I think the one area
that they're going to do theywill look for for revenue is the
amnesty program. So that,that, that's almost a guarantee that
will happen. And just makesure that if you have any issues,
(36:58):
you kind of fall into thatwindow. I think that would be for
July 1, 2018 through June 30of 24. And that would probably be
this year. So it usually likeAugust, September, like.
Something like that period orusually try to maybe do it after
the filing season. So youknow, kind of sales and income. Yeah,
(37:22):
it'll be not secretary ofstate, so not franchise tax. They
have their own separateamnesty. They have. Yeah, they're
due for one too, but wehaven't heard anything about it.
So.
Okay, excellent. Well, Dave,Natalie, thank you so much for your
time and your expertise and.
(37:45):
Maybe you like it or not, but.
I'm sure your phone will ringfor something. Maybe a bunch of franchise
tax that our listeners are nowlike, this might.
Be eye opening to a bunch oftaxpayers out there. Oftentimes we
like that. We just like tobring up things like we started it
with. We're not experts oneverything at all times. Not every
one of us is. But just to giveyou like thoughts, it's if you're
(38:08):
going through a transaction.Oh gosh, I think there might be something
with that awful franchise taxjust to get enough knowledge to like.
Right. Think about things.
Yeah.
Oh, absolutely.
Awareness.
Awareness. Awareness.
Exactly. Well, great.
Thank you for having us. Yeah,it was a lot of fun. Thank you.
Enjoyed it.
Thank you so much. This isanother episode of Saltivation. Till
(38:30):
next time. This podcast is foreducational purposes only and is
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 sho 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 back to Saltivation.We're continuing our conversation
with Dave Kupiak and NatalieMartin. Diving deeper into Illinois
tax complexities. Today we'lltackle the elusive franchise tax,
(00:56):
its hidden pitfalls, and whattaxpayers need to know about navigating
audits in Chicago and CookCounty. From surprise liabilities
to proactive tax strategies.
Let's dive in.
So let's maybe talk about thefranchise tax, maybe Senate Bill
2325 and what that proposal iskind of what's going on in the franchise
(01:22):
tax space right now.
Sure. So the franchise tax isa very kind of esoteric tax in Illinois.
It's based on your paid incapital and it has an allocation
factor which is unique and notlike your Illinois sales factor.
So if you think that it reallyleverages off the income tax, it
does not. It's a for theability to transact business in Illinois.
(01:46):
It is administered by theIllinois Secretary of State, not
the Department of Revenue.They are completely separate entities.
It has been repealed, broughtback from the well, it's been, it's
been scheduled to be repealed.The repeal has been repealed. So
it still exists. Long andshort. I don't think it will ever
(02:08):
die. Truly. The main crux ofthe franchise tax is to remain in
good standing in Illinois.This often comes up when you are
having a merger, having,having a bond issuance, doing some
stock issues and some bank orsome entity said, can I have your
(02:29):
Illinois good standingcertificate? And you say what? And
you say, oh, franchise tax,that's the main kind of club that
they have over this.
And licensing, too.
Licensing and licensing. Ifyou want to have a state contract,
they're going to look for yourgood standing certificate. That often
happens as well. As I said,it's administered by the Secretary
(02:51):
of State. So they currentlyhave a $10,000 exemption. So about,
I think about 90% of theentities in Illinois now are not.
They have to file the return,but they avail themselves of the
exemption and owe $75.Interestingly enough, LLCs, it's
(03:11):
a flat rate. You're notsubject to all the things that corps
are subject to. So it really,you know, skews towards LLC in Illinois
if you have a choice ofentity. So now that we have 90% of
the small entities, the LLC,things like that, exempt from it,
you're really focused on largecorporations that don't necessarily
(03:36):
have a vote in Illinois forthe politics of it. And you know,
it still brings in a couplehundred million dollars. So it's
not a. Something that they canget rid of easily. And there's a
little bit of a power strugglebecause the secretary of state does
administer it. It's not justanother tax administered by the Department
(03:56):
of Revenue.
There's less than 20 people inthe department that handles over
a hundred thousandcorporations. So for those 20 people
are generating a couplehundred million dollars of revenue.
It's politically, they don'twant to give it up. They really don't.
