Sales and Use Taxes in Illinois

April 13, 2006

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Illinois assesses a sales tax on the retail sales price of tangible personal property. Also, 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.

Liability for sales tax. Illinois is a state that assesses a sales tax on sellers for the privilege of doing business in Illinois. What this means for those of you who are retailers is that you're generally going to be required to collect and pay a 6.25 percent sales tax on all sales you make in Illinois (1 percent on qualifying food, drugs, and medical appliances). However, the state 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.

Liability for use tax. 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.

Sales or use taxes on services. 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.

In order to avoid losing tax revenues on services being provided outside the state, Illinois imposes a use tax. The state assesses this use tax against all persons who store, use, or otherwise consume tangible personal property in Illinois that was transferred to them by out-of-state service providers.

Sales and use taxes on leased property. Generally, leased and rented property won't 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.

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.

The following discussions address additional sales and use tax issues that many small business owners face: