Positioned as a hub of Midwestern commerce and a crossroads of America, Illinois stands out not just for its iconic Chicago skyline and rich history but also for its bustling business landscape. Yet, mastering the complexities of sales tax in Illinois calls for a deep dive into its unique rules and regulations, something every savvy business owner or entrepreneur in the Land of Lincoln should be well-versed in.
This guide breaks down everything you need to know about Illinois’s sales tax, from determining the right state and local sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Illinois’s sales tax with confidence and ease.
Sales Tax Nexus in Illinois
When a business creates either a physical or economic nexus, it is required to collect sales tax in Illinois.Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Illinois include:- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Affiliate Nexus: A retailer is considered to have a business presence in Illinois if they sell similar products under a similar name as someone in Illinois and pay them a commission on sales. This rule applies if the retailer’s total sales in Illinois exceed $10,000 over the past four quarters ending in March, June, September, and December.
- Presence at Trade Show: Out-of-state retailers making sales at Illinois trade shows are subject to state and local sales tax, as per Illinois Department of Revenue regulations—these regulations detail registration and tax collection requirements for such sellers.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus. Beginning October 1, 2018, the threshold for economic nexus in Illinois is $100,000 in gross revenue or 200 transactions in the preceding 12-month period. While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the governing laws for both physical and economic sales tax nexus requirements in Illinois.
Illinois Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Illinois.Tangible Products
Almost all goods are taxable in Illinois, including:- Cosmetics
- Electronics
- Clothing – Retail clothing sales, including special order items, are subject to Retailers’ Occupation Tax (ROT) and Use Tax (UT) in Illinois. The labor cost for making custom-made clothing is not deductible when calculating the sales tax.
- Furniture
- Jewelry
- Home Goods
- Groceries – Groceries are subject to a reduced state sales tax rate of 1%, although local areas like cities and counties may apply additional sales tax rates.
- Personal Hygiene – Personal grooming and hygiene products are taxed at a high rate of 6.25%, even if they claim medicinal benefits. However, if these products are sold with a prescription, they are taxed at a lower rate of 1%, similar to medication.
- Prescription Medications – Both prescription and non-prescription medicines are taxed at a low rate of 1%. However, nonprescription medicines classified as “grooming and hygiene products” do not qualify for this low tax rate.
- Medical Devices – Qualifying medical appliances in Illinois are taxed at a lower rate of 1% in retail sales compared to general merchandise, which is taxed at 6.25%.
- Feminine Hygiene Products (i.e., pads, tampons, and menstrual cups)
- Building materials – Manufacturers of electric vehicles, producers of electric vehicle component parts, and makers of electric vehicle power supplies.
- Newspapers and Magazines
Services
In Illinois, all service-based transactions, such as professional services, advertising, and cleaning services, are not subject to sales tax.Software-As-A-Service (SaaS)/Digital Products
SaaS (i.e. computer software) is not taxable in the state of Illinois. Digital products (i.e., ebooks, downloadable video content, mobile apps) are also not taxable.Shipping/Handling
Shipping and handling charges in the state of Illinois are generally not taxable. However in certain situations, shipping and handling fees are subject to sales tax if they meet the following conditions:- Not separately listed on the invoice or contract or
- if listed separately, but the seller doesn’t offer an option to avoid these charges, such as in-store pickup or free delivery.
Sales Tax Permits and Licenses in Illinois
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Illinois, the next important step is getting your Illinois Seller’s Permit, also known as a sales tax permit.Seller’s Permit
You can register for an Illinois sales tax permit online at MyTaxIllinois or mail in form REG-1. Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
- Retailer Certificates of Registration expire annually and renew automatically if filing and payment requirements are met, unless in Collections or with incomplete account information.
- Reseller (wholesaler, distributor, manufacturer) certificates or licenses expire every three years and require manual renewal with a paper Renewal Packet sent 90 days before expiration. Renewal by email or phone is possible if there are no account changes and the account is in a Renewal Pending state or has not expired for over three years.
- Cigarette/tobacco distributor licenses expire yearly; electricity excise tax self-assessing purchaser licenses expire every two years. These require a renewal application 30 days before expiration. Licenses become invalid upon business discontinuation.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale. In Illinois, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items. You can fill out Form CRT-61 provided by Illinois after you receive your sales tax permit from the state. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.Streamlined Sales Tax (SST)
The Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. However, Illinois is not a party to this program, meaning it does not follow the uniform rules and definitions established by SST but has its own sales tax regulations.Calculating and Collecting Sales Tax in Illinois
Sales Tax Computation
In Illinois, sales tax isn’t just one simple rate; it’s a combination of state and local taxes. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s Illinois Sales Tax Calculator to compute for sales tax. Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Pennsylvania and sells to a customer in Chicago, IL, with a ZIP code of 60607. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
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Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax. Illinois is a destination-based state, meaning sales tax is determined based on the seller’s location. That means for an Illinois-based seller, sales tax is generally based on the location of the seller when selling within the state. For out-of-state or remote sellers, the IL tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from Pennsylvania to a customer in Chicago, Illinois, where you have nexus, you’d apply Chicago’s sales tax rate to that sale. To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.Filing and Remitting Sales Tax Returns in Illinois
The next step after collection is filing and remitting your Illinois sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually.- Monthly Filing: Required if average monthly liability is greater than $200.
- Quarterly Filing: Needed when average monthly liability is between $50 and $200.
- Annual Filing: Mandatory if average monthly liability is less than $50.
- Quarter-Monthly Filing: Businesses with a monthly tax liability of $20,000 or more are required to make tax payments on the 7th, 15th, 22nd, and last day of each month.
Due Dates
In Illinois, the due date falls on the 20th day of the following month. For instance, sales tax collected in January is due by February 20th for monthly filers. However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.Filing Sales Tax Returns
To file your sales tax return for Illinois, a few options are available:- File online through the MyTax Illinois
- File by mail – Fill up Form ST-1 and file and pay through the mail.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly. Illinois’ timely filing discount is either $5 or 1.75% of the total sales tax collected, whichever amount is higher.Sales Tax Holiday
Currently, for 2024, there are no planned sales tax holidays in Illinois.Illinois Sales Tax Penalties
Like in most states, sales tax is a big part of how Illinois generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state. Here are the specific penalties for non-compliance with sales tax regulations in Illinois:- Civil penalties: 2% of total due (or minimum $250 if failure to file) within 30 days late, 10% for 31-90 days late, 15% for 91-180 days late, 20% for over 180 days late.
- Criminal offenses: Classified as Class 3 or Class 4 felonies, depending on severity and specific circumstances.
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