Illinois Sales Tax and the PetMeds Case: What You Need to Know
Illinois has never made sales tax simple, and the recent PetMeds case is no exception. As states continue to wrestle with economic nexus rules in a post-Wayfair world, Illinois’ unique sourcing structure created confusion and, for some, unexpected audit exposure. Here’s what happened, and what remote sellers need to know.
The Challenge of Origin vs Destination Sourcing
Over the years, Illinois has made several changes to its sales and use tax laws as it figured out how to implement economic nexus rules following the U.S. Supreme Court’s Wayfair decision. The challenge? Illinois is an origin-based sourcing state for in-state sellers, unlike most states that use destination-based sourcing. In simple terms, destination-based states can easily apply economic nexus thresholds and require sellers to collect tax based on where the buyer is located. Origin-based states like Illinois face more complications, especially when mixing in remote sellers.
How Sales Tax Worked in Illinois Before Wayfair
Prior to the Wayfair decision, Illinois-based sellers with a physical presence collected tax at the origin, where the product shipped from. For example, a warehouse in Schaumburg meant the Schaumburg tax rate applied to all in-state sales. But out-of-state sellers were different. If a seller fulfilled orders from, say, Indiana, Illinois law only required them to collect state use tax, no local tax was added. Even a retailer with physical nexus in Illinois but shipping from outside the state (like an Indiana warehouse) collected only the state-level use tax on Illinois sales.
Post-Wayfair: Leveling the Playing Field Act
Following Wayfair, Illinois implemented the Leveling the Playing Field Act which requires sellers with an economic nexus to collect tax if they exceed Illinois’ economic nexus threshold. These sellers were required to collect tax based on the destination of the sale. There were no changes to the requirements for collecting tax imposed on sellers with a physical presence in Illinois.
The PetMeds Lawsuit: A Constitutional Challenge
PetMeds Express (“PetMeds”), a Florida-based seller of pet medicines and related products, was assessed by Illinois for collecting incorrect tax rates on sales to in-state customers. PetMeds challenged the assessment, citing, in part, violations of the Commerce Clause in the U.S. Constitution. They argued the law imposes an undue burden on out-of-state retailers required to collect destination-based tax. Since the Illinois Department of Revenue maintains over 3,700 location codes for reporting, the process is significantly more complex for remote sellers than for those only required to collect the state’s use tax rate.
Illinois Responds with a Law Change
In response to the legal challenge, Illinois passed a new law requiring all sellers, regardless of nexus type, to collect destination-based tax when shipping products from outside the state. The law took effect January 1, 2025. For example, a Schaumburg-based seller fulfilling orders from an Indiana warehouse must now collect destination tax rather than just the state use tax. An Indiana seller with Illinois nexus must also collect destination-based tax. This levels the playing field going forward, but remote sellers remain exposed for sales made between October 1, 2018, and the end of 2024. The PetMeds case won’t provide broader guidance, as the company settled out of court in October 2024. Terms of the settlement weren’t disclosed.
What’s Still Unresolved?
While the new law addresses disparities for sellers shipping from out-of-state, not all constitutional questions were resolved. The PetMeds case didn’t address whether Illinois’ origin-based rules for in-state sellers, and destination-based rules for remote sellers, violate the Commerce Clause. Under current law, sellers with in-state inventory collect tax based on the inventory location, while those with inventory out of state must collect tax based on the customer’s location. A seller storing inventory in Bettendorf, Iowa faces significantly more complexity than one across the river in Moline, Illinois. That small geographic difference still creates a major compliance gap.
Don’t Assume Illinois Is Right
At Clarus Partners, we’ve helped multiple remote sellers navigate Illinois audits and assessments where tax was collected incorrectly due to this confusion. Bottom line: Just because Illinois issues an assessment doesn’t mean it’s correct.
Need help navigating Illinois sales tax rules?
Whether you’re unsure about sourcing, economic nexus, or audit exposure, Clarus Partners is here to help. Our team of experts can guide you through the nuances and help ensure you’re collecting the right tax in the right place. 👉 Let’s talk about your sales tax risk before Illinois does.