Yeah, right. Currently, theinterest is the, one of the most
onerous parts of this. It's 2%per month. 2%, 2%. 2% added up, put
(04:21):
it all together. We oftentimessee bills that the interest is two
and three times the tax.Because once again, if you think
you're looking back from anincome tax perspective, if you have
an unreported merger, I thinkour record is the 50s, 1950s, that
there were unreported mergersfor one of our clients. There's no
(04:43):
statute of limitations forthem with regards to unreported mergers.
So you're going back, sayyou're going back to. Commonly we
have ones that go back to2006, 5. You're looking at 20 years
of 2% per month interest. Sothe bill that's currently up is to
kind of realign interest, tolike a realistic interest. You know,
(05:09):
they often, they just, theirposition is it's statutory interest.
We can't, we have to. That'sjust how we have to compute it. So
this would change it, but itwould only change it going forward
in our minds, at least it'ssomething. You know, half of something
is better than zero ofsomething. Would we like it to go
back? Sure. But as written, itgoes forward. The interests change.
(05:34):
Yeah.
We have a lot of cities inColorado from a home world perspective
that do one percent per monthor one and a half percent per month.
So like in the city and countyof Denver, if you're doing like a
three year VDA, right. You'relooking at 36% interest on just a
sales tax. Maybe you've got ause tax that goes back seven years
and it's a Friday afternoonand I don't feel like thinking hard
(05:55):
to figure out to get seventimes 12. Correct.
Right.
Like that's a lot. That's abig interest number.
Right, right. And oftentimeswhat happens in these mergers is
that they're kind ofcompilation of paid in capital. So
you have your Paid in capitaland then you merged someone in with
their paid in capital. Sounbeknownst to you, you have all
(06:18):
of this outstanding liability.You know, and let's be realistic.
The franchise tax doesn'toften reside in the tax department.
Sometimes it resides in thelegal department. The legal department
doesn't understand the nuancesof what the base is. They don't what's
paid in capital. Theyoftentimes we see they take stock
times par is $100. You know,that's, that's the information that
(06:43):
they know. They don't knowthat on a federal return you have
$3 billion sitting inadditional paid in capital. That
that's what the Secretary ofState considers it to be. So it's
often a hot potato because itdoesn't reside in a place in companies.
It's often or it should residein multiple places and it's like
not me. And it just resides nowhere.
(07:04):
Then is Illinois capped likeDelaware is, or is it just like apic?
There is a cap on the annual,but there is not a cap on your additional.
So when people talk about the$2 million cap, it's a $2 million
cap on your annual tax. But ifyou've had the transactions from
1950, the additional paid incapital is.0015. The annual tax is
(07:30):
0.001. So you could have a $3billion base and you're at your $2
million cap. But unbeknownstto you, you have $5 billion that
you didn't add correctly.They're going to go back and there's
no limit on that $5 billion onthat. It's the Form 1430, which is
(07:52):
the increase in capital formthat you see that does not have a
cap. And they also argue thatthat does not have a statue.
Yeah.
Well, that makes, you know,Delaware is what, 250. 250,000 look
like, you know, sweet. I'llpay that.
We're just getting a potatoes.
Yeah.
A ton of common stock.
(08:13):
Just like so like, like I wasalluding to earlier, we talk about
the Department of Revenue. Wealso have to talk about this if you're.
And a lot of times sometimesthe registration is done by someone
in legal that says, oh yeah,we want to transact in business in
Illinois.
Sure.
Check. Right. Unbeknownst towhat the impact of it is.
(08:33):
Right, right. Because theydon't understand what goes into any
kind of computation.
Exactly.
On a state basis. Right,right. Because I mean, a lot of other
states. Right. Are just like,hey, give us your 50 bucks per year
or Whatever, Right. And youknow, you go, but there are the Illinois,
the Delawares that, you know,some of these other states that know
(08:55):
you have some financialinformation that you have to provide
and there could be someadditional tax involved.
Exactly. And from a legalperspective, one of the abilities
is the ability to use thecourt system, meaning you become
the plaintiff. If you're notregistered, then there is an argument
that you are not able to availyourselves of the court. So legal
departments oftentimes willregister everywhere, right. They
(09:19):
say, we might, I might sneezein Illinois someday. I want to just
be registered just in case.Right. And they don't understand
the impact. And then they getit. And then they say, hey tax, can
you give me these numbers toapportion this? And it's like, holy
cow, what is this? And thenthey wonder the minute that you file,
(09:40):
they're like, where have youbeen all my life? Right. And they
will, you know, well, and.
