As Illinois implements new changes to their sales tax system, effective January 1, 2025, businesses are struggling with the age-old question, ‘how will this affect me?” At Miles Consulting, we have the answer. We’ll explain below – here’s what we’ll cover:

  1. Destination-Based Tax Collection
    • Summary: Starting January 1, 2025, Illinois will implement destination-based tax collection, requiring sales tax to be calculated based on the delivery location for most transactions.
    • Why It Matters: This change aligns Illinois with other states, impacting both in-state and out-of-state sellers. Online sales will generally follow destination-based rules, but exceptions may apply based on transaction specifics.
  1. Updates Required in Avalara
    • Summary: Retailers using Avalara must update their settings to comply with Illinois’ new destination-based tax collection rules. Key changes include adjusting tax settings, activating ST-2 forms, and addressing a Chicago tax issue.
    • Why It Matters: These updates ensure accurate tax calculation and compliance. Businesses affected by the Chicago tax issue should update their nexus settings in Avalara or seek support if needed.
  1. Property Leasing Taxation
    • Summary: Illinois now applies sales tax to property leasing statewide, except within Chicago.
    • Why It Matters: Businesses leasing tangible personal property must adjust their tax practices accordingly, ensuring compliance with this new rule while noting the exception for Chicago.
  1. Vendor Discount Cap
    • Summary: Illinois has implemented a cap on the vendor discount, limiting it to $1,000 per month.
    • Why It Matters: This will likely have an impact on large retailers who benefit from a higher discount.

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Destination-Based Tax Collection

One of the most significant changes happening in 2025 is the transition to destination-based tax collection. Retailers with physical presence in Illinois, as well as out-of-state sellers, shipping products to IL customers, must now collect sales tax based on the delivery location, if the sale is sourced out of state. For Illinois retailers operating businesses within Illinois, origin-based tax collection may apply if the transactions are sourced to Illinois.

Online sales are generally considered to be destination-based tax collection, unless the company has inventory in the or title transfers at your place of business in IL. This means that if a retailer ships an item to a customer in Chicago from a warehouse in another state, they will charge the sale tax rate applicable to Chicago, rather than their own Illinois location. This change will better align sales tax collection processes with most other sales tax states.

*It is important to note that the tax collection rules rely heavily on the transaction specific details. You can find more information from Illinois here. Be sure to talk to your tax advisor if you think these changes are applicable to you. Talk to us.

2. Updates Required in Avalara

To ensure proper sourcing of sales tax, retailers using Avalara must make a few manual updates:

  • Change Settings: Retailers need to adjust their settings from “sales and sellers use” to “sales tax only” within Avalara. This will help streamline the tax calculation process according to the new regulations.
  • Activate ST-2 Forms: It is important for retailers to activate ST-2 forms in Avalara, these forms are necessary for reporting destination-based sales correctly.
  • Avalara Issue from 07/2024 regarding Chicago: Avalara announced an issue with the City of Chicago Personal Property Lease Transaction Tax in July 2024. Avatax has updated nexus so that a toggle must be activated in order for Avatax codes to apply to this return. Businesses with an Avatax account can update their nexus in Avatax using this link for instructions. If they need additional support, they’ll need to open a support ticket.

3. Property Leasing Taxation

Another change that Illinois has enacted is regarding property leasing. While property leasing is now subject to sales tax across Illinois, this change does not apply within Chicago. Businesses involved in leasing tangible personal property should be aware of this distinction as they adjust their tax practices.

4. Vendor Discount Cap

Illinois has also capped the vendor discount that retailers can receive at $1,000 per month. This will likely have an impact on large retailers who benefit from a higher discount.

Overall, Illinois’ changes appear to help taxpayers with consistency between states; however, there are many nuances, so we suggest speaking with your sales tax consultant. Don’t have one? At Miles Consulting, this is what we do – book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

We can help you navigate these changes.

Stay tuned for further updates from the Illinois Department of Revenue as we navigate these new rules throughout 2025.