This Week in State Tax

On August 5, Governor Pritzker signed House Bill 3144 (Public Act 103-0781), creating a state sales tax exemption for the sale of “food for human consumption” which is defined as food for human consumption that is to be consumed off the premises where it is sold, other than alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy, and food that has been prepared for immediate consumption. The state exemption takes effect on January 1, 2026, and applies to retailers’ occupation, service occupation, and use taxes. The current state rate on the newly exempted items is 1 percent.

Currently, the state passes through a portion of state sales and use tax receipts on food for human consumption to local governments. To offset any averse local revenue effects from the bill, the enacted legislation authorizes all counties and municipalities (home rule and non-home rule) to impose a tax on all persons engaged in the business of selling groceries at retail in the county or municipality at the rate of one percent, effective January 1, 2026. Counties may not impose such a tax within the boundaries of a municipality. In Cook County, a Regional Transportation Authority Retailers’ Occupation Tax may also be imposed at the rate of 1.25 percent upon the gross receipts from the sales of groceries. If a local retail occupation tax is imposed, then a local service occupation tax must also be imposed. All such local taxes will be collected and enforced by the Illinois Department of Revenue. The newly authorized local tax will require approval only by the local governing body, and not the voters, to be enacted. For questions regarding House Bill 3144, please contact Drew Olson.

The recently enacted Massachusetts budget bill contained provisions (H. 4800, sec. 225) authorizing the Department of Revenue to establish a 60-day tax amnesty program to be concluded not later than June 30, 2025. The amnesty program would waive all penalties for failure to file any return or pay any tax or estimated tax due for any return due on or before December 31, 2024. To qualify, taxpayers will be required to voluntarily file all proper returns and pay the full amount of tax and interest due by June 30, 2025. Taxpayers who are or have been subject to tax-related criminal investigations or who delivered or disclosed false or fraudulent documents or returns are ineligible for the amnesty program. Any taxpayer that participates in this program is precluded from participating in a future tax amnesty programs for the next 10 consecutive years, beginning calendar year 2024. The Department has not yet issued additional guidance or procedures on the tax amnesty program. Please stay tuned for future updates in TWIST. Please contact Ryanne Tannenbaum with questions on H.B. 4800.

In a P.L. 86-272 (15 U.S.C. secs. 381-384) case demonstrating the fine line between protected and unprotected activities, the Minnesota Supreme Court held that collection of marketing information by sales representatives fell outside the scope of the law’s protection. The taxpayer ran an industrial and packaging product business from Wisconsin but employed sales representatives who met regularly with Minnesota customers. After each customer visit, the representative was required to prepare a summary of sales information from the visit. They were also required to periodically develop more extensive reports containing marketing information about the customer’s needs (including bulk pricing requests, complaints about product or service quality, needs for certain products, and purchases from competitors). The marketing reports were recorded in a data base available to various parts of the company. The taxpayer filed its 2014 and 2015 Minnesota returns, claiming its in-state activities were protected by P.L. 86-272. The Department of Revenue found the taxpayer was liable for tax for several reasons. The taxpayer appealed, and the Department’s position was upheld by both the commissioner of revenue and the state tax court. The taxpayer further appealed to the state supreme court.

On appeal, the sole question was whether the activities of the sales representatives exceeded solicitation, and if so, were they de minimis and still protected? The court concluded the collection of sales-related information following each customer visit was protected under P.L. 86-272. It did hold, however, that the collection, preparation and reporting of broader market information on customers was not entirely ancillary to solicitation. It further held that the activity was not de minimis as the collection of marketing data was "regular and systematic" and over 1,600 individual market notes were collected over a two-year period. In reaching its decision, the court pointed to the separate documentation of sales and marketing data as evidence that the marketing data had some purpose outside the sales context and noted that the data was shared outside the sales department. For more information on Uline, Inc. v. Commissioner of Revenue, please contact Matthew Saunders.

The Comptroller of Public Accounts recently issued a memorandum on the application of the franchise tax statute of limitations when a taxpayer has requested an extension to file its franchise tax report. Generally, the statute of limitations to request refund or for the Comptroller to assess tax is four years from the date on which the tax "becomes due and payable." Without an extension, franchise tax payments are due by May 15, and the statute of limitations begins to run on May 16. A taxpayer may request an extension to file their tax report by making an estimated payment meeting certain criteria. Of note, the memorandum indicates the beginning date for the statute of limitations for taxpayers required to make payments by electronic funds transfer that have made a valid extension request will be August 16^th.  Earlier guidance had provided that the beginning date for the statute of limitations was November 16^th if an electronic funds taxpayer submitted a 2^nd extension request with the required tax payment. The guidance in the memorandum will apply to all reports originally due on or after January 1, 2021.

In another Texas development, the Comptroller recently released a private letter ruling discussing the taxability of a fee charged by the taxpayer for its computer-based testing service. The taxpayer produces and administers a college admissions exam that helps assess an examinee’s readiness for college. The taxpayer analyzes the examinee’s responses to the test questions and provides an assessment score, which can help determine the examinee’s readiness for higher education. The fee also allowed the examinee to have the taxpayer to send the test score to their high school and up to four colleges. In the past, the test had been administered in-person with supervision, using pencil and paper. The taxpayer planned to offer an option to take the test in-person with supervision, using a computer on which the taxpayer’s downloadable software application would be installed. 

The question presented was whether fee charged for the computer-based testing would be subject to sales and use tax as a taxable data processing service. The Comptroller explained that the service contains elements of data processing, including compiling the examinee’s responses, generating an assessment score, and providing the score to the examinee. The Comptroller determined, however, that these activities were performed only to facilitate the testing and assessment of the examinee’s readiness for higher education. Such a service is not an enumerated taxable service in Texas, and it was not, therefore, subject to tax. For more information on Memorandum 202408001M and PLR20240206093134, please contact Karey Barton.