Illinois Sales and Use Tax Guide for Retailers and E-Commerce Businesses

Sales and Use Tax Basics in Illinois

Sales Tax

As a complementary tax, sales and use tax apply to the sale and use of tangible personal property. Together, they form what is known as sales tax in Illinois. A sales tax combines state, local, and district taxes applicable to taxable sales.

Under the Retailers’ Occupation Tax Act, sales tax applies when a business sells tangible personal property or tangible goods, such as clothing, vehicles, jewelry, and business equipment, to be used or consumed in the state.

Use Tax

A use tax is imposed on the privilege to use tangible goods in Illinois. It applies when goods are bought from businesses located outside the state and brought into the state or when tangible goods are delivered to consumers from companies located outside Illinois.

Illinois State Sales and Use Tax Rates

Illinois has a 6.25% sales and use tax rate and a 1% rate for qualifying foods, drugs, and medical appliances. In addition to these state-wide applicable rates, local sales and use taxes, such as Chicago Home Rule municipal soft drink retailers’ occupation tax, Chicago Home Rule use tax on titled and registered items, and other county, district, or municipal rates apply to sold and bought tangible goods. Consumers' or individuals' addresses are essential for determining applicable local sales and use tax rates.

Tax-Exempt Transactions

General rules define that sales made to the state, local, and federal governments, non-profit organizations, such as charitable, religious, or educational, and interstate carriers for hire used as rolling stock are exempt from sales and use tax.

Furthermore, sales of newspapers and magazines, sales made to out-of-state buyers, and sales of machinery and equipment used for manufacturing or assembling tangible personal property for wholesale or retail sale or lease and agricultural production, as well as sales of legal tender, medallions, and gold bullion issued by qualifying governments, are also sales tax exempt.

Nexus Rules in Illinois

Determining whether businesses have a nexus or presence in Illinois is crucial for determining the sale and use tax obligations and requirements they must fulfill. Currently, companies may establish several types of nexus in Illinois.

Physical Nexus

For businesses to establish a physical nexus in Illinois, they must own or rent an office, warehouse, or some other real estate property in the state, have employees, including contractors, salespersons, and sales representatives, or have a third-party affiliate there.

Therefore, if businesses are incorporated in Illinois, have inventory there, or have personnel selling tangible goods in the state, they must register for, collect, and remit sales tax.

Economic Nexus

If physical presence is essential for so-called in-state retailers, the economic nexus is critical for out-of-state or remote sellers. Suppose businesses outside Illinois make taxable sales to Illinois consumers and exceed a USD 100,00 threshold in cumulative gross receipts from sales of tangible goods or have 200 or more separate transactions for the sale of tangible goods to Illinois. In that case, they are subject to sales tax requirements.

Marketplace Nexus

Marketplace nexus is defined in the same way as the economic nexus, regarding the USD and transaction threshold, but refers to marketplace facilitators and sellers. Therefore, if a marketplace facilitator or seller exceeds the threshold, they must report and remit sales tax to State and local Tax Authorities.

Click-Through and Affiliate Nexus

In many US states, introducing economic and marketplace nexus abolished click-through and affiliate nexus. Illinois first repealed the rules in 2018 and then reenacted them in 2020. Click-through and affiliate nexus are established when an out-of-state seller incentivizes or compensates an Illinois resident for directly or indirectly referring potential buyers to sellers by an internet link or in some other way.

In addition, the in-state individual provides potential buyers with a promotional code or other form that enables retailers to track referral sales, and the retailer’s cumulative gross receipts from such referrals were at least USD 10,000 during the preceding four quarterly periods.

Taxable Goods and Services in Illinois

The sale, lease, or rental of tangible goods such as soft drinks, prepared foods for restaurant consumption, prewritten and canned computer software, repair parts, and other items transferred or sold in conjunction with providing a repair service, and lawn equipment rented for hours, days, or weeks from a hardware store are all subject to sales and use tax rules and regulations.

Regarding services, Illinois does not subject them to sales tax. However, it does impose a service occupation tax on tangible goods transferred as part of the service provided.

Bundled Transactions and the True Object Test

A bundled transaction is considered a non-taxable service bundled with tangible goods. The Illinois Department of Revenue holds that if the purpose is to obtain a taxable tangible good, the whole transaction is taxable unless the taxable goods and non-taxable services are separately stated or listed.

