Illinois to assess 15% tax rate on undetermined tax locations

• Retailers shipping goods from outside Illinois are frequently required to use destination sourcing for sales of tangible personal property. Origin sourcing rules apply to businesses shipping products from inside Illinois.
• As of January 1, 2026, the Illinois Department of Revenue can impose a 15% tax rate on destination-sourced sales if the taxpayer fails to provide the information, schedules, or supporting documents necessary to determine the destination address. The 15% tax rate is higher than any Illinois combined state and local sales tax rate.  
• Illinois is the only state where a department of revenue can impose a higher tax rate on a taxpayer to penalize them for a sales tax sourcing error or insufficient information.

The new 15% tax rate hinges on destination and origin sourcing rules in Illinois as well as the state’s sales and use tax reporting requirements, so a review of these is in order. 

Destination sourcing bases sales tax rates on the location where the purchaser takes possession of the product or service sold, which is typically the delivery address for internet and mail-order sales. Origin sourcing bases sales tax rates on the seller’s address — usually the location where the order was taken or the ship-from address.

When Illinois started taxing remote sales, it applied destination sourcing to retailers with no physical presence in Illinois (remote retailers) and origin sourcing rules to Illinois retailers. However, after more than one remote retailer sued the state for discriminating against interstate commerce, Illinois changed its sales tax sourcing rules.  

Effective January 1, 2025:

• Destination sourcing applies to sales of tangible personal property otherwise sourced outside of Illinois. 
• Origin sourcing applies to sales of tangible personal property where the predominant selling activities occur inside of Illinois.

Illinois imposes different sales and use tax reporting requirements on destination-based sales and origin-based sales. The reporting obligations have changed since Illinois began taxing remote sales, but they remain lopsided.

Prior to January 1, 2025, remote retailers collected state and local retailers’ use tax based on the destination address, reported all sales on a Form ST-1, and reported the location codes for all destination-based sales on a Form ST-2, Multiple Site Form. Retailers maintaining a place of business in Illinois remitted retailers’ occupation tax (aka sales tax) based on the origin address for sales sourced inside of Illinois and reported all sales on a Form ST-1; they did not file a Form ST-2. Retailers maintaining a place of business in Illinois making sales of tangible personal property from outside the state would collect and remit use tax. 

As of January 1, 2025:

• Remote retailers collect destination-based Illinois retailers’ occupation tax, report all sales on a Form ST-1, and report the location codes for destination-based sales on a Form ST-2, Multiple Site Form. They must register a tax site for each new jurisdiction where they make destination-based sales. The Illinois Department of Revenue provides detailed guidance on how to determine destination-based sales and use tax rates and report destination-based sales. 
• Retailers maintaining a place of business in Illinois that ship goods from outside the state (aka out-of-state sellers) collect destination-based retailers’ occupation tax on those transactions, report all sales on a Form ST-1, and report the location codes for destination-based sales on a Form ST-2, Multiple Site Form. They must register a tax site for each new jurisdiction where they make destination-based sales.
• Illinois retailers making origin-based sales collect retailers’ occupation tax based on the origin address for those transactions and report those sales on a Form ST-1. So long as they do not make destination-based sales, they do not need to file a Form ST-2 or register a new tax site for destination-based sales.

As you can see, the reporting requirements for destination-based sales are more complex than for origin-based sales. In fact, according to Diane Yetter, founder of Sales Tax Institute, instead of reducing the sales tax burden on remote sellers, Illinois might be winning for making it the most burdensome.

“There are now three classifications of sellers, with different requirements for each,” says Yetter, “which makes sales tax compliance significantly more complicated and time-consuming for retailers shipping goods from outside of Illinois than for in-state businesses shipping from within the state.” 

Yetter explains, “For out-of-state and remote sales, the retailer is required to figure out which jurisdictions a certain address lies in, then they need to look up the Illinois ‘location code’ for each jurisdiction. Once they have the location code, they’re required to consolidate all sales that are in the same location code. Then they need to complete Form ST-2 detailing all the locations and associated sales. The effort to file all the locations on the ST-2 is significant. And if the seller makes a mistake and isn’t aware of the local taxes, they will be assessed a flat 15% tax rate — higher than any single rate that exists in the state.”

Starting January 1, 2026, the Illinois Department of Revenue can assess a 15% tax rate on transactions subject to destination-sourcing rules if the taxpayer fails to provide the information, schedules, or supporting documents necessary to determine such locations. 

The 15% undetermined location rate is primarily intended to be used with remote retailers and Illinois retailers making sales subject to destination-based sourcing who provide no destination-based sales information. The Illinois Department of Revenue will apply the 15% undetermined location rate against receipts if the taxpayer provides no address or sourcing information.

This is a big change. Prior to 2026, the department would simply have imposed a penalty for an unprocessable return for such transactions, per the Uniform Penalty and Interest Act (UPIA). 

Scott Peterson, VP of Government Relations at Avalara, says the new policy is unprecedented. “In my many years of doing tax administration I have never heard of an after-the-fact tax rate imposition.” Prior to joining Avalara, Peterson served as Executive Director of the Streamlined Sales Tax Governing Board and Director of the Sales Tax Division at the South Dakota Department of Taxation.

On and after January 1, 2026, the Illinois Department of Revenue will look at Form ST-1 and Form ST-2 to determine whether a business has provided the necessary information to validate their destination-based sales. Specifically, Form ST-2 lines 4a (the location code), 5a (the site address), 5c (the new municipal/county grocery tax line), and 8a (the city, state, and ZIP code) will be used to reconcile against Form ST-1, Step 3, lines 4a, 5a, 5c, and 8a. If the information on those lines doesn’t balance, the department will apply the 15% rate against the unaccounted-for receipts. Taxpayers won’t be required to amend affected tax forms.

The department is implementing the 15% undetermined location rate for returns dated on and after January 1, 2026. However, during audits it can apply the 15% rate for as far back as the audit period. Illinois has a six-year look back, so businesses that have been improperly sourcing sales for years could face steep assessments. 

Per an email from the Illinois Department of Revenue, in the event a taxpayer later provides correct destination-based sourcing information for the original return, the department will adjust the return to correct the sourcing information with correct local tax rates.

Automating sales and use tax collection, remittance, and returns helps reduce errors and streamline compliance, which is a good thing in all states. It will be particularly important for businesses reporting destination-based sales in Illinois starting January 1, 2026. 

Learn how Avalara AvaTax, powered by Avalara Agentic Tax and ComplianceTM, helps businesses streamline and improve sales tax compliance.