Section 130.2532  Annual Review

a)         Beginning on March 31, 2025, and by March 31 of each year thereafter, a holder of a Direct Pay Permit shall review its purchase activity to verify that the purchases made during the immediately preceding 12-month period of the calendar year ending on December 31, were sourced correctly and that the tax rate, including any local occupation taxes administered by the Department, was correctly applied.  However, there may be situations that would limit the review to a period of less than 12 months.

EXAMPLE 1:  A permit holder is granted a Direct Pay Permit on September 1, 2024.  The initial annual review period for the permit holder is limited to the period September 1, 2024, through December 31, 2024.  The review period for the following year will be the 12-month period beginning on January 1, 2025, and ending on December 31, 2025.

EXAMPLE 2:  A permit holder is under audit by the Department with part of the audit period covering January 1, 2024, through June 30, 2024, which overlaps the normal 12-month period ending on December 31, 2024, the permit holder is required to review.  Because of the audit, the permit holder is only required to review the period July 1, 2024, through December 31, 2024.

b)         In determining whether the tax was sourced correctly the Direct Pay Permit holder shall apply the provisions as prescribed by this Part, as well as Part 131 (Leveling the Playing Field for Illinois Retail Act), and local retailers' occupation taxes.  See 86 Ill. Adm. Code 131.155 and 270.115 for sourcing provisions.

c)         If during the review process, an error in sourcing or the tax rate is discovered, the permit holder shall file an amended return by April 20 of the year following the calendar year in which the review under subsection (a) occurs.

d)         A separate amended return shall be filed on forms prescribed by the Department for each filing period an error in sourcing or the tax rate is discovered.

e)         A holder of a Direct Pay Permit is liable to pay a penalty of $6,000 for each review period, even if such period is less than 12 months, for the failure to properly verify purchase activity and correct sourcing and tax rate errors. (See 35 ILCS 120/2-10.5(h)) The penalty shall not apply if 95% of the transactions for the applicable review period were correctly sourced and the correct taxes have been remitted.  Likewise, the penalty shall not apply if the permit holder acted with reasonable cause which shall be determined in accordance with the reasonable cause standards set out in 86 Ill. Adm. Code 700.400.

EXAMPLE 1:  The permit holder meets the March 31 and April 20 deadlines.  The permit holder is subsequently audited and found to be in 97% compliance.  The $6,000 penalty does not apply because the permit holder met the March and April dates for review, the filing of amended returns, and the 95% threshold for compliance. 

EXAMPLE 2:  The permit holder meets the March 31 and April 20 deadlines.  The permit holder is subsequently audited and found to be in 90% compliance.  The $6,000 penalty will apply because although the review and filing deadlines were met the permit holder failed to properly verify purchase activity and correct sourcing and tax rate errors as required to be in 95% compliance.  The penalty will apply unless reasonable cause is found.

EXAMPLE 3:  The permit holder does not file amended returns to correct errors in sourcing or the tax rates applied.  The permit holder is subsequently audited and found to be in 96% compliance.  Because the permit holder met the 95% compliance threshold, the penalty will not apply.

EXAMPLE 4:  The permit holder does not file amended returns to correct errors in sourcing or the tax rates applied.  The permit holder is subsequently audited and found to be in 90% compliance.  The permit holder is subject to the $6,000 penalty because it did not meet the compliance or filing requirements.  The permit holder did not meet the 95% compliance threshold, so the penalty will apply unless the permit holder can show reasonable cause.

EXAMPLE 5:  The permit holder does not file amended returns to correct errors in sourcing or the tax rates applied by April 20.  However, the permit holder files amended returns on June 1 to correct sourcing and tax rate errors.  The permit holder is subsequently audited and found to be in 96% compliance.  Prior to filing the amended returns, the permit holder was only 90% in compliance.  The $6,000 penalty will apply because the permit holder did not meet the statutory March 31 and April 20 deadlines and had initial compliance of only 90%.  The 95% compliance threshold is not based on a permit holder subsequently achieving 95% compliance, whenever that may be.  The $6,000 penalty will not apply if the permit holder can show reasonable cause.

1)         Transactions that involve only an error in the taxable nature of a purchase rather than an error in sourcing or tax rate are excluded from the $6,000 penalty determination (e.g., claiming items as exempt that were taxable and claiming items as taxable that were exempt).

2)         The percentage error rate for purposes of determining the threshold is computed using the total number of transactions for the review period, even if such period is less than 12 months. (See subsection (a)). The threshold computation is not based on a percentage of error using the transactions total dollar amount.

EXAMPLE:  A permit holder has 10,000 purchase transactions subject to the annual review provisions of the Direct Payment Program, of which 400 of the transactions were sampled.  Within that sample, 16 were found to be either incorrectly sourced or an incorrect tax rate was applied.  The error rate was 4% (16/400 = .04) and 96% of the transactions were reported correctly.  The $6,000 penalty will not apply because 95% or more of the transactions were reported correctly.

f)          Any person receiving a notice of penalty may:

1)         within 60 days after the date on the notice of penalty, protest and request an administrative hearing in writing.  (For further information on the practice and procedure in all contested cases in the Office of Administrative Hearings of the Illinois Department of Revenue, see 86 Ill. Adm. Code 200.)  Upon receiving a request for a hearing, the Department shall give notice to the person requesting the hearing of the time and place fixed for the hearing and shall hold a hearing in conformity with the provisions of the Act, and then issue its final administrative decision in the matter to that person.  In the absence of a protest and request for a hearing within 60 days, the Department's decision shall become final without any further determination being made or notice given; or

2)         if penalties and interest exceed $15,000, file a petition with the Independent Tax Tribunal within 60 days after the date on the notice of penalty.  For procedural information for the Independent Tax Tribunal, see 86 Ill. Adm. Code 5000, Subpart D.

(Source:  Added at 49 Ill. Reg. 5419, effective April 1, 2025)