Then if you want to withdraw,good luck.
Good luck. You gotta getcaught up. It's a very hard thing
to say. I'm no longertransacting business in Illinois.
Right.
Well, and then if you haven'tbeen paying correctly.
Yes.
And you want to withdraw, youhave to get caught up and you know.
(10:03):
Get yourself in good standing.Right. And like I said, there's a
lot of these stock times, parvalue on my base is 100. There's
a, there's a check mark on theform that says I'm just gonna elect
to pay on everything to makeit easy. Then I don't have to fill
out those numbers, I don'thave to apportion it. And if you
do that, it is a world of hurtto try to go back then and say, whoops,
(10:27):
I shouldn't have done that. Sooftentimes we'll see a hundred dollars,
check the box, go on my merryway. Someone wants to merge and they
say, let me see your franchisetax return. And it becomes part of
the due diligence of a mergerthat you have been way under reporting
for years.
And what's really unfortunateis sometimes you have these self
(10:50):
created problems where peoplewill say, you know what, we have
all these shell corporationsor empty non doing business corporations,
let's merge them together,clean them up. We've seen a situation
where someone took a $100filer that had zero factor in Illinois
and put it with another entitythat had 100% factor. And by putting
the two together, they createda $2 million liability. And all they
(11:13):
were supposed to do was getrid of these Entities that were paying
$75 a year. Unfortunately,when we got involved, they had already
dissolved the other company.If they hadn't dissolved the company,
we could have done it. Andwhat did the person at the Secretary
of State say, Natalie?
Yeah, they said, oh, that'sinteresting. I'm saying interesting.
I think they said, funny. Ididn't find it funny. If you would
(11:33):
have done it the other way, itwould have still been $75.
Yeah. So $2 million. Can youimagine the person at the company
who had to go and tell the CEOand CFO we have to pay $2 million
because we merged this thewrong way?
Nope.
I would have quit. I wouldhave quit first, found a new job.
Entities. Talk to your legalgroup. If you're in the tax department,
(11:54):
talk to your legal group andsay, hey, on this entity, can you
just give me an idea of wherewe are and where we're registered
for your purposes? Because Iwant to pair it up with where I'm
at. Do you what returns? Youknow, we often tell our clients,
you know, having a pointperson in other departments is really
(12:14):
important, that you can justbounce something off and say, hey,
tax person, you're not soscary. Let's go to lunch. And then
I know now when I have a taxquestion, I have someone or, hey,
legal person, I don't everwant to get in litigation. But. But
if I have a question aboutthis, it's really imperative to talk
amongst yourselves and shareinformation. And it oftentimes prevents
(12:38):
these things. Or if you get onthe front end, we're buying someone.
How is that structure going tohappen? Because we've seen it where
we get involved and we say,okay, you've got it structured this
way. I just want you to knowit's going to cost $500,000 a bill
on my franchise tax. If youguys need the structure, you just
(12:59):
need to bake in this cost.Because the last thing that a lot
of our clients want aresurprises if they're doing a major
transaction that is importantfrom the business operations perspective.
I'm not going to. I'm notgoing to hold it up for franchise
tax. I just want to includethe cost so that they know. Right.
Because as tax people, youdon't want to be the one that comes
in and says, whoops.
(13:21):
Right? Yeah. And if you starta new job or in a position where
you have just got there rightafter the merger, you want to make
sure you look at the franchisetax. Because like Natalie's alluding
to, there might be somereserve set aside for These tax issues
that won't hit your budget. Soif you could get the franchise tax
issue addressed with thereserve from the merger, all the
better. And then you can claimresponsibility going forward.
(13:45):
Man, a lot of cautionary tales here.
Right?
Afternoon. Afternoon. Sorry.But right.
If you wanted, let's say youdidn't really, you know, under the,
under the definitions of whatit is with the Secretary of State
transact business in Illinois.But if, let's say you wanted to take
(14:05):
something to court forwhatever reason, could you then just
go register with the Secretaryof state and then kind of file within
the court system? Or do youhave. Is there like a kind of a,
a waiting period from, likethe date of registration to, you
know, when you could kind ofutilize the court system?
Yeah, there's just a authorityto transact business. It's just something
(14:27):
you go to them with and yousay you fill out a lot of information.
