UPDATE 2/17/17 — I spoke to Jennifer at the City of Chicago, and she was able to answer many of my outstanding questions. I’ve updated the original post with these edits.
UPDATE 2/12/17 — a retail client highly recommends buying bags wholesale from Howard Packaging in Skokie; her sales rep is Marc Moder. She says, “My vendor is charging the tax… I will happily refer anyone to them. The owner of the company apparently loves dealing with small businesses and undercutting Uline prices.”
I’m all for taxation as a way to effect public policy. But it has to be manageable. It’s amazing how challenging it can be to follow the rules for collecting and remitting a particular tax. Take the City of Chicago’s new “checkout bag tax”, for example. Great idea — encourage folks to bring their own bags by making it more expensive to use a bag given to them by the store.
This new tax replaces a ban on “flimsy” plastic bags which targeted chain stores, who quickly found a loophole in providing higher-quality “reusable” plastic bags. But now it affects paper as well as plastic, and small business as well as big box chains. (See a great DNA Info article on the topic, here.)
And unfortunately, the rules surrounding this new ordinance are complex, and for most businesses, will be impossible to follow to the letter.
Here’s what I understand about how it’s supposed to work (please note that I’m not an expert and don’t work for the city — but unlike most folks, I forced myself to read the entire ordinance and all the information I could get my hands on, as well as called the City of Chicago’s Department of Finance to get clarification):
(Steps One and Two are to get retailers “caught up” with the tax for bags that are already in stock.)
1. For starters, each retailer must count all their bags — paper AND plastic — in stock at the end of day on January 31, 2017.
2. Then retailers pay the tax in advance on this existing inventory.
Supposedly, licensed retailers were mailed a “Floor Tax Return” by the City before December 31, 2016. If you did not receive one, but you do use bags, email revenuedatabase@cityofchicago.
A couple of important notes when filling out this return —
a) Once they get a copy of the return to you, you’ll see that you have to include your “Department of Finance Tax Account Number”. This is located in the bottom-left corner of your business license, under the mayor’s signature.
b) On Page 1, Section 1, Line 1, where it asks for the number of checkout bags on-hand, only note the number of bags that a) you intend to use in the City (if you sell at conventions in the suburbs, for example, don’t count those), and b) don’t fall under one of the exceptions (e.g., separating frozen goods, produce or bulk items, household products; selling to SNAP recipients — see #6 below).
c) If you’ve called your bag wholesaler and have determined that they either do or do not intend to charge the city bag tax moving forward, it’s a good idea to note this information on the bottom of Page 1 of the Floor Tax Return, in Section 2, where they ask for the wholesaler’s information. The city will be following up with these vendors, trying to convince them to charge the tax.
Fill out and mail in the Floor Tax Return with a payment of 5-cents per bag by March 3, 2017 (7-cent tax minus a 2-cent credit for your troubles). It’s a $100 fine if filed late — even if you had zero bags in stock at that point (but you do use them); even if your store did not sell or use checkout bags prior to February 1, 2017 (but you plan to in the future); and even if the store decides NOT to use any bags moving forward (but you used to). If you didn’t use bags before the tax and won’t use them moving forward, you’re exempt from filing the form.
The floor tax return, site schedules (a page for each of the retailer’s various locations — must be filled out even if there is only one), and payment must be mailed to:
Chicago Department of Finance
City Hall, Room 107
121 North LaSalle Street
Chicago, IL 60602
(The rest of the steps are how this will work moving forward.)
3. Wholesalers of paper AND/OR plastic bags (not retailers) must register with the City by February 1, 2017.
4. Wholesalers of paper AND/OR plastic bags (not retailers) must charge their customers (the retailers) 7-cents-per-bag minus a 2-cent credit for the retailer’s effort, and remit that 5-cents-per-bag to the City using Form 2737. (I don’t know of any clients who received this, and I cannot find a copy online; I presume the City only sends it out if they determine you are a bag wholesaler.)
5. The retailers pay this net 5-cents-per-bag tax as part of the invoices from the wholesalers for buying paper AND/OR plastic bags.
(This is where it gets complicated.)
