The state of the State
Complexities of sales tax
By MICHAEL D. KLEMENS
August in Springfield. The temperature's in the 90s. The humidity's higher. Headed home from the office you stop to pick up a gallon of milk. To beat the heat you buy a six pack of Pabst, and Coke for the kids. In line at the register you try to figure the tax. Good luck! The beer gets taxed at 5 percent by the state, 1 percent by Springfield and 1/4 percent by Sangamon County. Then Springfield adds a 1 percent home-rule tax to bring the total to 7 1/4 percent. The milk is food and only the 1 percent city tax applies. The soda is not food under state law so the state, city and county taxes apply. But Springfield exempts soda from its home-rule tax so the rate is only 6 1/4 percent. Three tax rates. Don't let it drive you to drink because the tax on liquor is just as confusing. Buy a $10 bottle of Old Smugglers whiskey and you would pay $1.20 tax in Evanston, 80 cents in Chicago and 63 cents in Cairo. Sales taxes are one of the great mysteries of Illinois. They confound merchants who collect them and customers who pay them."Nobody in this state knows what the tax rate is," says Verenda Smith, who answers questions about the tax for the Department of Revenue.
The Illinois sales tax structure came under scrutiny earlier this year by Gov. James R. Thompson's Revenue Review Committee. Charged with studying the issue in light of federal tax law changes, the group concluded in April: "The Illinois sales and use tax structure is a mess."
Here's why. First of all there is no animal tagged as a state sales tax. Instead four taxes make up what is called the state sales tax. The retailers' occupation tax and the use tax are linked. The seller pays his 5 percent tax for the privilege of conducting business in Illinois with the 5 percent use tax he collects from the customer for the privilege of using property in Illinois. The service occupation tax and service use tax are similarly linked. The service person pays the 5 percent tax on what he pays for property used in providing a service with the 5 percent service use tax he collects from the customer.
Local governments get in on the "sales tax" game, too. In all 1,397 local governments levy a "sales tax." All 102 counties and most city and village governments levy the municipal or county retailers and occupation taxes. Buy in an incorporated area and it gets the tax. Buy outside a city or village and the tax goes to the county. The Regional Transportation Authority imposes a 1 percent tax in Cook County and a quarter percent in the five collar counties. The Metro-East Mass Transit District puts on a quarter percent tax in parts of Madison and St. Clair counties. The DuPage Water Commission adds a quarter percent tax in most of DuPage and parts of Will and Cook counties. In addition 17 cities use home-rule powers to levy additional sales taxes.
Taxation of services is even more confusing. In Illinois the parts in a parts-and-labor transaction are taxed. The tax is based on the service person's cost, not what he or she charges the customer. Take your car to a service station to have a new tailpipe installed; the tax that the mechanic pays the state (and that you pay the mechanic) is based on his cost for the tailpipe. Neither his markup nor the charge for labor is taxed.
The Revenue Review Committee suggested reducing the number of tax rates and taxing the same things everywhere. Following its report representatives on governor and legislative leaders huddled to hammer out legislation. It was not ready until late June and the issue was put off until fall. Then, with opposition from the business community and from local governments, action was again delayed. Sen. Dawn Clark Netsch (D-4, Chicago) says that working out differences with local governments may take some time, but she remains optimistic that the changes will eventually be made.
6/December 1987/Illinois Issues
Here's what the draft conference committee report would do:
• Move the state sales tax rate on general merchandise from 5 to 6 1/4 percent and eliminate the 1 percent municipal and county taxes and the 1/4 percent county supplementary tax. The state would still keep its 5 percent and distribute the increase to local governments.
• Impose a statewide 1 percent tax on food and medicine, but eliminate the county or municipal tax on those items, again distributing it to locals.
• Have the Department of Revenue collect the home-rule sales tax, which could be no more than 1 percent. Food and medicines, if taxed, would be at the same rate.
• To parallel state exemptions, eliminate all local taxes on the machinery and equipment used by coal, oil, farm, manufacturing and graphic arts businesses. Eliminate exemptions in enterprise zones for building materials and for materials consumed in producing a product.
• Tax merchandise transferred as part of a service at its retail price rather than cost. If labor is not itemized, it would be taxed.
The change would produce no new money for the state and no tax increase for most citizens, the revenue department says. Residents would pay more in the eight counties that have not imposed the 1/4 percent county supplementary tax: Adams, Alexander, Grundy, Clark, Henderson, Jasper, Madison, Putnam and Schuyler. So would those in the counties and municipalities that have retail occupation taxes at less than 1 percent.
The biggest losers would be businesses that make large purchases out of state, many times to reduce taxes. Now they pay only the 5 percent state use tax because there is no local use tax. The same purchase made in Illinois would generate at least a 6 1/4 percent tax. Under the proposed law, no matter where they made a purchase, businesses would pay a 6 1/4 percent use tax. This would amount to a $60 million to $80 million boost borne primarily by business. That provision has prompted opposition from the Illinois State Chamber of Commerce and the Illinois Manufacturers' Association.
If the businesses pay more tax, the local governments would get it, but that's not enough to convince city and village officials to support the proposals. They are unconvinced that the provisions to hike business taxes will clear the General Assembly, says Steven Sargent, executive director of the Illinois Municipal League. And. Sargent says, his members worry about loss of control of their taxing power. The municipal league opposes both the state takeover of the municipal retail occupation taxes and preemption of home-rule authority. "There's a certain concern based on experience that it's so much easier to alter and change a tax that's being imposed by the General Assembly and then returned to municipalities," Sargent says.
Also categorized as winners are retail merchants whose lives would be less complicated by having to file one set of forms, follow one set of rules and forbear one set of audits (the Department of Revenue's). Tucker Olson, executive vice president of the Illinois Retail Merchants Association, says the changes would make the laws comprehensible and introduce fairness as well as some degree of logic. "Frankly, merchants have a difficult time understanding the logic." Olson says.
Complexity begets new problems. Douglas L. Whitley, president of the Taxpayers' Federation of Illinois and chairman of the Revenue Review Committee, sees more trouble if changes are not made. He offers an example. A business Whitley will not identify has complained to him about the different rates and lack of a single source of information. Their solution is to seek an exemption from the sales tax. That's no answer. Whitley says, because it narrows the base. But it points out the problem, he adds, "You can't have a tax structure that's so complicated people won't comply."
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