There is a question on there.When did you start transacting business
in Illinois? So that's often avery kind of squishy answer from
our perspective. But youcould. We have clients that go backward
and say, oh, we have been intheory doing it since 2020. Or you
(14:49):
could say today or, you know,it varies. And then you pay kind
of in advance. And thatestablishes what's called your measurement
date, which is also kind of aweird concept. Your filing date is
based on when you first forthat authority to transact business.
So I'll send. You could have ameasurement date of 731 and then
(15:12):
your return is due 60 daysafter that. So that's then due 10
1. That's why you. There's norhyme or reason to your reporting
period. So mirror that up thenwith your federal return and everything
else. It makes it reallycomplicated. And the Secretary of
State doesn't reallyunderstand the concept of. I don't
know what my pick is as ofJuly 31, because that's not really
(15:36):
a date in my world. Yeah.Reporting date. Right. So oftentimes
we, we tell our clients, getas close as you can. Right. I mean,
if you don't have a magic7:31, you, you have a second quarter
if your, your calendar year.Yeah, yeah. But. But that, that's
kind of the nuance of how youget these strange reporting periods
(15:56):
and how that complicatesthings as well because they don't
line up nicely with the incometax. Yeah.
And we've also helped a coupleof corporations convert to LLCs if
they have. To your pointearlier about the cap, if you're
paying Over a million dollarsa year consistently. But you don't
have to be a C corp, you know,you're not publicly traded or anything.
Just convert to an llc. Thengoing forward, like Natalie said,
(16:17):
you only have to pay the $200.You don't have to worry about any
of this anymore.
Is that your legal status? Soyou could be an LLC from a corporate.
From an incorporationstandpoint, but with the irs, you
could have checked the box.
And still we're talking aboutlike a C corp that.
Yeah, yeah.
Right. But let's say you were.
But like if you were an LLCand you wanted to.
(16:38):
Right. Be.
If you checked. Yeah. Ifyou're treated as the C corp with
your nlc, it doesn't subjectyou to the.
So any kind of election thatyou've made with the IRS doesn't
your.
Yeah. The legal form of theentity as opposed to how it's taxed.
The irs state purpose.
Yep.
Correct. Correct.
But Stace, I stand by herstatement. And I'm even further in
(16:59):
saying, hey, Secretary ofState, we can kind of help you calculate
it, but we're not going toadvise you on that because.
That'S more of a legal issue.And that's, that's why we get.
Especially with Illinois, I'mgonna stand by that statement.
Most of anyone in Illinois,the franchise tax oftentimes because
people don't really enjoy it.Not that you would enjoy tax all
(17:21):
the time, but it's a veryesoteric tax. So. And it does. It
really lends itself to a lotof legal issues embedded. It's really
a legal filing in most cases.Yes. So we definitely work with accounting
firms because they usuallyhave the data. Right. But they don't
necessarily want to getinvolved. And oftentimes too, there's
(17:43):
a legal group in the Secretaryof State that is the only opportunity
for any negotiation. And onceyou start talking to a lawyer there,
you have to be a lawyeryourself or you're representing the
client. So oftentimes this ismore of a legal type filing than
a traditional income sales tax return.
(18:06):
Yeah. No, and I think, I meanthose of us that are the due state
tax. Right. I do think that,you know, we, we tend to get. Our
clients will be like, well,this is tax on it. So therefore here,
tax person, you deal with it.
Right.
But I mean, but I think thekind of takeaway here is that this
tax can be a gotcha.
(18:29):
That a.
Lot of taxpayers may fullyappreciate that.
Exactly.
We've had clients that werethreatened to have to stop doing
business in Illinois becausetheir License was being held up because
of this. We've had bondinsurances that were held up. We've
had lending. Someone wasactually going to lease a building
in the city of Chicago and thelandlord wouldn't grant them the
(18:49):
lease until they got theletter of good standing. So we kind
of act as intermediary saying,you know, we've done enough of these
that we're working on it forour client. You know, we could basically
say that we know that they'llget back in good standing. Just the
best practice would be don'tgive anything to the Secretary of
State if you don't know whatthey're going to use it for. Especially
federal consolidated returns.
(19:10):
I mean, on that point, they'llask for federal consolidated returns.
They don't necessarilyunderstand the concept of a federal
consolidated return. This taxthe owner franchise taxes entity
by entity. So they don'tnecessarily understand consolidation.
