Understanding the New Illinois Sales and Use Tax for Leased or Rented Tangible Personal Property: Effective January 2025

Floor buffer polishing granite tiled floor

As the Illinois business landscape continues to evolve, so do the tax regulations that govern it. With the introduction of P.A. 103-592, effective January 1, 2025, a significant change occurred: businesses that lease or rent tangible personal property will now be classified as retailers and subject to Illinois’ Sales and Use Tax laws. 

Who Needs to Pay Attention?

If your business involves leasing or renting tangible personal property, this change directly impacts you. The law targets “all persons who, in the ordinary course of business, lease or rent tangible personal property,” meaning not only large retailers but also smaller enterprises and individual proprietors will be affected. Understanding what constitutes a lease under this new definition is essential to effectively navigating the upcoming tax requirements.

Defining a Lease

According to the new regulations, a “lease” is defined broadly. It refers to the transfer of possession or control of tangible personal property for a fixed or indeterminate term in exchange for consideration. This means that whether you call it a lease, rent, or something else – if you are providing tangible personal property in a manner that fits this definition, you are subject to the new sales tax requirements. Importantly, agreements intended solely as security agreements that do not involve the transfer of possession do not qualify as leases.

Registrations and Tax Obligations

As a newly defined retailer, your business must register with the Illinois Department of Revenue. Once registered, businesses must remit sales tax on lease or rental receipts. Register now to ensure compliance and avoid penalties.

Important Steps to Register

  1. MyTax Illinois Portal: Utilize the MyTax Illinois online system to add new tax registrations. 
  2. Form ST-1: All lease receipts are reported on the sales and use tax return.

You can complete and submit updated paper forms if electronic registration is not feasible. 

Tax Exemptions on Purchases for Lease or Rent

For businesses that purchase tangible personal property specifically for leasing or rental, there is a pathway to claim a tax exemption. Starting January 1, 2025, companies may use Form CRT-61, Certificate for Resale, to exempt purchases that will indirectly incur Retailers’ Occupation Tax through leasing activities, which can provide significant financial relief for qualifying purchases.

What Receipts Are Taxed?

Understanding what receipts from lease or rental transactions are subject to taxation is crucial for compliance. The lessor is responsible for remitting tax only on the portion of the selling price they receive within the specific reporting period. If you manage multiple contracts or leases, it’s essential to track payments closely to ensure accurate tax reporting.

The “selling price” in the context of a lease or rental agreement aligns with what’s typically understood in retail transactions – including any credits or services provided.

Existing Contracts and Future Tax Liabilities

One common question concerns existing contracts established before the new law takes effect. The law applies to all gross receipts received on or after January 1, 2025, meaning that agreements signed before that date will still incur tax on payments made afterward. All business owners must communicate with customers regarding these changes to avoid misunderstandings.

Determining Tax Rates for Lease Transactions

Suppose your business involves making lease or rental agreements that require periodic payments. In that case, you will need to determine the correct tax rate to apply based on the primary property location of the leased item. Each location may have different local tax rates in addition to the state tax, thus necessitating careful attention to the addresses associated with each lease. Businesses can leverage the Tax Rate Finder on the MyTax Illinois homepage to identify the appropriate rates by property address.

Handling Multiple Permanently Located Business Sites

Understanding how to report receipts from each site is imperative for businesses operating in multiple locations. Receipts must be reported on Form ST-2, which is specifically designed for businesses with multiple tax sites. Each site needs to be registered individually in the MyTax Illinois system.

Filing and Payment Timing

Compliance involves proper registration, tax collection, and timely filing of tax returns. Form ST-1 is due on or before the 20th of the month following the end of each reporting period. If the filing date falls on a weekend or holiday, it will extend to the next business day.

Rental Purchase Agreements versus Standard Leases

It’s important to differentiate between standard leases and rental purchase agreements. Rentals that fall under the Rental Purchase Agreement Tax, primarily for personal, family, or household purposes, do not fall under the new Retailers’ Occupation Tax. This segmentation means that some businesses may be exempt from the new tax regulations if they primarily deal with rental purchases.

