Illinois Requires Destination Sourcing for Certain Out-of-State Sellers

Sales tax professionals have long been aware of Illinois’ complicated sales tax system. To add to the complexity, Illinois 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 January 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% (or higher in some cases).
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% 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.
As a result, an out-of-state seller still charging Illinois’ flat sales tax rate of 6.25% when it should be charging 11% (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 whether any of their activities create income tax issues. Please contact your BDO SALT professional for further guidance and advice.


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