Illinois is an important hub for commerce in the United States because of its large population and central location. Naturally, retailers’ occupation tax (i.e., sales tax) is a major source of income for the Illinois Department of Revenue and the state agencies it supports. While most sales in the state will be subject to sales tax, Illinois does offer some exemptions that might apply to you or your client’s business. Proper use and documentation of your sales tax exemptions can save you money when making purchases and keep you from wrongfully collecting sales tax.
Illinois Sales Tax Exemptions on Property Purchased for Resale
One of the most widely recognized and used sales tax exemptions in Illinois and most other states is for sales of property that are bought for future resale. Generally, Illinois sales tax only applies at the time of a final sale to a consumer. Resale exemptions are then available for transactions between suppliers who distribute to retailers or other suppliers. For example, a sale between a supplier to a department store that later makes a final sale to an individual user. The sale between the supplier and department store would qualify for use of a resale certificate. You can document your resale transactions using Form CRT-61 and then report those transactions on Schedule A, Line 4 of your sales tax return on Form ST-1.
As a business, you’ll likely interact with resale exemption certificates on two levels. The first is when you purchase property that you plan to resell to your customers, in which case you would present the exemption certificate to your supplier. Secondly, you may receive a resale exemption certificate from one of your customers when they buy your item.
Good Faith Acceptance of an Illinois Certificate of Exemption for Resale
The seller is generally responsible for evaluating the nature of a transaction and the decision to accept a buyer’s resale certificate. Sellers who act in good faith when accepting a properly completed resale certificate can usually do so without fear of punishment from the Illinois Department of Revenue, even if the buyer was fraudulent in its use. Good faith simply means you have no knowledge or reason to doubt the legitimacy of the buyer’s certificate at the time of the transaction.
Using Property that You Purchased with a Resale Exemption Certificate
Aside from proper recordkeeping, the biggest issue concerning resale certificates is when you submit a certificate at the time of purchase but end up using the product instead of reselling it. For example, let’s say you operate a store that sells power washers. You purchase a power washer with a resale certificate but later use it to clean the pavement and walkway outside your storefront. When this type of activity happens, you are responsible for reporting and paying the applicable use tax on the power washer.
Exemption for Your Sales Made to Customers Outside Illinois
As mentioned, Illinois is a major center of commerce, and many businesses make sales to people in other states. Although you may have sales tax liability to the state where you sell the item as an online retailer, you will likely be exempt from any Illinois sales tax for the transaction. Of course, this exemption does not apply if the sale physically happens in Illinois (i.e., change of title or possession).
You can report your sales that qualify as interstate commerce on Line 5 of Schedule A of your sales tax return. To support your claims for interstate commerce exemptions, you should retain information that shows delivery to the out-of-state purchaser such as a waybill, bill of lading, a USPS receipt, or a trip sheet.
Illinois Also Makes Sales Tax Exemptions for Certain Manufacturing and Building Initiatives
To promote growth and innovation, Illinois also offers sales tax exemptions for certain purchases of property that you use to achieve other business ends. Usually, these exemptions are for industrial materials or equipment used in manufacturing, construction, or other development. Some examples and their corresponding exemption certificates include:
- Manufacturing machinery and equipment (Form ST-587): You must use it more than 50% of the time for producing items for wholesale, retail, or lease. This exemption includes purchases of machinery or equipment needed to maintain or repair other exempt manufacturing equipment.
- Machinery and equipment for farming (Form ST-587): You must use the item for agriculture production more than 50% of the time. This exemption generally excludes purchases of Illinois-registered vehicles and ATVs. However, some ATV users may qualify for the exemption.
- Enterprise zone materials: Includes the sale of building materials for real estate located in the enterprise zone and the sale of personal property to a DCEO-certified business for certain qualifying uses. To document this exemption, use Form EZ-1 for building material purchases or a copy of the DCEO certificate and a written statement from the business for other qualifying purchases.
- High impact and reimagining electric vehicle businesses (HIB/REV): includes exemptions for sales of business materials and other qualifying personal property to a DCEO-designated business. Again, you can document using Form EZ-1 for building materials or a copy of the DCEO certificate and written statement from the business.
- River edge redevelopment zone (Form EZ-1): Exemption for the sale of building materials used toward remodeling, rehabilitating, or new construction on an industrial or commercial project where the municipality of the project’s location has issued a Certificate of Eligibility for Sales Tax Exemption.
Sales Made to Tax-Exempt Organizations in Illinois
Illinois provides sales tax exemptions for items purchased by other tax-exempt organizations such as:
- Churches
- Non-profit daycares
- Schools
- State, local, and federal government bodies
- Certain senior citizen organizations
- Exclusively charitable organizations
- Non-profits that operate for artistic or cultural purposes
To qualify, the sales tax-exempt purchase must further the organization’s purpose and the sale must be with the organization (i.e., not an individual member or representative). Additionally, the organization must have a valid exemption identification number (“E” number), which sellers can verify at MyTax Illinois. You can report your sales to tax-exempt organizations on Line 13 of Schedule A on your sales tax return.
What About Tax for Sales by a Tax-Exempt Organization in Illinois?
If you are a tax-exempt organization that sells tangible personal property, then you will generally be liable for the accompanying sales tax on those transactions. However, some of your sales may be exempt from sales tax if they qualify under any of the following exceptions:
- You sell the item to a member, student, patient, etc. of the organization.
- The sale does not directly compete with other businesses in the community.
- For no more than two times per year, sales from occasional dinners that are open to the public.
Your organization must have an active “E” number to qualify for these sales tax exemptions and must use the proceeds from these sales to further the organization’s charitable purpose.
Illinois Sales Tax Exemption Through Lowered Sales Tax Rates
Although not a true exemption from sales tax with an accompanying certificate, Illinois imposes a reduced sales tax rate of 1% on certain sales of food, drugs, and medical appliances. Other states generally exempt sales tax on these items altogether, but Illinois elects to give them a preferable rate compared to the 6.25% rate for sales of general merchandise. Specifically, the lower rate applies to the following sales:
- Food: Items not prepared for immediate consumption (i.e., most food sold at the grocery store) but excluding alcohol, soft drinks, candy, and hot food.
- Drugs: Both prescription and nonprescription items that claim to have medicinal value, excluding standard grooming and hygiene products.
- Medical appliances: Both prescription and nonprescription items that serve to replace a malfunctioning body part (e.g., corrective eyewear or contacts, prosthetics, insulin syringes, dentures, etc.).
Get Professional Help Defending or Implementing Your Illinois Sales Tax Exemptions
If you sell or buy items in Illinois, it’s almost inevitable that you will handle a sales tax exemption certificate. When you do interact with tax-exempt sales, your compliance with recordkeeping requirements will be essential for defending your tax reporting when facing a future audit or assessment. Audits are common when you have a high volume of claimed exemptions or uncharacteristic use of exemptions given your industry or type of business. The state of Illinois will be quick to assess you if your documentation doesn’t support your reported exemptions. In these situations, our team of sales tax professionals is available to defend your use of an exemption and avoid unfair assessments against your business where possible.
Schedule your consultation with Sales Tax Helper about issues involving an Illinois sales tax exemption.