Local Lease Transaction Tax Implications

One potentially complex area involves businesses conducting business in regions with local lease transaction taxes. The new legislation specifies that tangible personal property subjected to a local lease transaction tax adopted before January 1, 2023, is exempt from the state’s lease tax. This necessitates thorough recordkeeping and an understanding of local tax ordinances that may vary significantly from state rules.

No Tax Credits for Pre-Paid Taxes

Businesses should note that no credit is available for taxes paid on tangible personal property previously purchased for leasing purposes. However, if you incur tax liabilities from off-lease sales of previously rented items, you may qualify for a credit, provided state tax was paid at the time of purchase.

Depreciation Considerations

Businesses may also wonder about depreciation on leased merchandise they previously utilized outside Illinois. Unfortunately, no depreciation for out-of-state use is allowed under the new tax law, which imposes taxes based solely on lease or rental receipts collected.

Direct Tax Liability for Non-Compliant Lessors

Lastly, should you lease tangible personal property from a business that does not collect the tax, you are still legally obliged to pay that tax directly to the IDOR. This underscores the importance of maintaining accurate tax records and being diligent about tax reporting and payment responsibilities.

How Thompson Tax Can Help

The changes to Illinois sales and use taxes on leased or rented tangible personal property bring both challenges and opportunities for businesses operating in the state. Thompson Tax can assist your business with understanding the details of these changes, ensuring you obtain the necessary registrations and implement the proper compliance practices. 

Our team of experts is equipped to provide guidance and support, helping businesses effectively navigate this new regulatory landscape. Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors.

Kansas Eliminates State Sales Tax on Food: What Taxpayers and Retailers Need to Know

countertop with food pantry items and vegetables

Effective January 1, 2025, Kansas eliminated the state’s sales tax on food and food ingredients, a significant development that has implications for consumers, retailers, and local governments alike. This long-anticipated change, outlined in Notice 24-21 issued by the Kansas Department of Revenue on December 9, 2024, aims to provide economic relief to households by lowering the cost of groceries. However, it also places new responsibilities on retailers to ensure compliance and prepare their systems for the transition. Here’s what you need to know about this change and its implications.

Overview of the Change

Kansas’ decision to eliminate the state sales tax on food and food ingredients marks a significant policy shift. The measure is part of broader efforts to reduce the tax burden on residents and address concerns over the rising cost of living. While the state-level sales tax will no longer apply, it is important to note that sales taxes imposed by cities and counties will still be in effect. This creates a dual-layered tax structure that retailers must navigate carefully.

Definition of Food and Food Ingredients

The Kansas Department of Revenue has clarified what constitutes “food and food ingredients” under the new policy. These include:

  • Edible Items: Substances consumed for taste or nutritional value, such as fruits, vegetables, meats, and dairy products.
  • Beverages: Items like bottled water, soft drinks, and juices, provided they meet the definition of a food or food ingredient.
  • Exclusions: Prepared foods, alcoholic beverages, and dietary supplements are excluded from the tax exemption and remain taxable.

The detailed definitions and exclusions underscore the need for retailers to correctly categorize their products to ensure compliance.

Implications for Retailers

Retailers play a critical role in the successful implementation of this tax change. As of January 1, 2025, they must ensure their point-of-sale (POS) systems and software reflect the elimination of the state sales tax on qualifying food and food ingredients.

Key Action Steps for Retailers

  1. System Updates:
    • Update POS systems to remove the state sales tax on eligible items.
    • Retain the ability to apply local sales taxes for cities and counties that impose them.
  2. Training Staff:
    • Educate employees on the updated tax structure to avoid errors at checkout.
    • Ensure customer-facing staff can address questions about tax changes.
  3. Auditing Product Categories:
    • Conduct a thorough review of product inventories to classify taxable and non-taxable items correctly.
    • Collaborate with software vendors or tax consultants to implement accurate tax settings.
  4. Compliance and Record-Keeping:
    • Maintain detailed sales records to demonstrate compliance with the new tax structure.
    • Monitor local tax rates to ensure proper application of city and county taxes.

