Illinois implements new sales tax sourcing rules in 2025

The new sales tax sourcing rules affect out-of-state sellers shipping goods to Illinois addresses from a location outside of Illinois. Shipments originating from inside Illinois are not impacted.

Illinois sales and use tax law defines three different types of retailers:

• An out-of-state seller is a business based in another state that has a physical presence in Illinois.
  • Shipments to Illinois addresses may be shipped from inside or outside Illinois.
• A remote seller is a business with no physical tie to Illinois (i.e., no physical presence nexus with Illinois).
  • Shipments to Illinois addresses always originate from a location outside Illinois.
• An in-state seller (aka an Illinois retailer) is a business based in Illinois that conducts all selling activity in Illinois.
  • Shipments to Illinois addresses always originate from a location within Illinois.

The new sales tax sourcing rules would apply if a Wisconsin-based business with a showroom in Chicago ships goods into Illinois from a warehouse in Kenosha.

However, the new sourcing rules would not apply if this Wisconsin-based business were to make a delivery to an Illinois address from its Chicago warehouse. Likewise, they do not affect in-state sellers or remote sellers.

Due to the enactment of Illinois SB 3362 (Public Act 103-0983), as of January 1, 2025, out-of-state sellers shipping goods from outside Illinois must collect the sales tax rate in effect at the delivery address. Basing sales tax on the point of delivery is known as destination sourcing. 

Prior to January 1, 2025, out-of-state sellers shipping goods from outside Illinois collected a single statewide use tax rate of 6.25%. 

The base Illinois state sales tax rate is 6.25%, but in many parts of the state, the total state and local sales tax rate is much higher. Local rates range from 0% to 4.75%, so the total sales tax rate can be as high as 11%. There are hundreds of different local tax rates in Illinois.

Given the delta between 6.25% and 11%, it’s critical for affected businesses to update their sales tax systems to account for the new sales tax sourcing rules. An out-of-state retailer that collected the 6.25% statewide use tax from its Chicago customers in 2024 may now need to collect the combined state and local sales tax rate for Chicago, which is currently 10.25%. 

Note that Illinois has an extremely complex sales and use tax system. What’s colloquially known as “Illinois sales tax” is actually  four distinct taxes in Illinois: retailers’ occupation tax; service occupation tax, service use tax, and use tax. For simplicity’s sake, we generally use the terms sales tax and use tax in this post.

Sourcing rules did not change for deliveries originating in Illinois

Out-of-state sellers should continue to use origin sourcing — collecting the sales and use tax rate in effect at the origin of the sale — when making a delivery from within Illinois. This may be the location of the inventory (e.g., a warehouse on the outskirts of Chicago) or the office where the order was taken.

Today, remote retailers apply destination-based sales tax when selling into Illinois. But that wasn’t always so.

Illinois enacted its economic nexus law and began taxing remote sales on October 1, 2018. From October 2018 through December 2020, remote retailers collected the single state use tax rate (the same rate out-of-state retailers applied to deliveries originating outside of the state until December 31, 2024).

When the Leveling the Playing Field for Illinois Retail Act took effect on January 1, 2021, Illinois implemented destination sourcing for remote sales. Since then, Illinois has required remote retailers to collect the combined state and local sales tax rate in effect at the delivery address.

In-state retailers in Illinois follow origin sourcing rules. They collect and remit the sales tax rate in effect at the location where the sale originated. This may be the ship-from address or an office where an order was taken.

As a result, Illinois sales and use tax compliance may be much less complex for in-state retailers than it is for remote retailers and, as of January 2025, out-of-state retailers shipping goods into Illinois from outside of the state. Instead of accounting for hundreds of sales tax rates, in-state retailers may only need to account for one or two sales tax rates.

Marketplace facilitators that have sales tax nexus with Illinois are required to collect and remit Illinois state and local sales tax on behalf of marketplace sellers. The new sourcing rules also apply to marketplace facilitators registered for Illinois sales and use tax.

When filling orders from outside Illinois, marketplace facilitators must use destination sourcing and remit state and local sales tax at the rate in effect at the delivery address.

When fulfilling orders from inventory located in Illinois, marketplaces should use the origin sourcing model and collect state and local sales tax at the rate in effect at the origin of the sale: either the location of the inventory or the place where the order was taken. 

The Illinois Department of Revenue offers guidance about the sales tax update in this informational bulletin.

Several businesses are challenging the state’s sourcing rules for remote retailers. They maintain that the Leveling the Playing Field Act discriminates against interstate commerce by using different sourcing rules for similar taxpayers and imposing undue burdens on remote retailers. 

One business that was disputing an assessment settled with the state in 2024. However, at least one other business has launched a new legal complaint. In December 2024, the Massachusetts retailer Life Is Good filed a petition with the Illinois Tax Tribunal protesting an assessment of more than $245,000 (petition procured by Bloomberg Tax). 

The petition describes how much more complicated sales and use tax compliance is for remote sales than for in-state sales. For example, remote retailers must separately determine, register, and report each Illinois location to which a sale is delivered. This entails adding a unique location code for each location. In-state retailers don’t need to use location codes or worry about hundreds of different sales tax rates.

States won the authority to tax remote sales when the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. (June 2018). The court found that South Dakota had taken steps to ensure remote sales tax compliance would not be unduly burdensome. Would it reach the same conclusion about Illinois today? 

Illinois isn’t the only state with different sourcing rules for in-state sales and remote sales. “Tennessee and Utah both use origin sourcing for in-state sales and destination sourcing for out-of-state sales,” explains Scott Peterson, VP of Government Relations at Avalara. “They avoid the criticism aimed at Illinois because, as member states of Streamlined Sales Tax, they pay for sales tax compliance software for remote businesses.” 

Still, Peterson acknowledges that this doesn’t address the issue of the same products being taxed at different rates due to the location of the seller.

If you’re registered for Illinois sales and use tax, you should know whether the new sales tax rules apply to you. It may be helpful to talk to a trusted tax advisor. If the Illinois sales and use tax changes affect you and you fail to update your tax systems as necessary, you could end up liable for uncollected taxes, penalties, and interest.

Avalara is helping thousands of retailers comply with the new Illinois requirements. Our software automates sales tax and use tax calculation, collection, and remittance, improving accuracy and reducing compliance costs. Learn more at avalara.com.

If you’re already an Avalara customer, visit the Avalara Knowledge Center for more information about how to handle the Illinois sales tax changes.