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In brief

The City of Chicago recently issued nexus guidance and a limited safe harbor for City tax purposes in light of the US Supreme Court’s pivotal South Dakota v. Wayfair ruling and the State of Illinois’ statutory economic nexus standards. True to form, the City implemented its new nexus standards by executive action via publication of a “nexus and safe harbor” “information bulletin” on its website (available on the City’s website, here), as opposed to the Chicago City Council more formally (and more appropriately) adopting a new ordinance.

The City’s Information Bulletin provides that as a home rule municipality, the state statutory economic nexus thresholds applicable for Illinois sales/use tax nexus do not directly apply for City tax purposes. Thus, while the City will consider whether a business has exceeded the Illinois economic nexus thresholds, which generally consist of USD 100,000 or more in sales or 200 or more transactions during the immediately preceding 12-month period, the City’s inquiry will not end there. Whether the City has the authority to require a given business to collect its taxes is a combined question of law and fact that must be analyzed on a case-by-case basis. Other factors the City may consider broadly include: “agreements that the entity has with other businesses in Chicago; activities that the entity’s employees or other agents perform on the entity’s behalf in Chicago; any physical presence that the entity has in Chicago; advertising directed at Chicago customers; and any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago.”

In sum, the City has declared the State’s economic nexus thresholds to be inapplicable for the myriad of local taxes administered by the City (e.g., amusement tax, cigarette tax, hotel accommodations tax, lease transaction tax, liquor tax, restaurant tax, use tax, etc.).

Notwithstanding the broad and somewhat ambiguous economic nexus standard outlined above, the Information Bulletin does attempt to provide some certainty but only in limited circumstances. More specifically, beginning 1 July 2021, the City will offer a safe harbor for “an out-of-state entity that received under USD 100,000 in revenue from Chicago customers during the most recent four calendar quarters ….” However, this safe harbor is narrowly limited to “(i) Chicago’s amusement tax … as applied to amusements that are delivered electronically ; and (ii) Chicago’s personal property lease transaction tax … as applied to nonpossessory computer leases.”

Key takeaways

Under the auspices of executive action (i.e., an informal information bulletin), the City has finally addressed application of “economic nexus” to the numerous local taxes it administers. Unfortunately, other than the narrow circumstances outlined above, the nexus standard set by the City fails to provide the certainty and clarity multistate taxpayers deserve when attempting to effectively determine their state and local filing obligations. The lack of a clear economic nexus or safe harbor threshold — applicable to all of its taxes — is questionable, at best, and arguably is in conflict with the US Constitution’s Commerce Clause requirement for substantial nexus, as set forth by the US Supreme Court in Wayfair. Going forward, multistate taxpayers with operations or customers located in the City will need to closely examine their business activities in order to determine whether nexus exists and consider requesting a private letter ruling.

Baker McKenzie will continue to monitor developments regarding City of Chicago taxes.


Ted Bots is a partner in the Firm's Chicago office where he serves as an advisor to multinational companies providing a full range of state and local tax services covering planning, restructurings, as well as tax litigation an controversy matters. Ted is well recognized for his speeches throughout the country on a variety of state and local tax issues at national, regional and local tax conferences including those hosted by Council On State Taxation, Tax Executives Institute, Inc., Taxpayers' Federation of Illinois, Chicago Tax Club, Chicago-Kent College of Law, California Tax Bar & California Tax Policy Conference, among others.


Drew Hemmings is a member of Baker McKenzie’s North America Tax Practice Group where he focuses his practice on state and local tax matters. Prior to joining the Firm, Mr. Hemmings was a state and local tax consultant with a national accounting firm.

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