Implications for Consumers

The elimination of the state sales tax on food and food ingredients represents meaningful savings for Kansas residents. With the average household spending a significant portion of its income on groceries, this policy change can ease financial pressures, particularly for low and middle-income families.

Example Savings:

Assuming a 6.5% state sales tax, a household spending $500 monthly on groceries would save approximately $32.50 each month or $390 annually. While local sales taxes will still apply, the absence of the state tax reduces the overall burden significantly.

Local Sales Taxes Still Apply

Although the state sales tax will no longer apply to food and food ingredients, local jurisdictions retain the authority to impose their own sales taxes. This means that grocery purchases in Kansas may still be subject to city and county taxes, which vary across the state.

Challenges for Retailers:

  • Variable Rates: Retailers must accurately calculate and apply local sales tax rates.
  • Geographic Complexity: Businesses operating in multiple locations must account for differing local tax rates.

Consumer Awareness:

Consumers should be aware that the total sales tax on their grocery bills will depend on the location of the purchase. It is advisable to check receipts to ensure an accurate tax application.

Preparing for the Transition

The Kansas Department of Revenue has issued guidance to help stakeholders prepare for the changes. Retailers are encouraged to act promptly to avoid disruptions and ensure compliance. Here are key recommendations:

  1. Review the Official Notice: Read Notice 24-21 thoroughly to understand the scope and specifics of the policy change.
  2. Leverage Resources: Use tools and support offered by the Department of Revenue, including workshops, FAQs, and technical assistance.
  3. Engage Experts: Consider consulting with tax advisors or legal experts to navigate the complexities of the transition.

How Thompson Tax Can Help Businesses

At Thompson Tax, we specialize in helping businesses navigate complex tax changes quickly and confidently. Our expertise ensures that your business remains compliant while minimizing administrative burdens. Here’s how we can assist:

  1. Product Classification Assistance:
    • Our team thoroughly reviews your products to ensure all items are correctly classified under the new rules.
  2. Ongoing Compliance Support:
    • From routine audit cycles to detailed record-keeping solutions, we ensure your business is always prepared for success.
  3. Consulting Services:
    • Our experts provide strategic advice on managing the dual-layered tax structure, helping you avoid costly errors and streamline operations.

Partnering with Thompson Tax ensures that your business can focus on its core operations while we handle the complexities of tax compliance.  Contact us today!

Understanding H.B. 8 and H.B. 10: Key Changes to Sales and Use Tax on Digital Products, Tax Rates, and Sourcing Rules

Person typing into a white calculator

The landscape of sales and use taxes is evolving rapidly to align with the growth of digital commerce. Louisiana has joined this trend by enacting H.B. 8 and H.B. 10, which introduced two new legislative measures that became effective January 1, 2025. These laws expand the sales tax base to include digital products, implement phased changes to sales tax rates, and clarify sourcing rules and nexus guidelines. Here’s a detailed look at how these updates will affect businesses and consumers in Louisiana.

Expanding the Tax Base to Digital Products

In an era where digital goods and services are increasingly replacing their physical counterparts, Louisiana’s decision to tax digital products mirrors similar trends in other states. Beginning in 2025, sales and use tax will apply to a broad range of digital products, including:

  • Digital audiovisual works such as movies, shows, and videos
  • Audioworks like music, podcasts, and other audio files
  • Digital books, periodicals, and discussion forums
  • Digital codes, apps, and games
  • Other tangible personal property delivered electronically, including software updates, maintenance, and support services

Whether consumers purchase these items outright, subscribe to them, or stream them, they will be subject to Louisiana’s sales tax.

H.B. 8 provides exemptions for digital products and software used in business and healthcare settings to offset the potential burden on key sectors. This ensures that organizations in these fields can continue operating efficiently without the burden of increased costs for essential digital tools.

For businesses outside these exemptions, the expanded tax base presents an opportunity to review their offerings and pricing strategies to remain competitive while maintaining compliance.

