The little-known use tax and the IL-1040 form have become the latest fronts in the State of Illinois’ battle against its severe budget deficit. For the first time, your Illinois tax return in 2010 will include a line to report the use tax that you owe.
Getting to Know the Use Tax
I’m sure many of you are thinking to yourself, “Use tax? I read a lot about how Illinois raised its state income tax, but I don’t remember the articles saying anything about a new use tax.” That’s because the use tax has been around for more than 50 years.
The use tax is a tax on goods purchased outside Illinois for which a) no sales tax was charged, or b) the state that charged you sales tax charged you a tax rate below Illinois’ 6.25% rate. (County and/or city sales taxes are tacked on top of the state rate, which is why Chicago residents pay a total sales tax of 9.75%). Most states impose a use tax. Before 2010 enforcement of the tax in Illinois has been primarily limited to large corporations and to individuals who make out-of-state purchases of big-ticket items such as cars and boats.
In 2010 the Illinois legislature required that reporting of the use tax be moved from a separate tax form (ST-44) to the IL-1040. The purpose of this change is to increase awareness of the tax, and hopefully encourage more individuals to fess up and pay their use tax.
How is the Use Tax Calculated?
Illinois provides tax payers with three options for determining and reporting the amount of use tax owed:
1. Estimate the amount of use tax by multiplying the taxpayer’s income by .06% (.0006). As a result, a person who made $100,000 in 2010 would owe $60 under this method.
2. Calculate the actual amount of use tax by using a worksheet provided with the IL-1040 instructions.
3. Report $0 of use tax owed to indicate that no purchases of goods were brought into the state at a lower sales tax rate or at no sales tax.
Taxpayers are not allowed to leave this line blank; they must calculate their use-tax liability by using one of the three methods above. Furthermore, the Illinois Department of Revenue includes the following line in the instructions on the IL-1040: “If we find that you owe additional tax, we may assess the additional tax plus applicable interest and penalties. We conduct routine audits based on information received from third parties, including the US Customs Service and other states.”
What Does This Mean For You?
When you provide me with your 2010 tax data, I will need you to tell me which of the three methods you would like to use to calculate the use tax. Unfortunately, I cannot input a $0 on the IL-1040 without your permission. Likewise, I don’t want to use the Illinois estimated rate without your permission. If you want to determine the actual amount of your use tax, I will provide you a Use Tax Worksheet that you can use to make this calculation.
Calculating your actual use tax requires knowing how much state sales tax you paid, and this can be tricky, particularly for online purchases. Some savvy online shoppers are frequently able to avoid paying sales tax by finding online retailers that do not charge sales tax for out-of-state buyers. Large online retailers such as Best Buy, Target, and Apple, however, do charge sales tax based on your zip code; consequently, these purchases will not figure into your use-tax calculations. Amazon.com charges sales tax based on your zip code for some purchases, but not for others; it depends on which Amazon vendor is fulfilling the order.
I realize calculating the actual amount appears to be a big hassle, especially compared with the other two options. For the actual method, if you want to provide me the amount of your non-taxed purchases, I can then fairly easily calculate the use tax. But regardless of which method you choose, I will need your approval.
Illinois Provides Use-Tax Amnesty
If you determine that you owe Illinois use tax for the period from July 1, 2004 to December 31, 2009, you may file and pay it without interest or penalty between now and October 15, 2011. To take advantage of this amnesty window, you need to complete ST-44 and write “Amnesty” on the form. We can help you file this if you like.
I am sure many of you will wonder how stringently Illinois will enforce the use tax. It is difficult for me to give an opinion or advice on this, but I do know Illinois has beefed up its technology to identify non-filers. In light of this, using the estimated method might be your best bet to keep your tax return from getting flagged for further inspection. Illinois may be using other sources to identify people who are failing to accurately report use-tax liability; obtaining records of big-ticket purchases might be one way for the state to identify these people. Some states are going directly to Amazon to get customer purchase history, but I have not heard of Illinois doing this.
For questions related to the use tax or any other question related to your tax return, please contact Bart Eilts at 773-525-6171 or bart@eiltscpa.com
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