When your company needs supplies, it's common to purchase a wide variety from just a few vendors because it's easier to keep it simple. Some of the purchases for your business may be tax-exempt, while others aren't. Dealing with the tax status of each and every individual purchase can prove to be time-consuming. The Illinois Department of Revenue has come up with a way to improve the system, saving you time and energy.
What Is a Direct Pay Permit?
An Illinois direct pay permit allows a business to make multiple purchases throughout the month without paying any local or state taxes on those purchases at the time of sale. You should not think of this as a way of not paying the required taxes or evading them. Instead, it's a way of determining the total amount of tax due to a vendor on a monthly basis rather than on a by-purchase basis. The appropriate jurisdictions monitor any businesses with direct pay permits and hold them accountable for any errors in filing taxes for the month.
How Do You Apply for a Direct Pay Permit?
Not every business can apply for a direct pay permit, and requirements will vary depending on the jurisdiction. For the most part, a direct pay permit benefits larger companies that make multiple purchases throughout the month by saving them time and money in the long run. Prior to applying, companies should look over Form ST-47 Information for Direct Payment Program Participants to verify that they would qualify for a direct pay permit (Form ST-46).
A business interested in applying for a direct pay permit must complete Form ST-45, the Direct Payment Program Application, which you can get from the Illinois Department of Revenue. The application must be in writing to the local tax commissioner. The application statement must include the purpose the business has in seeking a direct pay permit, along with how the approval of a direct pay permit will directly benefit the company.
What Are the Benefits of Holding a Direct Pay Permit?
When applying for a direct pay permit, consider which of the following way(s) your company will benefit from holding a direct pay permit:
- The direct pay permit will allow your company to calculate the tax more accurately for electronic business transactions, including where procurement cards are used, when you have evaluated receipt settlements, and for electronic data interchanges.
- If the purchase's taxability is impractical or difficult at the time of sale, a direct pay permit would be beneficial.
- Your company will be able to improve its compliance with the current tax laws of the local jurisdiction.
- When your company deals with the laws and regulations of several states and jurisdictions, using a direct pay permit will help streamline the process for better automation or central accounting and purchasing processes.
- Direct pay permits may help your company reduce administrative work when it comes to verifying, calculating, determining, and remitting tax on purchases.
Businesses dealing with any of these situations may benefit from using a direct pay permit, consolidating their time on rectifying their tax liability to vendors each month.
What Are the Risks of a Direct Pay Permit?
As you can imagine, there's a higher risk of tax fraud or evasion when utilizing a direct pay permit, so jurisdictions are more diligent about monitoring all tax activity of businesses with direct pay permits. When applying for a direct pay permit, your business can expect to be audited before the application will even be considered. You can also expect to be audited every three years as long as the direct pay permit is in effect. The local and state jurisdictions are counting on your company to accurately and honestly report all tax liabilities.
Once your company is issued a direct pay permit, it's essential that you also adopt efficient and accurate audit management and accounting procedures. For an Illinois direct pay permit, be sure to follow the guidelines for use detailed on Form ST-47. Some purchases are ineligible for the direct payment method. These include:
- Personal property that will be titled or registered by a state government agency. This restriction covers boats, airplanes, and vehicles.
- Utility taxes including telecommunications.
- Beverage and food purchases.
- All purchases subject to the Service Use Tax Act or Service Occupation Tax.
Knowing the rules and regulations for the Illinois direct pay permit will keep your company in the clear in case of audits.
How Does a Company in Illinois Report Direct Pay Permit Purchases?
There are several forms that need to be completed in full in order to accurately report your company's direct pay permit:
- Form ST-1: Sales and Use Tax and E911 Surcharge Return.
- Form ST-2: Multiple Site Form.
- Form ST-2-DP: Direct Pay Multiple Site Form.
If your company is registered as a single site filer, you still need to file Forms ST-2 and ST-2-DP along with the ST-1. Filing these forms helps to differentiate between direct payment purchases and the sale you make. You will report all sales made by your company on Form ST-2 and then all direct payment purchases made on Form ST-2-DP.
As of Jan. 1, 2021, it's the responsibility of the direct pay permit holders to ascertain whether their vendors are remote retailers or marketplace facilitators. If a vendor is either a remote retailer or a marketplace facilitator, then the tax amount due is based on the location in Illinois that the items were shipped or delivered. The place where you take delivery may impact the amount of sales tax due because of the non-home rule, home rule, park district, mass transit, county public safety, public facilities or transportation, flood prevention district, municipal business district, or county school facility tax.
If your company is looking to save money and time, using direct pay permits to control purchases and tax payments may be beneficial. If you'd like to learn more about direct pay permits, the application process, or whether it would benefit your company, reach out to us at Pasquesi Sheppard. Our knowledgeable team has the experience to get your company through an audit and onto saving time and money. We're available by phone at 847-234-5500, or you can contact us via our online form, and a member of our team will be happy to respond as soon as possible.