Right. And our other takeawayfrom that is they don't have the
(19:33):
same non disclosure that theDepartment of Revenue do with regards
to confidentiality. A FOIArequest to the Secretary of State
may allow them to give outyour federal return. So we often
tell our clients, just don't.They are not the Department of Revenue.
The confidentiality that youhave with the IRS and Department
(19:54):
of Revenue does notnecessarily exist with them. They
will put things into the legalgroup so that it becomes more privileged,
but it's not the same. So ifyou ever get in and they routinely
do this, give us your federalconsolidated return. First off, it's
boxes. Right. This is notsomething I can just like send down
(20:15):
to you, scan it and send it toyou. It's boxes of material. And
there's a whole bunch ofentities in there that you're not
privy to because I'm talkingabout A, not A, B, C, and what have
you. So if you get one ofthose requests, take a pause and
talk to someone before you do.
Yeah. Don't give it to them.
(20:35):
Yeah, yeah.
Speaking to the third bucketof kind of jurisdictions talked about
the state and we kind ofSecretary of State is kind of the
offshoot. But then, you know,we brought up Chicago and Cook County.
So any. What's going on inChicago? Anything. Anything fun happening?
(20:59):
What's not going on in Chicago other.
Than Cubs opening season?
Yeah.
It's opening day here for theRockies. Yeah.
It's, you know.
Is that what you're wearingyour blue jacket, Natalie?
I was just. Yes.
Yeah.
Thinking the same thing.
(21:19):
You're supporting your cups.
Yes.
Right.
I mean, my mom grew up southside, so that's why maybe I'm wearing
the gray.
Okay, well, Dave and I. AndI'm a Cubs fan and he's a Sox fan,
so it can't happen.
It was very tough last year, right?
Yeah. Yeah, it was not so goodlast year.
(21:39):
It's generally not easy to bea Chicago sports fan.
Yeah.
It doesn't matter which team. Yeah.
It's just. I don't know why.It's just. Yeah, we're jealous to.
It's not easy to be a Chicagotaxpayer either. So there you go.
Let's bring it all back.
Yeah.
So what do we got going on inthe city?
So in the city, they'relooking for a billion dollars. That's
(22:01):
their budget shortfall forthis year. They did some borrowing,
but it still didn't get themthere. So they're being a little
more aggressive in theiraudits. And what's amazing is a lot
of the clients we talk to havebeen audited multiple times by the
city over the last 10, 20years. And this most recent audit,
the auditors are bringing upnew things, so especially on the
lease tax side. And it just.We feel bad for them because usually
(22:23):
if you have an audit history,there's some kind of understanding.
If you didn't bring it up thelast audit, you know, you're going
to be. And the old person,who. I shouldn't say old. The prior
person in charge of the cityfinance department was a very good
prospective person. He's like,okay, if we missed something last
time and you missed it, we'regoing to do a perspective only. And
everybody was happy with thatbecause, you know, like, you. It
gives you some education andallows it. But now it seems like
(22:46):
they're going back, thatperson retired. And now they're dealing
with this on a. You know, wegot you. And we're seeing mostly
on the lease tax side.
Yeah. So a lot of Chicago hasthis, like, personal property lease
transaction tax. It's a niceway of saying, like, cloud computing
and anything you use on yourlaptop. Right. I mean, let's not
talk about a personal propertylease transaction. They've had like,
(23:08):
all of these bulletins wherethey say, we're clarifying, we're
clarifying. You're. They wereclarifying from 1980 before any of
this exists, but that's kindof an aside. So that's where Chicago
is unique to Illinois.Illinois might give you the five
prong or the mic, do this, andyou're on your way. Chicago is going
to tax like your SAP, yourAlexis, your Bloomberg, your. Any
(23:32):
Type of service, any type ofthose computer services that you're
using. 10.25%, right. This isnot like low numbers.
Yeah. And they just raised itto 11% this January. And there used
to be a differential betweendata storage and used to be at a
lower 5%. Not anymore. It'sall 11%. So it's really a very aggressive
(23:54):
tax. And when people, if youthink about it, especially on the
IT side, some of thesecontracts you're signing are pretty
large contracts. And so whenyou get hit with 11% tax on something
you didn't know about, the onenice thing about the city is they
say, we'll collect it fromeither the supplier or the taxpayer.