Sales Tax Rate Adjustments Through 2030

In addition to broadening the tax base, H.B. 10 establishes a phased adjustment to Louisiana’s sales tax rate:

  • From 2025 to 2029, the rate will increase to 5%, incorporating the permanence of a previous temporary increase of 0.45% and an additional 0.55%.
  • Starting in 2030, the rate will decrease slightly to 4.75%, reflecting a long-term effort to balance revenue needs with taxpayer relief.

These rate changes will directly impact businesses, especially those with large volumes of taxable transactions. Updating point-of-sale systems, accounting software, and invoicing processes to reflect the new rates will be critical. For businesses that operate across state lines, keeping Louisiana’s specific tax changes in mind will be vital for accurate compliance.

Sourcing Rules and Nexus Guidelines

H.B. 10 also addresses the complexities of taxing goods and services in a digital economy by implementing clear sourcing rules. These rules determine how and where transactions are taxed based on the purchaser’s location or the destination of the goods and services provided.

Additionally, the legislation clarifies nexusa critical concept in determining a business’s tax obligations in a particular state. Specifically, ownership of or rights to digital products stored on servers located in Louisiana will not establish nexus. This provision is a relief for businesses that utilize cloud-based infrastructure in the state, as they won’t face unexpected tax liabilities based solely on server location.

What This Means for Businesses and Consumers

For Businesses

Compliance with these new tax laws will require businesses to:

  • Update systems and processes. Tax software, point-of-sale systems, and other financial tools must be adjusted to accommodate new tax rates, expanded definitions, and sourcing rules.
  • Understand exemptions. Businesses in sectors like healthcare should confirm whether they qualify for exemptions under the new rules.
  • Seek expert advice. Working with tax professionals can help ensure a smooth transition and avoid costly errors.

These changes may also influence pricing strategies, customer communications, and business operations, making it essential for businesses to act proactively.

For Consumers

Consumers may notice an increase in the cost of certain digital products and services. This includes streaming subscriptions, eBooks, and previously untaxed software purchases. While these changes are unlikely to deter demand, they underscore the growing importance of digital goods in state revenue frameworks.

How Thompson Tax Can Help

Navigating tax changes can be complex, but you don’t have to face them alone. Thompson Tax is here to provide comprehensive assistance with all your sales and use tax needs. From understanding the implications of H.B. 8 and H.B. 10 to ensuring compliance with new tax rates and rules, our team of experts is dedicated to helping your business thrive.

Contact us today to stay informed, compliant, and ready for the future of sales and use tax in Louisiana. Together, we’ll ensure you’re prepared for whatever changes come next.

In response to recent wildfires in Los Angeles

firefighter holding spraying hose with fire in background

In response to recent wildfires in Los Angeles, Governor Newsom and the California Department of Tax and Fee Administration (CDTFA) have extended various tax filing deadlines and provided additional relief measures for affected businesses. 

Extended Filing Deadlines

  • Sales and Use Tax: The deadline for Los Angeles County taxpayers whose last return was under $1 million has been moved from January 31, 2025, to April 30, 2025.
  • State Income Tax: LA County taxpayers can postpone filing 2024 tax returns and making payments until October 15, 2025.

Additional Tax Relief

  • Interest and Penalties Waivers: CDTFA offers relief upon request for those not automatically covered by the extension.
  • Payment Plans: Flexible plans are available for impacted businesses.
  • Replacement Records: CDTFA will provide duplicates of lost or destroyed tax records free of charge.

Broader Assistance

  • Extensions and relief can be requested by taxpayers outside LA County who were also impacted by wildfires.
  • Some fees (e.g., annual cigarette and tobacco licensing) are not extended.

Stay Informed

On behalf of Thompson Tax, we extend our heartfelt sympathies to those impacted by the California wildfires. These communities have shown incredible courage in the face of uncertainty and loss. To aid in their recovery, we have donated to the American Red Cross and encourage you—if you are able—to contribute there as well or to another organization of your choice.

