Direct-to-consumer wine sellers will face confusing, burdensome, and potentially unlawful new tax collection responsibilities beginning in 2021.
The Illinois Department of Revenue released Informational Bulletin FY 2021-06 to provide sales tax guidance for licensed direct-to-consumer wine shippers. Beginning January 1, 2021, such licensees must collect Illinois taxes as follows:
- When annual sales to Illinois customers are below $100,000 or 200 transactions, they must collect 6.25% state Use Tax.
- When sales to Illinois customers exceed $100,000 or 200 transactions, then (i) a seller with no physical presence in Illinois must collect state Retailers Occupation Tax ("ROT") of 6.25% and the local ROT in effect at the delivery address; whereas, (ii) a seller with physical presence in Illinois must collect only 6.25% Use Tax.
This policy creates significant administrative burdens for the direct-to-consumer wine industry and, if they err in collection, could create exposure to qui tam claims of under-collection or consumer claims of over-collection. This follows Chicago's action, as of July 1, 2020, to apply its Liquor Tax to wine directly shipped to Chicago consumers from outside Chicago, without specifying a dollar or transaction threshold for nexus.
There may be grounds to challenge the guidance under state and federal law. First, ROT (as opposed to Use Tax) cannot be imposed on goods shipped to Illinois purchasers from a seller's out-of-state location. SeeNortonCo. v. IDOR, 340 U.S. 534 (1951). By imposing local ROT on out-of-state, direct-to-consumer wine sellers, FY 2021-6 appears to violate that prohibition. Second, forcing out-of-state sellers to collect a higher tax than in-state sellers unconstitutionally discriminates against interstate commerce. Associated Industries of Missouri v. Lohman, 511 U.S. 641 (1994). On wine delivered to the same customer, under FY 2021-06 some wineries with no Illinois physical presence will collect more tax than a winery with in-state presence. The intent of the Liquor Control Act is "[t]o authorize direct shipment of wine by an out-of-state maker of wine on the same basis permitted an in-state maker of wine … in conformance with the U.S. Supreme Court decision … in Granholm v. Heald." 235 ILCS 5/6-29. FY 2021-06 appears to both violate the Liquor Control Act and unconstitutionally discriminate in favor of wineries with an Illinois physical presence.