So if your supplier has beencharging you, that's a good thing.
(24:15):
A lot of times the suppliersdon't charge it. There was even a
situation where a lot ofsuppliers entered into an agreement
where they weren't collectingit, but then on a going forward basis,
they stopped collecting it. Soa lot of the clients thought they
were paying it and they'renot. There's also one nice thing
about the city is they say,we're going to apportion or allocate
it. So they're only going tocollect it based on your usage in
(24:37):
the city of Chicago. So thisis great during COVID because a lot
of the employees weren't inthe city, so a lot of people were
able to reduce their exposurehere. But now that that's over, you
have to kind of do this on anannual basis, figure out how many
of your employees are actuallyusing this in Chicago. And if they
use it in Chicago more thanthey don't, then that employee is
counted as a Chicago user.
(24:59):
And we see it a lot where theentity will say, I'm not going to
necessarily only tax you on25%. I'm going to either zero tax
you and you have to assessyour own use tax, or I'm going to
100% tax, like you mentionedearlier. And then you're going to
provide the affidavit and I'mgoing to ask you to claim a refund
(25:20):
from the city. So it really ismessy. You know, it's kind of what
you prefer. If you can selfassess and you set up a direct pay,
that's probably the easiestway. But some companies don't like
that. They feel like, I don'tknow if I'm going to trust you, but
then they'll say, I'm onlygoing to assess you 100%. And you're
(25:42):
like, well, wait a minute,it's 25. So I'm now going to go through,
give you my affidavit ofapportionment. You have to claim
the refund because you're thepayer, not me. And it's a whole issue.
Yep.
And you know, logisticallyspeaking. Right. A multiple points
of use is great in theory, butin order to actually get that, to
(26:04):
show up on an invoice and tolike, implement the ability to do
that is not easy.
Right.
Because we've had thisconversation. Stacy might be thinking
of the same client because weare actually doing a. They're a SaaS
company. A refund claim for.It was actually an insurance company
that was like, hey, I know Ipaid this, you know, ppl, the lease
(26:25):
transaction tax years andyears and years ago, but here's my
exemption certificate. Goback, get me, you know, my money
back. It's for like 10 grand.So they've probably paid us more
money to actually get therefund because now we're going through
like a mini audit for thatreturn period. And it's like, okay,
well, I need to see all ofyour transactions. I need to see
all of your exemptioncertificates. I need to see all of
(26:46):
this and all of this. And it'sjust, it's, it's very cumbersome.
And, you know, the contrary istoo. If you're going to take. And
we kind of talk with ourclients about this from an NPU perspective.
Okay. If we're, if you'regoing to apportion things out of
the city, what about the otherclients you have that you probably
(27:08):
need to be putting into thecity from a usage perspective? So
where do you want to go withthat? Because this, the same client
was like, hey, we only havelike four users in New York. Everyone
else is, you know, Washington,Texas. It's like, okay, cool, we're
licensed there too. But now Igot, I got to charge you sales tax
in Texas and Washington andall the other places. So you're not
(27:30):
really getting the arbitrageyou want.
Yes, right.
And we had a client who, wejumped on this one a little later.
They're not located inChicago, but they had customers in
Chicago. And this is, and I'lljust say this because you guys have
probably seen it both on thelawyer side, the CPA side, the consultant
(27:53):
side. People hire people whodon't know state tax. And the first
attorney they hired basicallylitigated that they were trying to
apply the Hertz case when thisclient had customers in the city
and had equipment in the city.And we're like the Hertz case doesn't
apply. And unfortunately, bythe time we got involved, the city
was really angry at thembecause they spent a lot of time
(28:14):
in litigation over somethingthat shouldn't have been in litigation.
And so we kind of had to firstcalm the city down on behalf of our
client and just kind ofexplain that, you know, we see this
all the time, and that's whatwe try to explain to people, is,
you know, you don't hire, youknow, a general practitioner to do
brain surgery. You need tohave someone who's familiar with
the different areas just toget the best answers. And a lot of
(28:35):
times when we get involved onthe second or third time, our clients
are really frustrated thatthey've already paid so much fees
to get nowhere. And it kind ofputs all of us at a disadvantage
because we're trying to helpthem, but they're angry because they've
already paid all this moneyand fees to get nowhere. So we just
strongly recommend whoeverpeople use that they try and find
someone who's familiar withthe issue that's before them because
(28:57):
it just makes it worse or evenyet. We've seen so many situations
where they give the wronginformation to the jurisdiction.
