Understanding Sales and Use Taxes in Illinois

Filed under Sales Taxes. Fact checked on June 22, 2012.

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Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Illinois.

llinois assesses a statewide 6.25 percent sales tax on the retail sales price of tangible personal property. (This rate is reduced to 1 percent for groceries, drugs, medical appliances, and modifications to make a motor vehicle accessible for the disabled.) If you are a service provider who transfers tangible personal property to your customers as part of the service you provide, sales tax will be incurred on the tangible personal property transferred. So, if your business buys, sells or uses tangible personal property in Illinois, a sales or use tax liability will probably be incurred.

You should also be aware that many cities and counties in Illinois impose their own, additional, sales taxes, so be sure to check with your local government to see whether any additional taxes apply to you.

The seller responsible for paying Illinois sales taxes, but the law requires you to pass it on to your customers. State law does not allow you to pay the tax out of your pocket — what is know as "absorbing the tax".

Tip

Illinois requires you to obtain reimbursement for this tax from your customers. So, if you fail to remit the correct amount of taxes on a given transaction, the state can go directly to your customer and collect the right amount of tax. While going after each purchaser to collect the right amount of sales tax may be impracticable, the state clearly intended to reserve that right for itself.

Most Services Are Not Taxed in Illinois

In Illinois, you may provide services without incurring any sales tax liability for the service. However, this exclusion from tax does not extend to any property or equipment included in the price of the service you provide. Illinois imposes a sales tax on the selling price of tangible personal property transferred to your customers as part of the service you provide. Illinois does not, however, assess sales tax on tangible personal property included in your service if you've already paid sales tax on it when you bought it from a vendor.

Illinois Does Not Tax Most Leases

Unlike most states, in Illinois, leased and rented property generally is not be subject to sales or use tax. However, the state will examine the leasing arrangement and classify it as a sale if it appears that actual ownership will transfer to the lessee for some nominal amount once the lease term has ended.

Example

You enter a leasing agreement with Couch Potato Electronics Store to lease a 96" big screen TV for five years. According to the terms of the lease, you will be able to purchase the leased TV at the end of the lease term for $5. Upon examining this transaction, the state would most likely classify it as a sale and require sales tax to be paid since the ending purchase price is such a nominal amount.

Illinois Provides Numerous Sales Tax Exemptions

Illinois allows exemptions from sales tax based on the type of transaction (such as a resale exemption), or the nature of the organization purchasing the product (such as a charitable organization).

Illinois Exempts Goods Purchases for Resale from Tax

If you purchase goods or products and will resell them in your business, or include them as part of the service you provide, you may claim a resale exemption from sales or use taxes. However, you will have to collect sales tax from your customers when they purchase the goods or products.

Resale exemption certificates. In order to obtain a resale exemption, the seller may require you to present, in good faith, a resale certificate. In addition, the state provides a resale exemption to you if you're a service provider who purchases tangible property that will be transferred to your customers as incidental to the provision of your services. If you want this exemption, you must present the seller with a valid resale exemption that contains an active registration or resale number.

The state doesn't provides a specific certificate form for you to use, so you're free to develop your own resale certificate document. With that said, though, the document should at least contain the following information:

  • the buyer's and the seller's name and address;
  • an indication of the general character of the property being purchased;
  • the buyer's registration number or resale number or the foreign certificate of resale in the case of an out-of-state purchaser.

Illinois Permits Blanket Resale Certificates

Illinois allows the use of blanket resale certificates. A blanket resale certificate is a resale certificate that a buyer provides to a seller from whom the buyer makes numerous exempt resale purchases. The idea is that by providing a blanket resale certificate, both the buyer and the seller can avoid the hassle of having to deal with a new certificate every time you make a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, the buyer should present, in good faith, a blanket resale certificate to the seller that includes the same information as a regular resale certificate.

The blanket resale certificate will remain valid for an indefinite time period, but the state recommends that you obtain updated certificates every three years.

Physical Presence Triggers Tax Liability

Illinois has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if your business has physical presence within Illinois. To determine if you have a physical presence, ask yourself the following:

  • Do I have retail facilities, a warehouse or any office space in Illinois? Maintaining retail or warehouse facilities means that your business has a physical presence within the state. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the state.
  • Do my employees or I enter Illinois for purposes of taking and transmitting orders from customers in Illinois? If your employee or independent contractor enters Illinois for purposes of taking or transmitting orders, your business has a physical presence in Illinois. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the state.
  • Do my delivery vehicles frequently enter Illinois for purposes of delivering property? Frequent deliveries in Illinois by your trucks will give you physical presence in Illinois. An occasional delivery, however, may not constitute a physical presence within the state.

How to Calculate Sales Tax

You calculate sales taxes by taking the tax rate, which is 6.25 percent for most taxable items, and multiplying it by your gross receipts. Gross receipts are based on your total retail sales or tangible personal property transferred to your customers through the services you provided.

You Must Claim Refund If You Overpay

If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you or your customer discover such an overpayment, the state allows you or your customer to file a claim for a credit or refund. You or your customer should submit the claim on forms furnished by the Illinois Department of Revenue. The state will normally issue a credit memorandum rather than give a refund to the person who made the erroneous payment.

Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the state will not approve it.

Illinois Imposes Use Tax on Out-of-State Purchases

In order to avoid losing tax revenues on sales transactions taking place outside the state, Illinois also imposes a use tax. The use tax is assessed against all persons who store, use, or otherwise consume tangible personal property in Illinois that was purchased out-of-state. If the out-of-state seller you purchase property from is a registered retailer in Illinois, you should pay the use tax to the retailer. If the retailer is not registered in Illinois, you should pay the use tax directly to the state.

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