Are Services Subject to Sales Tax in Illinois?

Sales tax systems across the United States can be complex, with varying rules for different types of transactions. Illinois presents a nuanced landscape when it comes to the taxation of services, often differing from the sales tax applied to tangible goods. Understanding these distinctions is important for businesses and consumers alike. The taxability of a service in Illinois frequently depends on whether it is explicitly enumerated as taxable or if it involves the transfer of tangible personal property.

General Rule for Service Taxation in Illinois

Illinois generally does not impose sales tax on services. Many common services, such as professional advice or labor that does not involve the transfer of physical goods, are exempt from sales tax. The state primarily levies sales tax on the retail sale of tangible personal property.

Examples of services that are not taxed include legal consultations, accounting services like tax preparation or auditing, and medical services provided by doctors or dentists. This default position applies unless a specific statute or circumstance dictates otherwise.

Specific Taxable Services

While the general rule in Illinois exempts most services from sales tax, several specific categories are explicitly made taxable by statute. These exceptions often address services that have characteristics similar to goods or are deemed appropriate for taxation for other reasons. Telecommunications services, for instance, are subject to a specific excise tax. This tax applies to messages or information communicated via telephone services, including long-distance and local calls, and cellular mobile services. The state telecommunications excise tax rate is 7%, with an increase to 8.65% effective July 1, 2025. Municipalities can also impose their own telecommunications taxes, which can range up to 6%.

Certain digital services can also fall under taxable categories, depending on their nature. While Software as a Service (SaaS) is not subject to state sales tax in Illinois if accessed remotely without a download, some local jurisdictions, such as Chicago, treat SaaS as the leasing of personal property and tax it under their Personal Property Lease Transaction Tax. This city-specific tax rate can be as high as 11% as of January 1, 2025. Amusement services are another area where specific taxes apply, particularly at the local level. Chicago’s amusement tax, for example, applies to live events, concerts, and even streaming services, with rates varying and increasing for 2025. Coin-operated amusement devices are also subject to an annual privilege tax at the state level, with local taxes also possible.

Services Involving Tangible Personal Property

Complexity arises when services involve the transfer of tangible personal property. Illinois addresses this through the Service Occupation Tax (SOT) and Service Use Tax (SUT). These taxes are not levied on the service itself, but rather on the tangible personal property that is transferred as an incident to the sale of the service. The state sales tax rate is 6.25%, and local taxes can increase the combined rate to as high as 11% depending on the location of the sale.

When a service provider transfers tangible personal property during the provision of a service, they may incur Service Occupation Tax liability. In auto repair services, the labor charged for fixing a car is not taxed. However, any new parts installed are subject to the Service Occupation Tax. The serviceman is responsible for calculating and remitting this tax on the selling price of the transferred property. If the selling price of the tangible personal property is separately stated on the invoice, the tax applies to that amount. If not separately stated, the tax is generally based on 50% of the entire customer bill.

Another common scenario involves printing services. While the design work or creative labor might not be taxed, the physical printed materials are subject to sales tax. Similarly, for photography services, a sitting fee for the photographer’s time and artistic labor is not taxed. However, any physical prints, albums, or digital files transferred to the client are considered tangible personal property and are therefore taxable. Construction contractors operate under specific rules; they are generally considered the end-users of materials incorporated into real estate. This means they pay sales tax on their purchases of materials from suppliers and typically do not charge sales tax on their labor to clients for improvements to real property.