And now all of a sudden youwere dealing with one issue. Now
you have three or four issuesbecause this information is confusing
everybody. So anything youcould do to basically make it easier.
And one thing we that Chicagoalso, Chicago is a home rule unit,
so they can basically createany tax they want in Illinois. You
(29:18):
have to have above a certainnumber of people in it. They have
an amusement tax as well. Andwithin the last couple years, they've
gotten a lot of attentionnationally because of their streaming
and gaming electronic, youknow, streaming audio services. But
a lot of the other smallervillages and communities have started
to impose these amusement tax.And Natalie and I were asked by one
(29:38):
client who received a noticefrom the city of Evanston who just
enacted it. And we basically,on behalf of the client, worked with
the city of Evanston to makesure that their tax was constitutional,
to fix it, because our clientdidn't want to pay an unconstitutional
tax and then have a claim tax.
I know what I'm trying to getat, but this isn't doing it correctly.
(30:00):
Right? And once again, like, Idon't want to go through protracted
litigation for them to say,oh, I'm going to amend ordinance
now 10 years later and gothrough all these court things because
I have an obligation to chargemy clients correctly. I don't think
this. I don't think thiscurrently enacted ordinance works,
but I know how it could workor I know how it doesn't work. And
(30:24):
you know, that's the thingtoo, like cut and paste. They'll
say, oh, well, we took it fromChicago and we took this little piece
or this little piece. And thenyou have like large multi state organizations
that have their own type oflegislation that they want to see
enacted. And they'll be like,oh, well, I took a piece there and
(30:44):
I took a piece here. So longand short. Chicago Amusement Tax,
too, is another kind of alittle bit of a trap. Cook county,
then they're their own fiefdomas well. So they'll say, I have parking
issues. I have, you know, myown taxes in Cook County. So, you
know, we once had someone thatwas interested. They were a company
(31:07):
from Italy and they wereinterested in coming over and they
had picked Chicago. And we'relike, we love it, it's our home.
But it's incredibly difficult.You have a VAT over there, right?
And that's all you do. Right.And then you come here and you're
like, wait a minute, I havethe irs, I have the Department of
Revenue, I have Cook County, Ihave the city and I have the Secretary
of State. Like, can't theyjust fill out one form and can't
(31:29):
they share it? You know, nosuch luck. So. And under, you know,
and that's like a bestpractice also, like understand your
footprint. Right? You thinkyou're only in Chicago or you think
only someone visits there, orI don't have nexus or what creates
nexus anymore. Just kind ofsegue into it like a larger discussion
(31:51):
on state tax. You know, youreally have to keep up to date with
where you are now, whereyou're availing yourself of. You
don't even have to be thereanymore, necessarily where your customers
are. It's just, it's just muchmore complicated.
Yeah. And our frustration iswhen the city will issue, the state
does this too, a nine figureassessment. Now, I don't care how
(32:13):
big you are, a nine figureassessment is a big assessment. And
we just had one from Chicago acouple years ago. It went from nine
figures to a no change letter.Can you imagine the CFO telling the
CEO and the, you know, duringyour quarterly reports, we might
owe $100 million, but we mightnot. And for it to go from $100 million
to zero, it makes us lookgood. But at the same time, you don't
(32:34):
want to be in that situationbecause it should have never been
$100 million. So you're havinga lot of people are feeling that
if they don't give anything tothe auditor the whole way. Well,
no, they're not going to.They're just going to issue these
big assessments.
And the last point on that,Illinois is notorious for responsible
officers. So sometimes theresponsible officers will get the
(32:55):
million dollar assessment whenthey're on their vacation and then
you really get a call. How.What. How does this me? Or you'll
leave a company and you'llstill be listed in Illinois as the
responsible officer. So lo andbehold, something gets assessed and
it comes to you. So, yep,check those our favorite officers
(33:16):
are. And check, you know, ifyou're leaving a company that you
leave being an officer as well.
When we were in industry,there was a Chicago police officer
who showed up on the groundfloor and says, I've been instructed
by the finance department toeither collect all the unpaid parking
tickets or come back with theofficer of the company. It's amazing
how quickly.
(33:38):
I'm sure.
