Sales tax system: more consistent
By MICHAEL D. KLEMENS
State taxes soared on January 1, but almost nobody noticed. With the arrival of the new year the state sales tax rate rose 25 percent, meaning that those who purchase taxable goods in Illinois will annually pay $670 million more in state sales taxes. Nobody noticed because local taxes went down a like amount. Few taxpayers care where their taxes go, and fewer comprehend Illinois' sales taxes.
The fundamental changes that went largely unnoticed resulted from sales tax reform legislation passed by the Illinois General Assembly in 1988. Enactment followed study and recommendations by the Revenue Review Committee appointed by Gov. James R. Thompson after the 1986 election. Douglas L. Whitley, president of the Taxpayers' Federation of Illinois, chaired the committee whose report criticized a system where in different places, different items were taxed and different rates were charged. The commission found the sales tax system a headache for merchants and a mystery to citizens.
On January 1 the state sales tax rate increased from 5 percent to 6.25 percent. The jump went unnoticed because simultaneously the 1 percent local sales tax (a municipal tax inside a city or village and a county tax outside) and the .25 county supplementary sales taxes were abolished.
The fundamental change should leave unaffected those who depend on the money that sales taxes raise. The state retains 80 percent of the 6.25 percent sales tax (its original 5 percent), and counties and municipalities will get 20 percent (their original 1.25 percent).
The existing 1 percent local sales tax on food and drugs became a 1 percent state tax distributed to counties and municipalities. Transit districts retained taxation of food and drugs. There will be a noticable change on September 1, 1991, when home-rule governments lose their power to place an additional tax on food and drugs.
Some sales taxes will remain, distinguished now from general sales taxes as excise taxes. Home-rule municipalities and counties can impose excise taxes on utility use, hotel rooms, alcohol, restaurants and cigarettes. Similarly home-rule governments can impose a "use" tax on automobiles. The governments must collect those taxes themselves.
Home-rule taxing bodies can also impose — in .25 percent increments — their own sales taxes on top of the 6.25 percent state sales tax. And beginning September 1, 1990, the Department of Revenue will collect those taxes for them.
Local governments immediately noticed the loss of some taxing authority. Out as of January 1 were sales taxes on machinery and equipment used in farming, manufacturing, graphic arts, coal exploration and oil drilling, items that were already exempt from state sales tax.
Some taxpayers noticed higher taxes right away. Those in counties and municipalities which had not imposed a tax or imposed the local sales tax at less than 1 percent, began paying higher taxes. The Whitley commission identified 51 municipalities that imposed the retail sales tax at less than 1 percent and 16 counties that did not impose the .25 percent county supplemtary tax.
The biggest tax bill increase fell on Illinois businesses making out-of-state purchases. Previously, such purchases were subject to the 5 percent state sales tax not to any local tax. Now they are subject to the higher 6.25 percent state sales tax, generating an estimated $65 million in new revenues. Part of that money comes from citizens making mail order purchases to firms that must collect state sales tax. Lawmakers have allocated that money for sewage treatment plants.
Overhauled is the way sales taxes are paid in service transactions that include parts and labor. Previously the service business paid sales tax to the supplier from which it bought parts. That will continue if the annual cost of materials is less than 35 percent of the service business annual receipts. If materials exceed the 35 percent threshold, each customer will pay tax on the itemized costs of the parts or, if not itemized, on 50 percent of the total bill.
With all these changes, the retailer should notice a simpler system. The monthly sales tax return form has been shortened from 65 to 28 lines. The move to a common rate means the seller needs to make fewer computations. And come September, when the state begins collecting home-rule sales taxes, the merchant will have one form to file instead of two.
Although the changes will be little noticed by the average taxpayer, they meant major changes for the Department of Revenue. Darlene Logsdon, program administrator for public services, says that her agency has embarked on a major out-reach campaign to alert retailers, accountants and local governments to the changes. The department has not added new staff but has spent $5 million to reprogram computers. Logsdon says the simplification may result in fewer errors by filers, allowing staff who now deal with errors on forms to perform other tasks.
If the sales tax changes make the system less incomprehensible to anyone, then will be worth the effort.
26/January 1990/Illinois Issues