Is There Tax On Services In Illinois

Tax Decoded | Spring 2017

A Revenue enhancement on Services?

Illinois budget woes set the bar for expanding the tax base.

Keith Staats, JD Executive Director, Illinois Chamber Tax Institute

Equally I WRITE THIS Column, At that place'South Even so NO SOLUTION TO THE BUDGET IMPASSE IN SPRINGFIELD.

All that seems articulate among both Democrats and Republicans is that spending cuts solitary will not exist plenty, and tax increases are therefore inevitable.

Which brings the states to the real unanswered questions: Which taxes and how much?

One proposal being floated effectually is for a revenue enhancement on services. To understand how this might be possible, we need to sympathise the electric current Illinois sales taxation organization.

Sales Taxation in Illinois

What we know as sales tax is really a circuitous combination of taxes, including the Retailers' Occupation Tax (ROT), the Use Taxation (UT), the Service Occupation Tax (SOT) and the Service Use Tax—none of which currently tax services. Yous then demand to add to this the various locally imposed retailers' occupation taxes authorized by state law, and administered and nerveless by the Illinois Department of Revenue.

The ROT is imposed on persons in the business of selling tangible personal property at retail or to end users, and is measured by the selling price. The UT is complementary to the ROT and was enacted in the early 1950s to end the practice of persons making out-of-state purchases of tangible personal property to avoid sales taxes. Although Illinois has an SOT in proper name, information technology doesn't actually revenue enhancement services. Instead, it taxes tangible personal property transferred as the effect of a sale of service. In fact, the only services Illinois currently taxes (through other tax acts) are telecommunications, hotels and car rentals, amidst others.

The Source for a Tax on Services

In my estimation, absent of blowing upwards the current system and starting over, Illinois can't just amend its existing sales taxation (ROT and UT) to taxation services. Instead, the State would need to prefer a new tax act or acts.

Similarly, if the General Assembly wishes to grant local units of government potency to revenue enhancement additional services at the state level, it would have to adopt a whole serial of locally imposed service taxes similar to the multiplicity of taxation acts that currently grant diverse local government bodies the authority to impose local taxes.

What we've seen and so far is the filing of Amendment 3 to Senate Bill 9 (SB 9), the taxation component of the Senate's "Grand Bargain," which proposes amending the existing sales taxes to revenue enhancement a number of services, including storage; repair and maintenance; landscaping; laundry and dry-cleaning; private detective, warning and security; pest control; cable idiot box, video and audio streaming; direct satellite broadcasts; and personal care services, such every bit manicuring, tattooing, tanning and massage. The nib as well grants say-so to certain units of local authorities to impose additional local taxes on taxable services.

I suspect that if the bill is enacted in its current class, it volition be challenged under the Illinois Constitution's "Uniformity Clause," which provides that, "In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly. Exemptions, deductions, credits, refunds and other allowances shall be reasonable." A claiming could be based on the broad outcome of why certain services are taxed while others are not. For example, a challenge could address the revenue enhancement of storage services and why at that place's an exemption for grain storage.

The service tax proposal in SB 9 appears to take its genesis in the results of the Illinois General Assembly'south bipartisan Commission on Government Forecasting and Accountability'south (COGFA) recent study comparing Illinois to surrounding states that do tax services.

The COGFA's report indicates that Iowa taxes an additional 81 services compared to Illinois, while Indiana taxes eight, Kentucky 6, Missouri 11 and Wisconsin 14. The COGFA then estimates the additional state revenues that could exist generated by taxing services in Illinois, both at the business- to-business and end-user levels. Following Iowa'due south instance, for instance, Illinois could generate an additional $one.2B to $2.9B a year. Following Wisconsin's example, the state could generate an boosted $588M to $953M. The latest version of the service revenue enhancement proposal appears to be a modified and expanded version of services Wisconsin taxes.

In contrast, I recently spoke with COGFA Director Dan Long, who advised that each quarter-percent increase in Illinois' corporate and personal income taxation rates would generate $98M and $925M, respectively, and each i-per centum increase in the state sales tax charge per unit would generate $370M.

The electric current proposal to tax additional services has generated a great bargain of controversy and opposition. When you review the numbers, and the push back from the groups subject area to expanded tax, you can see why Illinois has tended to enhance income revenue enhancement rates over expanding the tax base of operations to additional services.

Undoubtedly, adopting some or all of the proposals laid out in SB 9 would make Illinois' electric current sales tax organization even more complex. However, the only culling to making the current byzantine system fifty-fifty more byzantine would be to blow it up and begin again. While that might sound appealing, it would be a massive undertaking for both the government and the taxpayer customs.