Yeah, so it was very.
Sometimes our tax is notpersonal, but when it gets to the
personal level, that's when itgets really important, right?
Oh, absolutely, absolutely.Like, if you're in the tax department
of a company and you don'twant one of those corporate officers
(33:58):
showing up at your doorstepsaying, I got this.
Right in the mail. What isthis? Yeah, exactly. So as we wrap
up, is there.
Anything that you think ourlisteners should know or pay attention
to or keep their ear to theground on when it comes to Illinois?
Yeah, and I apologize. When wewere talking about the Pepsi case,
I should have said thedepartment will acknowledge 8020
(34:21):
companies if they're donecorrectly with substance in them.
We've seen a bunch of themdone that way. So you want to make
sure, don't be afraid of them.Because if you put the required substance
now, it's going to take a lotof time and you have to find business
entities and stuff like thatthat goes in it. But if you do it
right, they've accepted themunder audit. I think that there's
current legislation out therethat's trying to take away some of
the benefits of the 8020company. And I think because of the
(34:43):
Pepsi case and some otherabuses that might be out there that
people are looking at that.But hopefully there's some pushback
on that because it is. It'sgood tax policy. We're not worldwide.
You know, we're unitary, butwe're not worldwide. So, you know,
I think the 8020 company doesserve a purpose here.
And just from a bigperspective, our Budget is due by
the end of May. It currentlyso it's our legislative session.
(35:08):
We've been told and it's beentalked that there isn't going to
be a lot of tax things goingon this, this time we have a pretty,
I wouldn't say balancedbudget, but with how they move things
around, it can appearbalanced. So we're not looking for
anything. But Illinoisoftentimes floats all of these thousands
(35:31):
of bills and then you know,the 29th of May, it's an omnibus
bill that's thousands of pagesthat oh my gosh has like tax provision
in it. We're not currentlylike really looking at anything.
But that doesn't mean it can'thappen. But that's the time to be
looking at is kind of the May.They like to get out of out of Dodge
(35:51):
by the end of May. Sometimesit goes if it goes over. They also
need more votes so they need asuper majority. Although Illinois
is run by mostly Democrats, sothe governor is Democrat and Senate
and the Houses. But it stilljust adds hads an added burden that
they don't like to get to. Sojust keep your keep listening. Things
(36:14):
come out. Like Dave said,Chicago has its own separate budget.
They moved some things aroundand did some borrowing. So it's not
immediate, but they are, theyhave a kind of a strategic outlook
that they are under. Sothey're going to be looking at things
as well. So just keep your earout and you know, Department of Revenue
(36:36):
is always coming up with kindof their new issues and what they're
looking at so.
Can jump on the retaildelivery fee bandwagon.
You're welcome. Right.
There you go. Yeah, that's.Yeah. Yeah. I think the one area
that they're going to do theywill look for for revenue is the
amnesty program. So that,that, that's almost a guarantee that
will happen. And just makesure that if you have any issues,
(36:58):
you kind of fall into thatwindow. I think that would be for
July 1, 2018 through June 30of 24. And that would probably be
this year. So it usually likeAugust, September, like.
Something like that period orusually try to maybe do it after
the filing season. So youknow, kind of sales and income. Yeah,
(37:22):
it'll be not secretary ofstate, so not franchise tax. They
have their own separateamnesty. They have. Yeah, they're
due for one too, but wehaven't heard anything about it.
So.
Okay, excellent. Well, Dave,Natalie, thank you so much for your
time and your expertise and.
(37:45):
Maybe you like it or not, but.
I'm sure your phone will ringfor something. Maybe a bunch of franchise
tax that our listeners are nowlike, this might.
Be eye opening to a bunch oftaxpayers out there. Oftentimes we
like that. We just like tobring up things like we started it
with. We're not experts oneverything at all times. Not every
one of us is. But just to giveyou like thoughts, it's if you're
(38:08):
going through a transaction.Oh gosh, I think there might be something
with that awful franchise taxjust to get enough knowledge to like.
Right. Think about things.
Yeah.
Oh, absolutely.
Awareness.
Awareness. Awareness.
Exactly. Well, great.
Thank you for having us. Yeah,it was a lot of fun. Thank you.
Enjoyed it.
Thank you so much. This isanother episode of Saltivation. Till
(38:30):
next time. This podcast is foreducational purposes only and is
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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