Important new Illinois state tax changes
Changes are coming to Illinois state taxes.
The fiscal year 2025 budget includes a variety of tax changes, including potentially eliminating the 1% grocery tax. Here’s what you need to know about the recent bills that have been signed or might be signed soon:
Sales and use tax changes
Changes to sales and use tax in Illinois include:
Grocery tax repeal
Beginning January 1, 2026, under HB 3144, Illinois would eliminate its 1% state sales tax on groceries. HB 3144 was sent to Gov. Pritzker on June 6, 2024, and he is expected to sign it.
However, even if HB 3144 is enacted, the grocery tax may not completely disappear in Illinois. The bill also empowers counties and municipalities to impose their own local tax of up to 1% on groceries, without a referendum.
Grocery retailers in Illinois should stay informed about their local legislation to determine whether their county or municipal jurisdiction will implement a grocery tax beginning in 2026.
Vendor discount cap
Under HB 4951, enacted on June 7, 2024, Illinois caps the vendor discount that the state has historically given retailers to help offset the cost of collecting and remitting the state’s sales and use taxes. Effective for tax returns due on or after January 1, 2025, the vendor discount is capped at $1,000 per month.
The justification for this bill is that software automation has almost eliminated manual work from the sales and use tax collection/remittance process. However, it does not acknowledge the cost of evaluating and documenting state sales tax exemptions or dealing with state sales and use tax audits.
Lesors
Under current law, lessors pay Illinois sales tax on the purchase of property they lease and they do not collect Illinois tax on the lease stream.Under HB 4951 and effective January 1, 2025, lessors may purchase this property without tax under an Illinois resale exemption and charge Illinois tax on the lease/rental payments as they are received from lessees. This change will bring Illinois’ approach to rentals in line with effectively all other states.
Swipe fees
Under HB 4951 and effective July 1, 2025, Illinois will become the first state in the nation to prohibit debit and credit card networks and issuers from imposing interchange fees (better known as “swipe fees”) on sales taxes, excise taxes and tips/gratuities.
For example, if a customer uses a credit card in a store, the card issuer collects a swipe fee based on the total charge, including the sales tax. Because the retailer doesn’t get to keep the tax but must pay it to the state or local taxing authority instead, they must pay out-of-pocket to make up for the tax revenue effectively taken away by the “swipe fee.”
This law change may present practical problems for retailers, such as the decision of whether to make purchasers swipe their cards twice — one for the cost of the item and one for the sales/excise taxes and gratuities — an approach that may create its own challenges.
Remote seller sales tax rule changes
The Illinois House and Senate approved SB 3362 on May 28, 2024. The bill requires remote sellers to collect local sales taxes using destination rates. This bill is still pending and has not yet been sent to Gov. Pritzker.
Under existing law (the Leveling the Playing Field for Illinois Retail Act), remote retailers with some physical presence in Illinois but no selling activities within the state must only collect the Illinois use tax rate of 6.25% and are not required to collect local taxes.
Under SB 3362, effective January 1, 2025, these same retailers would follow destination-based sourcing rules, collecting tax at the state’s 6.25% retailer’s occupation tax rate along with any applicable local taxes based on the sale’s destination.
Business income tax changes
Changes to Illinois business income tax include:
Extension of corporate net operating loss deduction cap
Under prior law, Illinois had imposed a cap on net operating loss (NOL) deductions for corporations other than S corporations. This cap limited NOL utilization to $100,000 per year and was applicable to tax years ending on or after December 31, 2021, and before December 31, 2024.
Under the new law (HB 4951, enacted June 5, 2024), the NOL cap was extended through 2027, though the annual limitation was increased to $500,000. Even though Illinois’ NOL cap was increased, it is still one of the strictest NOL limits in the country. As corporations conduct tax planning for the 2024 tax year, this change in Illinois’ NOL deduction limit will be an important item to consider.
Financial organization apportionment
HB 4951 also changes how financial organizations source their gross revenue from investing and trading activities when computing their Illinois sales factor.
Under prior law, for tax years ending before December 31, 2024, interest, dividends, net gains and other income from investing and trading assets and activities was included in the numerator of a financial organization’s Illinois sales factor if the income was properly assigned, based on substantive contacts, to a taxpayer’s fixed place of business in the state.
Under the new law, effective for tax years ending on and after December 31, 2024, this same revenue is sourced using the same percentage as all of the financial organization’s other activities. This change would generally benefit financial organizations that are based in Illinois and increase the Illinois apportionment percentage of out-of-state financial organizations.
How Wipfli can help
Wipfli’s state and local tax team is ready to support your business in navigating the potential implications of these changes. Our dedicated professionals can help bring clarity to complex statutes and provide you with solutions to effectively minimize tax.
Contact us today to learn how we can help you mitigate SALT tax exposure.