E-Commerce Framework

Remote sellers are those located outside Illinois who make taxable sales to consumers in the state and are subject to economic nexus requirements. Therefore, if they exceed the USD 100,000 threshold or have 200 or more separate transactions relating to the sale of tangible goods, they must register for sales tax purposes.

Every quarter, the remote sellers are self-evaluated to determine whether they exceeded either of the thresholds for the previous 12 months. Establishing a nexus means remote sellers must collect and remit sales tax and apply other state and local retailers' occupation tax rules.

Marketplace Rules

Many out-of-state sellers sell their tangible goods through marketplaces operated by what is known in the US as a marketplace facilitator. Marketplace sellers that make sales through a marketplace facilitator that does not meet a tax remittance threshold and establish nexus in Illinois must collect and remit sales tax on their sales made through that marketplace.

However, if the marketplace facilitator must collect and remit taxes on behalf of marketplace sellers, the marketplace is considered a retailer, and the sales tax responsibilities and liabilities lie on them.

Nevertheless, out-of-state sellers may sell their goods through an online marketplace and their websites. In that case, sales made through the marketplace, which collects and remits taxes, are reported by the marketplace facilitator, and sales made through their website are reported by the out-of-state seller.

Digital Goods and Services

Retail sales of canned or pre-written software intended for general or repeated use, regardless of the form in which it is transmitted, including electronic means such as download, are subject to tax. Therefore, the canned software is treated as tangible goods.

Under the 2022 interpretation, Software-as-a-Service (SaaS) providers are considered servicemen. The status of a serviceman means that if a provider transfers an API, applet, desktop agent, or remote access agent to enable the consumer to access the provider’s network and services, the consumer receives computer software that is subject to tax.

On the contrary, if tangible goods are not transferred to the consumer, the transaction is not subject to sales tax under general rules. This means that software-as-a-service (Saas) is not taxable.

However, in some cases, SaaS may be subject to local sales tax rules, such as the Chicago Personal Property Lease Transaction Tax.

Digital Marketplace

Sales and use tax rules for digital marketplaces are known as marketplace facilitator rules and have been in place in Illinois since 2020. Under these rules, marketplace facilitators or operators are responsible for collecting and remitting sales tax on sales they make or facilitate once they meet specified conditions.

Digital Platform Operator

A marketplace facilitator must conclude an agreement with a third-party marketplace seller, directly or indirectly facilitate a retail sale to consumers by listing or advertising the sale, and, independently or through agreement with third-party service providers, collect payment from the consumer and transfer it to marketplace sellers.

Once the marketplace facilitator exceeds the marketplace nexus set at USD 100,000 or more in cumulative gross receipts from sales of tangible goods or 200 or more separate transactions for the sale of tangible goods, they must start collecting and remitting sales tax.

In addition, they must register on two accounts for sales tax purposes: one for their sales and one for all facilitated sales. This further implies that registered marketplace facilitators must determine on a sale-by-sale basis if the sale through their marketplace is on behalf of a marketplace seller or their sale.

The applicable sales tax rate is determined based on the consumers' location, which is based on the destination principle. This is known as the destination rate.

Filing and Payment Requirements in Illinois

Filling and payment frequency for sales tax purposes depends on the amount of the taxable person's average monthly liability. Annual filing is required if the average monthly liability is less than USD 50. Quarterly tax returns are required when the average monthly liability is above USD 50 but below USD 200. Taxable persons must file monthly tax reports if the average monthly tax liability is above  USD 200.  Tax returns are filed electronically through the MyTax Illinois portal.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Taxable persons who do not file tax returns on time or file a tax return on time that cannot be processed and fail to correct it within 30 days may face a late filing penalty. The late filing penalty for late submission of up to 30 days is 2% or USD 250, whichever is lower, of the due tax.

However, if the taxable persons fail to file a tax return within 30 days of receiving a notice from the Revenue Department, an additional penalty of USD 250 or 2%, whichever is greeted, of the due tax may be imposed. Nevertheless, the additional penalty cannot exceed USD 5,000.

Making a late payment could result in penalties of 2% of the due tax if the payment is late between 1 and 30 days or 10% of the due tax if the payment is made 31 or more days after the payment deadline.

The State of Illinois also defines a fraud penalty of 50% of the deficiency or claim amount attributable to the fraudulent act or omission when the returns, refund, or credit claims are submitted with fraudulent intent.

In addition to penalties, those not complying with the filing and payment requirements may also face interest on due taxes.