/ 2 min read / Reed Smith Client Alerts

Major changes to Illinois Tax Law

Authors

Michela V. Petrosino, David P. Dorner

Key takeaways

  • The following tax and revenue bills were recently passed by the Illinois General Assembly and are now before Governor Pritzker for signature:
  • HB 3144 (the Governor's “grocery tax”) would repeal (eff. Jan. 1, 2026) the state’s 1% tax on groceries and authorize municipalities and counties to impose their own local 1% grocery tax.
  • HB 4951 would make significant changes to a number of Illinois’ tax laws, including:
    • allowing lessors to charge sales tax on the lease or rental stream of property, as opposed to paying tax on the upfront cost of property acquired to lease;
    • extending the state’s net operating loss cap for three more years, with an increase of the cap from $100,000 to $500,000;
    • capping the sales tax vendor discount (1.75% of sales/use tax collected) at $1,000 per month;
    • increasing the franchise tax exemption to $10,000 next year; and
    • changing how financial organizations apportion their investment and trading activities to Illinois.
  • SB 3362 would “re-level” the playing field by requiring out-of-state retailers currently collecting Illinois use tax (i.e., those that have nexus with Illinois) to start collecting local taxes using destination rates.

Significant Tax Legislation Passed by the Illinois Legislature

HB 3144

  • HB 3144 would repeal the state's 1% tax on groceries and authorize counties and municipalities to impose their own local 1% tax on groceries, effective January 1, 2026.
  • Groceries no longer subject to the tax would include any food for human consumption that is to be consumed off the premises where is it sold. Food prepared for immediate consumption, alcoholic beverages, soft drinks, candy items, and food infused with cannabis, would still be subject to the state's full sales tax rate.
  • Any local grocery taxes enacted by ordinance will be administered and enforced by the Illinois Department of Revenue.
  • NOTE: Because the law change would take effect in 2026, it remains possible the state could repeal the elimination of the tax prior to its effective date. However, if the tax on groceries is eliminated as budgeted for fiscal year 2025, retailers selling grocery items should review their internal procedures prior to the effective date to ensure state sales tax is no longer collected on previously taxable items to avoid any qui tam and consumer fraud actions. Retailers should also closely monitor their local tax laws to avoid missing periods in which collection and remittance is required and potential penalties and interest.

HB 4951, Article 75

  • Article 75 of HB 4951 would change the state’s sales tax on leases of tangible personal property from a tax paid by the lessor at the time the leased property is purchased to a tax on the rental charges paid by the lessee. This conforms Illinois to the way other states tax leases and rentals.
  • Article 75 would also create new exemptions for (1) property that is leased and subject to Chicago’s personal property lease transaction tax and (2) lessees of “software licenses” meeting Illinois’ “5-part” test for licensed software (Ill. Admin. Reg. tit. 86, 130.1935).
  • These changes will be effective January 1, 2025.
  • Titled property (e.g., cars, aircraft, watercraft, etc.) is excluded from the tax on leased and rented property.
  • NOTE: Retailers will be entitled to claim the so-called “86-54” credit for tax previously paid on leased equipment sold at retail in Illinois, but there is no “one time” credit in the proposed law to account for sales or use tax recently paid to Illinois on rental inventory. (The “86-54” credit refers to Illinois Department of Revenue Information Bulletin, FY 86-54 (June 1986), which explains how lessors of property can claim a credit for the upfront tax paid upon the purchase of inventory for leasing in Illinois. FY 86-54 was subsequently codified in Ill. Admin. Code tit. 86, § 130.2013(h)(2).)

HB 4951, Article 85

  • Under Article 85 of HB 4951, effective for tax years ending on or after December 31, 2024, financial organizations would include receipts from investment assets and activities and trading assets and activities in the receipts factor based on the ratio of Illinois income from receipts derived from the activities found at 35 ILCS 5/304(c)(3)(i)-(vii), over total income from these same activities. Under current law, such receipts are generally sourced to Illinois if the taxpayer’s fixed place of business was in the state.
  • NOTE: This change would benefit Illinois headquartered financial organizations, who would be allowed to apportion their investment and trading income based on the apportionment percentage derived from their other financial activities. Out-of-state financial organizations may see an increase in their Illinois apportioned income because their investment and trading income will no longer be sourced entirely to their fixed place of business outside of Illinois.

HB 4951, Article 105

  • Article 105 of HB 4951 would impose a $500,000 per year cap on net operating losses (“NOL”) available for use against corporate income taxes at $500,000 per year. The cap would be in place for three years, beginning with tax years on or after December 31, 2024.
  • NOTE: An earlier amendment provided that no carryover deduction can exceed $500,000 for any taxable year ending on or after 2024. Amendment No. 3 to HB 4951, changed the NOL cap period from a permanent freeze to a three-year extension by changing the provision to now read “for any tax year ending on or after December 31, 2024 and prior to December 31, 2027.” The NOL cap is a ticking financial timebomb for the state; thus, we would not be surprised if a permanent cap comes up again in future legislation to permanently avoid the revenue ramifications of years of pent-up losses.

HB 4951, Article 110

  • For years, the Illinois Legislature has toyed with capping the “vendor discount” provided to Illinois retailers to help offset the costs of collecting and remitting sales and use tax on behalf of the State of Illinois. Under Article 110 of HB 4951, the vendor discount would be capped at $1,000 per month in the aggregate for returns other than transaction returns filed during the month, effective for tax returns due on or after January 1, 2025. The $1,000 monthly cap also applies to the 9-1-1 surcharges collected by sellers.
  • NOTE: This bill was passed under the premise that software has largely automated the sales and use tax collection and remittance process. However, this argument fails to account for the costs of reviewing and enforcing the state’s tax exemption provisions, and the time and cost of Department audits. However, retailers may see a benefit from the elimination of interchange (“swipe”) fees on sales tax and gratuities.

HB 4951, Article 115

  • Under Article 115 of HB 4951, the first $10,000 in franchise tax liability would be exempt from taxation, effective for years beginning on or after January 1, 2025.
  • NOTE: Many taxpayers no longer have an annual franchise tax liability because the state’s exemptions have increased over the last 4 years from $30 in 2020, $1,000 for tax years 2021-2023, $5,000 for 2024, and now $10,000 for 2025. However, taxpayers are still required to file annual reports, and to comply with the state’s requirements to report mergers and other changes to a corporation’s shares and paid-in capital.

SB 3362

  • This bill would amend Illinois’s sales and use tax laws to require retailers making sales that are shipped into Illinois to start collecting local sales tax based on the rate applicable where the goods are shipped or delivered to (i.e., destination-sourcing), effective January 1, 2025.
  • NOTE: Under current law, only “remote retailers” (i.e., retailers that have “Wayfair” nexus but no physical nexus with Illinois), are required to collect and report local sales tax on sales shipped into Illinois. Other retailers (i.e., those having physical nexus with Illinois) use origin sourcing, and, for sales shipped into Illinois, are typically required to charge only the state use tax rate of 6.25 percent, and no local tax, on such sales. This legislation is intended to “re-level” the “Leveling the Playing Field for Illinois Retail Act” (35 ILCS 185/5-1) for remote retailers.

Client Alert 2024-124

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