Significant Illinois Sales Tax Changes in 2025
Illinoisans will ring in 2025 with a number of changes to the sales tax law, and Clarus Partners can help you navigate these complexities. Perhaps the biggest and most impactful change pertains to Illinois taxation of leases and rentals.
Leases of Tangible Personal Property Now Taxable
Illinois has long treated payments from lessees to lessors as payments for services that are not subject to tax in the state, making Illinois an outlier amongst the states that impose a sales tax. Beginning January 1, 2025 lease payments for new and existing leases will be taxable. In true Illinois fashion, this law change does not simply make transactions taxable.
Key Considerations of the Illinois Sales Tax Changes:
- Leases in the City of Chicago are not subject to state and local sales and use taxes. These leases remain subject to Chicago’s Personal Property Lease Transaction Tax.
- Exemptions that apply to sales of tangible personal property also apply to leases of tangible personal property. Lessors must now collect exemption and resale certificates or sales tax on the lease payments. Learn more about how Clarus Partners can assist.
- Leases that require periodic payments are taxable at the rate imposed where the leased property is located. For example, an accounting firm leases a copier for use in the office. The applicable rate is the rate imposed at the location of the copier.
- Leases that do not require periodic payments (i.e., a one-time rental) are taxable at the rate imposed where the property was located when leased/rented. For example, a do-it-yourselfer rents an auger to dig holes for a fence from a local hardware store. One payment is required for the rental. The tax rate imposed at the location of the hardware store applies to the rental.
- Prior to January 1, 2025, tax was due when lessors purchased property they lease to others. After January 1, 2025, lessors may purchase this property exempt from sales tax by issuing a resale certificate.
- No credit for tax paid on leased property prior to January 1, 2025.
- Leases of items that must be titled or registered with a state agency are exempt from the tax.
Changes to Remote Sales Sourcing Rules
Illinois is also changing the sourcing rules for remote sales. Currently, sales made by a retailer with no physical nexus with Illinois must collect sales tax at the rate imposed at the destination where the property is shipped.
However, retailers with a physical nexus with Illinois that ship products from a location outside the state only collect the state use tax rate of 6.25% and retailers that ship product from a location within the state collect tax at the rate imposed where the inventory is stored. After January 1, 2025, sellers with a physical nexus that ship products from a location outside Illinois will collect tax at the rate imposed at the destination where the property is shipped.
Vendor’s Discount Cap and Interchange Fee Prohibition
The legislation also caps the vendor’s discount offered to taxpayers for timely filing sales and use tax returns at $1,000 per month. Later in 2025, starting on July 1, Illinois is prohibiting interchange fees on the amount of tax and gratuity included in the transaction if the merchant informs the bank of the tax and gratuity amounts. Illinois is the first state to enact this prohibition, though other states have pending legislation regarding this issue.
Software Exemption Codified
In addition, Illinois has codified a five-part test to determine if software is exempt from tax. The test has long been part of a regulation. To be exempt, the sale of software must:
- Be evidenced by a written agreement signed by the licensor and customer outlining the rights and restrictions to the software.
- Restrict duplication and use of the software.
- Prohibit licensing or transferring of the software to a third party without permission of the licensor.
- Provide another copy at minimal or no charge if the customer loses or damages the software or permit the customer to make a copy of the software.
- Require the customer to destroy or return all copies of the software to the licensor at the end of the license period.
The legislation also exempts from sales and use tax any software that has been subject to the Chicago Personal Property Lease Transaction Tax.
Groceries Tax Repealed (Partially)
The best news of the Illinois sales tax changes in 2025 is legislation for residents is that Illinois is repealing the 1% state tax on groceries. However, this change won’t take effect until January 1, 2026.
Additionally, the legislation allows counties and non-home rule municipalities to impose a 1% tax instead of the state tax.