PetMed Express, Inc. has filed a lawsuit against the Illinois Department of Revenue, challenging the state’s “Leveling the Playing Field for Illinois Retail Act” as discriminatory against remote retailers and violating both the Commerce Clause and the Uniformity Clause.
PetMed Express, Inc., a Florida-based online retailer of pet medications, food and other items, has filed a petition against the Illinois Department of Revenue challenging the state’s Leveling the Playing Field for Illinois Retail Act (Act). In PetMed Express, Inc. v. Illinois Department of Revenue, No. 23 TT 104, PetMed argues that the Act violates the Commerce Clause of the U.S. Constitution and the Uniformity Clause of the Illinois Constitution as well as raising raises taxpayer issues under audit.
PetMed contends that the Act discriminates against remote retailers compared to those with a physical presence in Illinois. Specifically, the Act requires remote retailers to use destination sourcing to collect state and local tax based on the customer’s location. However, in-state retailers and out-of-state retailers with an Illinois presence are required to use origin sourcing and collect tax at the seller’s location. As a result, in-state retailers have an easy collection and remittance process while out-of-state retailers face a cumbersome process, which in no way reflects a level playing field.
PetMed argues that this treatment places an undue burden on interstate commerce and discriminates against out-of-state businesses due to the increased compliance costs and administrative challenges of managing destination sourcing requirements. This includes identifying and registering location codes, remitting separate jurisdictional forms, and often manually validating location code in what can be a costly process, and is a process in-state retailers with single tax rates based on location do not face.
PetMed also contends that the Illinois tax regime violates the Uniformity Clause of the Illinois Constitution that requires tax laws be both uniform and non-discriminatory against certain taxpayers. The company argues that the tax burden on remote retailers is substantially different from that on in-state retailers, lacking a rational basis for such a distinction.
Determining Tax Collection Obligations
Sales tax is ridiculously complex. Post-Wayfair sales tax is typically sourced to a customer’s front door instead of a warehouse or storefront. Determining one’s status as a vendor requires an understanding of the laws combined with a taxpayer’s unique way of delivering goods and services to its customers. While software helps with a part of the administration of sales tax, expert advice is critical for proper implementation.
There are over 10,000 local jurisdictions, some of which are state collected and others which are home rule. Using technology to deal with all of the tax jurisdictions and front door/same day delivery is a challenge for multistate vendors. Sales tax software cannot solve every business’s unique tax profile. This is why TaxOps exists, to serve as an advisor and supervisor for the combination of technology with advisory compliance solutions.
We advocate at all local and state levels for meaningful change to make sales tax collection and remittance more manageable, simpler. Taxpayers like PetMed had to file a lawsuit to assert Commerce Clause violations. How many taxpayers can afford to hire attorneys and wait for a court to decide?
Litigation can take two to three years, and many cases are settled without a decision. While we can thank PetMed for taking up the mantel of parity, how many more taxpayers are dealing with leveling the playing field laws that clearly level nothing for out-of-state taxpayers who might not even know where Cook County is (Cook County is in Chicago, which also contains 134 other municipalities!)? How can a state possibly think such laws are fair and bias those laws in favor of in-state taxpayers, which is clearly a violation of the Commerce Clause?
The PetMed case is significant as it challenges the fairness and constitutionality of state tax laws affecting remote sellers. A ruling in favor of PetMed could force other state tax regimes to assess their tax systems and correct any indiscriminate laws.
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