Nexus is a technical tax term referring to the connection between a seller and a state, or other local jurisdiction that requires the seller to collect and remit taxes. In most circumstances and historically nexus is established when a business has a physical location (such as an office or warehouse) or when a certain sales threshold has been met. The rules surrounding nexus significantly changed with the U.S. Supreme Court ruling on South Dakota v Wayfair striking down the physical presence requirement. Since the 2018 ruling, many businesses have been seeking guidance on how to comply with local tax rules, including those with the City of Chicago. In late January, the City of Chicago issued an Information Bulletin Nexus and Safe Harbor, outlining how nexus matters will be approached going forward. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.
Nexus Safe Harbor
The bulletin includes the introduction of a safe harbor program for remote sellers. Under the program, out-of-state entities with less than $100,000 in sales, over the past four consecutive quarters, will not be required to collect the Chicago Amusement or the Personal Property Lease Transaction Tax for the current calendar quarter. The program is offered with the following conditions and limitations, including:
- The entity has no other significant contacts with Chicago such as a physical presence, local employees, or agents acting in their interest.
- The program will apply on a prospective basis starting July 1, 2021. No refunds will be given, or credits granted for taxes paid prior to that date.
- If a business initially qualified for the program but no longer does, it is required to register with the Department of Finance within 60 days, begin collecting taxes within 90 days, and continue collecting for at least one year.
- The safe harbor program is focused only on the issue of whether a business has to collect taxes and does not impact whether a company has payment responsibility.
In cases where the safe harbor does not apply, the Bulletin confirms that businesses with Chicago activity are expected to comply with tax collection and payment regulations. Several factors will be reviewed when determining whether a business has collection and payment responsibilities. The factors include whether the state’s economic nexus threshold has been met, whether agreements with other Chicago businesses have been made, any local employee activity, local advertising programs, and any other activity aimed at conducting business in Chicago. Ultimately, whether nexus has occurred will be evaluated on a case-by-case basis.
While many remote sellers have focused on complying with state tax rules, it is important not to neglect local jurisdiction requirements as well. Since there is often lack of conformity around nexus rules it is important to carefully review guidance in jurisdictions where the business may have exposure. If you have questions about the information outlined above or need assistance with a state or local tax issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.