You Could Be Hit With A Higher Tax Rate When Selling Into Illinois
Sales tax professionals have long been aware of Illinois’ complicated sales tax system … and it’s not getting any easier now that the state has enacted a new sales tax sourcing regime that may increase the tax rate required to be charged by certain out-of-state sellers. Starting Jan. 1, 2021, the applicable sales tax rate for certain out-of-state sellers may vary depending on the customer’s location, with tax rates up to 11 percent (or higher in some cases).
What’s Your Connection To Illinois?
Out-of-state sellers that do not have a physical presence in Illinois are now required to charge sales tax using the destination rate. However, some sellers located outside of Illinois can continue to charge 6.25 percent as applicable, rather than using destination sourcing. These include sellers with a physical connection to Illinois, including sales representatives who travel occasionally to Illinois to call on current or prospective customers.
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As a result, an out-of-state seller still charging Illinois’ flat sales tax rate of 6.25 percent when it should be charging 11 percent (based on destination sourcing) faces a potential annual cash tax exposure on Illinois taxable sales of $1 million, before interest and penalties, of over $45,000.
The above summary covers only one aspect of the new sourcing rules. It is important to note that Illinois’ newly adopted regulation encompasses six different rules for sourcing transactions; therefore, each rule must be considered. Out-of-state sellers should also be mindful of whether any of their activities create income tax issues.
What Does This Mean For Ohio Businesses?
If your Ohio-based business sells into Illinois and meets the state’s nexus standards, you are now required to collect ALL local rates, in addition to the 6.5 percent rate. In the past, you would likely only collect 6.5 percent in sales tax. This means that the tax rate your business is required to collect beginning Jan. 1, 2021, could range anywhere between the 6.5 percent you’re used to, to 10 percent if doing business in some localities. Additionally, filing returns in Illinois is an increasingly complex exercise.
If you are doing business in Illinois and would like to know whether you’re collecting the appropriate amount of sales taxes, or even if you meet the state’s nexus requirement, reach out to Rea & Associates’ state and local sales tax team today.
Contact: Kathy LaMonica, Vertex Certified Professional (Cleveland CPA Firm)