Understanding the New Destination Sourcing Rules for Illinois Sales and Use Tax

Concept of Destination Text with the State Seal of Illinois

Illinois officially began applying destination sourcing rules for sales tax as part of the implementation of the Leveling the Playing Field for Illinois Retail Act, which became effective on January 1, 2021. This legislation was passed to align Illinois’ sales tax laws with the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require out-of-state (remote) sellers to collect and remit sales tax based on the destination of the purchase.

Here’s a breakdown of its implementation:

  1. Pre-2021: Illinois primarily used origin-based sourcing for intrastate transactions, where sales tax was calculated based on the seller’s location.
  2. January 1, 2021: The destination sourcing rules took effect, requiring remote sellers and marketplace facilitators meeting Illinois economic nexus thresholds (i.e., $100,000 in sales or 200 transactions annually) to collect and remit tax based on the delivery address.
  3. Retailers’ Occupation Tax (ROT) Changes: The rules also extended to intrastate retailers delivering goods to customers in different jurisdictions within Illinois. Businesses had to collect local taxes applicable to the customer’s delivery address.

These changes significantly impacted how businesses calculated and remitted sales and use taxes, especially for online and remote sales.

Updates to these rules, as outlined in recent guidance issued by the Illinois Department of Revenue (IDOR), will take effect on January 1, 2025, and aim to clarify tax collection obligations based on the location where a product is delivered or a service is consumed. 

Key Components of Illinois’ Guidance

1. Application to Retailers and Marketplaces

Illinois requires retailers, including those operating through third-party marketplaces, to collect and remit tax based on the customer’s location. This includes both in-state and remote sellers meeting the economic nexus threshold (e.g., $100,000 in sales or 200 transactions annually in Illinois).

2. Effective Date and Scope

While destination sourcing rules have been gradually implemented, the most recent guidance clarifies situations such as:

  • When a product is shipped to a buyer in Illinois.
  • When a product is picked up by the buyer at a location other than the seller’s principal place of business.

3. Local Tax Implications

Destination sourcing affects the local sales tax rates that apply. Illinois has a complex patchwork of local tax jurisdictions, and businesses must now determine the precise tax rate applicable to each transaction.

4. Software and Compliance Tools

IDOR recommends leveraging tax automation software to simplify the process of calculating the correct tax for every jurisdiction in Illinois. Businesses are advised to keep detailed records of delivery addresses and tax rates applied.

Who Is Affected by the Rules?

The new guidance impacts a broad range of entities, including:

  • Brick-and-Mortar Retailers: Particularly those offering delivery services or shipping goods out of their immediate vicinity.
  • eCommerce Sellers: Online retailers must ensure they collect the correct tax rate based on the customer’s delivery address.
  • Marketplace Facilitators: Platforms facilitating third-party sales must collect and remit tax on behalf of sellers.

Challenges for Businesses

Adapting to destination sourcing rules presents several challenges:

  • Complex Tax Jurisdictions: Illinois has over 300 local tax jurisdictions, each having its own distinct rates and rules.
  • System Upgrades: Businesses may need to invest in new software or systems to determine tax rates for each transaction accurately.
  • Increased Administrative Burden: Keeping up with changing rates and reporting requirements can strain resources, especially for small businesses.

Strategies for Compliance

Here’s how businesses can ensure compliance with the new rules:

  1. Audit Your Sales Processes: Review all sales channels to determine where destination sourcing applies.
  2. Invest in Technology: Implement sales tax compliance software to automate tax calculations and filings.
  3. Train Your Team: Ensure your accounting and sales teams understand the rules and can apply them correctly.
  4. Consult a Tax Professional: Seek advice from tax experts to navigate the complexities of Illinois’ tax system.

Looking Ahead

The clarification of destination-sourcing rules reiterates Illinois’ commitment to modernizing its tax framework in an era of eCommerce and digital transactions. While the new rules create challenges, they also ensure a fairer distribution of tax revenue across the state’s jurisdictions.

Businesses must act quickly to understand and comply with these changes to avoid penalties and ensure a seamless transition. Staying proactive by leveraging technology and seeking expert advice will be key to thriving in this evolving tax landscape.

Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors and are always just a phone call away.