6. There are a million exceptions for bags that are exempt from the tax — so the retailer will need to apply to the wholesaler for a credit for each of these exceptions, to be applied to the next invoice — but how in the world are they going to be able to track them or document them in case of a City audit? Examples include:
Paper and plastic bags ordinarily intended and designed for use by customers inside a store to:
– package loose bulk items, such as fruit, vegetables, nuts, grains, candy, cookies or small hardware items
– contain or wrap frozen foods, meat or fish, whether prepackaged or not
– contain or wrap flowers, potted plants or other damp items
– segregate food or merchandise that could damage or contaminate other food or merchandise when placed together in a bag
– contain unwrapped prepared foods or bakery goods
As well as:
– plastic bags with a retail price of at least fifty cents ($0.50) each
– bags that are used to carry items purchased with SNAP (food stamps)
Retailers should take a credit for these tax-exempt paper and plastic bags on the next bill received from their wholesalers. The wholesaler in turn should claim a credit for the tax amount refunded to their retailers on the next monthly payment to the City. On this topic, the City says, “It shall be presumed that checkout bags sold or used by wholesalers and stores are subject to the tax imposed under this chapter until the contrary is established. The burden of proving that such checkout bags are not taxable hereunder shall be upon the person so claiming.”
7. The retailer is permitted to pass along the 7-cents-per-bag tax to the end consumer, in which case the bag tax needs to be stated separately on the receipt to the consumer; I recommend that retailers work with their accountants or bookkeepers to make sure this is set up correctly in their POS systems. The City has provided a lovely placard to post for your customers so they understand what’s going on.
(Remember, this is a 7-cent tax minus a 2-cent credit for the retailer’s troubles, so the amount collected from consumers is 7-cents, but the amount remitted to wholesale bag sellers or, in many cases, directly to the City, is a net 5-cents.)
8. However, the retailer may choose to absorb the cost themselves, in which case it does not have to be stated separately on the receipt.
(This is where it gets even more complicated.)
9. However, either way, it is the retailer’s responsibility to make sure that their wholesalers who sell them bags are in fact charging them the bag tax. But this has a couple serious drawbacks:
(a) If the retailer buys bags online or in a non-traditional outlet, the chances are pretty low that the wholesaler will be registered to collect and remit sales tax, leaving the retailer in the position where they have to do all of it voluntarily, filing Form 2737 with the City, which is even more time-consuming than the rules and process I noted above.
(Note: if you are a retailer in this situation, you must contact the City of Chicago’s Business Contact Center at 312-747-4747 or by e-mail at RevenueDatabase@cityofchicago.org to register to collect and remit the bag tax. However, I was told by the City Department of Finance that they would prefer not to have thousands of small businesses registering with them; they’d rather convince the wholesalers to charge the tax. They said if you don’t receive an affidavit from the City asking you to register, you’re off the hook as long as you’ve declared your wholesaler to them on the Floor Tax Return, step #2 above.)
However, to be safe — in the case where your wholesaler refuses to charge the tax — I recommend switching vendors. A client has recommended Howard Packaging in Skokie as one who both charges the tax and values working with small businesses.
(b) If the retailer isn’t passing the tax along to customers, then the entire point of the tax — to create an incentive for consumers to bring their own bags — is moot. It will just be a revenue-raiser for the City and nothing more.
Supposedly, there are ways to pay this tax through aldermanic offices and chambers of commerce (I will be shocked if this turns out to be true — please let me know in the comments section below if you hear of it), and those same groups have free reusable “ChiBags” available for retailers to give away to customers throughout February and March.
For the record, other non-taxable examples of bags and bag usage include:
– bags provided by a dine-in or take-out restaurant to contain food or drink purchased by the restaurant’s customers
– bags provided by a pharmacist to contain prescription drugs
– bags sold in packages containing multiple bags intended for use as garbage bags, pet waste bags or yard waste bags
– bags of any type that customers bring to a store for their own use or to carry away from the store goods that are not placed in a bag provided by the store
– newspaper bags
– dry cleaning or garment bags
– plastic liners that are permanently affixed, or designed and intended to be permanently affixed, to the inside of a particular bag
And if you’re interested in the history of this fiasco, as well as how it affects small businesses, contributes to income inequality, and lines the pockets of the city and of big box stores — well, there’s lots of that here:
– Excellent “DNA Info” article on the topic
– Daily Herald article discussing policy matters
– Fuller Tax Blog “Complete Guide” to the bag tax
– Chicago Tribune article