Are All Services Taxable in Illinois?

The taxation of services in Illinois can be complex. While many services are generally untaxed, important exceptions exist. This article clarifies when and how services become subject to taxation within the state.

The Fundamental Principle of Service Taxation

Illinois law establishes a foundational rule: services themselves are not subject to sales tax. This principle differentiates the labor or expertise provided from the transfer of physical goods. A “service” refers to an intangible act performed for another, such as legal advice, consulting, or medical care. However, this rule has two primary scenarios where services become taxable.

The first scenario involves services that include the transfer of tangible personal property (TPP) as an incident to the service. If a service provider furnishes a physical item during their service, that item is subject to tax. The second scenario encompasses services specifically enumerated as taxable by Illinois statutes, irrespective of any TPP transfer. These statutory exceptions target particular industries or activities, showing the limitations of the “no tax on services” rule.

Services Involving Tangible Personal Property

Services in Illinois become taxable when they involve the transfer of tangible personal property (TPP) as an “incident” to the service. This taxation falls primarily under the Service Occupation Tax (SOT) and Service Use Tax (SUT). The SOT is imposed on service providers (“servicemen”) for the tangible personal property they transfer to their customers. The SUT is a complementary tax imposed on the recipient for using such tangible personal property in Illinois.

For example, an auto mechanic replacing a part involves both labor and the transfer of a new part. The value of the part becomes subject to SOT. This also applies to services such as graphic arts, where physical prints are transferred, or custom software development when the software is delivered on physical media.

The tax applies to the selling price of the tangible personal property transferred. If the serviceman separately states the selling price of the TPP, the SOT is calculated on that stated price. If the selling price of the TPP is not separately stated on the customer’s bill, Illinois law allows for the SOT to be based on 50% of the entire customer bill. In either case, the tax base cannot be less than the cost price of the tangible personal property transferred.

Some servicemen may elect to pay SOT on their cost price of the TPP if their material costs are below a certain threshold. Otherwise, the serviceman is liable for the SOT on the selling price of the TPP transferred. Service providers should issue certificates of resale to their suppliers when purchasing tangible personal property intended for transfer to customers to avoid paying sales tax twice.

Additional Services Subject to Specific Taxes

Beyond services involving the transfer of tangible personal property, Illinois explicitly taxes certain services through specific statutes. These taxes are distinct from the Service Occupation Tax and apply regardless of whether any physical goods are exchanged.

Telecommunications services are one such category, subject to the Telecommunications Excise Tax. This tax applies to both intrastate and interstate telecommunications that originate or terminate in Illinois and are billed to an Illinois service address. As of July 1, 2025, the state telecommunications excise tax rate is set to increase from 7% to 8.65%, with a portion dedicated to supporting the 9-8-8 Suicide and Crisis Lifeline.

Amusement services also face specific taxation. This includes charges for various entertainment or recreational activities offered to the public. For instance, the Chicago amusement tax applies to events like sporting events, concerts, and streaming services, with rates varying (e.g., 9% on charges paid, increasing to 10.25% for streaming amusements in Chicago as of January 1, 2025).

Certain utility services, such as the distribution and sale of electricity and natural gas, are also subject to excise taxes. Hotel operators are subject to the Hotel Operators’ Occupation Tax for renting rooms for periods of less than 30 consecutive days, including short-term rentals. Parking services are another taxed category, with the Parking Excise Tax imposed on the use of a parking space, typically at rates like 6% for hourly/daily/weekly use and 9% for monthly/annual use.

Business Obligations for Taxable Services

Businesses providing taxable services in Illinois must adhere to specific compliance requirements. The initial step involves registering with the Illinois Department of Revenue (IDOR) to obtain an Illinois Business Tax (IBT) number. This unique identifier is essential for all state tax filings. Registration can be completed online through MyTax Illinois, in person at an IDOR office, or by mail.

Once registered, businesses must collect the applicable service tax from their customers at the point of sale. The collected taxes must then be remitted to the IDOR. This process involves filing tax returns, such as Form ST-1 and Form ST-2. These forms facilitate the accurate reporting of collected taxes and are filed electronically through MyTax Illinois. Businesses with higher tax liabilities may be required to make accelerated or quarter-monthly payments. Maintaining detailed records of all transactions, including sales, collected taxes, and remittances, is also a continuous requirement.