On June 16, 2025, Illinois Gov. J.B. Pritzker signed budget legislation with revenue enhancements driven by a variety of income and sales tax changes.1 In the area of income tax, the legislation changes from the Joyce to the Finnigan method for combined group apportionment, eliminates two exceptions to the interest and intangible expense addback requirement, includes 50% of global intangible low-taxed income (GILTI) in the tax base, and changes the sourcing of sales of a pass-through entity interest. For sales and use tax, the legislation eliminates the transaction threshold for determining remote retailer nexus and applies the “Leveling the Playing Field” policy to service occupation tax and service use tax.
Income tax
Combined apportionment
For tax years ending on or after Dec. 31, 2025, Illinois changes from the Joyce to the Finnigan method in determining the sales of the entities in a combined group that are included for apportionment purposes.2 As explained by the Illinois Department of Revenue, under the Joyce method of apportionment, the determination of whether a unitary member included on the combined return is taxable in a state is made on a separate company basis.3 The unitary group of corporations calculates its apportionment by dividing the combined Illinois sales of the members with nexus in Illinois by the total combined sales of the unitary business group everywhere.4 Under the Finnigan method, a unitary group of corporations is determined to be taxable in a state if any member of the unitary group is subject to tax in that state. The unitary corporation calculates its apportionment by dividing the Illinois sales of the members by the total combined sales of the unitary business group everywhere.5
Specifically, the sales factor provisions for combined apportionment are amended to provide that sales of each member of a unitary business group who is not a taxpayer subject to Illinois income tax are determined based on the apportionment rules applicable to the member and are aggregated.6 Each taxpayer member of the unitary business group will include in its sales factor numerator a portion of the aggregate Illinois sales of nontaxpayer members based on a ratio. The numerator of the ratio is the taxpayer member’s Illinois sales taking into account its applicable sales factor provisions. The denominator of the ratio is the aggregate Illinois sales of all the taxpayer members of the group taking into account their respective sales factor provisions. In addition, if inclusion of sales in the sales factor or numerator of the sales factor depends on whether a taxpayer is considered taxable in another state, the taxpayer is considered taxable in any state in which any member of its unitary business group is considered taxable.
Interest and intangible expense addback
Under current Illinois law, an addback is required for interest paid to a foreign person who would be a member of the same unitary business group but for the fact that the foreign person’s business activity outside the U.S. is 80% or more of the foreign person’s total business activity.7 As amended, for taxable years ending on and after Dec. 31, 2025, if Internal Revenue Code (IRC) Section 163(j)8 applies to the taxpayer for the taxable year, the reduction in the amount of interest for which a deduction is allowed under IRC Section 163(j) is treated as allocable first to persons who are not foreign persons and then to foreign persons.9
For taxable years ending on or after Dec. 31, 2025, two existing exceptions from the interest and intangible expense addback requirements are eliminated. The first exception that is no longer available relates to interest or intangible expense paid to a person subject to tax in a foreign country or state, other than a state that requires mandatory unitary reporting, to a tax on or measured by net income to such interest or intangible. The second exception that has been eliminated relates to interest or intangible expense paid with respect to a contract or agreement entered into at arm’s-length rates and terms and the principal purpose for the payment is not federal or Illinois tax avoidance.10 However, two discrete exceptions to addback continue to apply for taxable years ending on or after Dec. 31, 2025. The first exception to addback applies if the interest or intangible expense is paid to a person who is not a related member, and the transaction giving rise to such expense did not have as a principal purpose the avoidance of Illinois income, and is paid pursuant to a contract or agreement that reflects arm’s-length terms. The second exception to addback applies if the taxpayer shows that the adjustments are unreasonable, or the taxpayer and the Director of Revenue agree in writing to the application or use of an alternative apportionment method.
Inclusion of GILTI
For taxable years ending on or after Dec. 31, 2025, corporations must include 50% of the amount of GILTI received or deemed received or paid or deemed paid under IRC Section 951A in the Illinois tax base.11 Prior to amendment, GILTI was not specifically included in the Illinois tax base.
Sourcing sales of pass-through entity interest
Effective for tax years ending on or after June 16, 2025, capital gains or losses for sales or exchanges of shares in a pass-through entity, other than an investment partnership, are sourced to Illinois based on the average of the pass-through entity’s Illinois apportionment factor in the year of the sale or exchange and the immediately preceding two tax years.12 If the pass-through entity was not in existence during both of the preceding two years, then only the years in which the pass-through entity was in existence are considered in computing the average. Under existing law, capital gains and losses from selling or exchanging an interest in a pass-through entity generally were considered intangible income and sourced to Illinois if the taxpayer had its commercial domicile in the state at the time of the sale or exchange.13
Sales and use tax
Remote retailer transaction threshold eliminated
Beginning Jan. 1, 2026, a remote retailer is engaged in the occupation of selling at retail in Illinois for purposes of sales and use tax if its cumulative gross receipts from sales of tangible personal property to purchasers in Illinois are $100,000 or more.14 Under current law, a remote retailer is engaged in selling at retail in Illinois if: (i) the cumulative gross receipts from sales of tangible personal property to purchasers in Illinois are $100,000; or (ii) the retailer enters into 200 or more separate transactions for the sale of tangible personal property to purchasers in Illinois.15 A similar change is made for marketplace facilitators.16
Leveling the Playing Field extended to services
The Leveling the Playing Field for Illinois Retail Act is expanded to include retailers and servicemen maintaining a place of business in the state.17 As a result, Leveling the Playing Field applies to service occupation tax and service use tax. Beginning Jan. 1, 2026, the service occupation tax is amended to provide that a certified service provider filing a return on behalf of a serviceman maintaining a place of business in Illinois must, at the time of the return, pay to the Department the tax owed less a discount of 1.75%, not to exceed $1,000 per month.18 A serviceman maintaining a place of business in Illinois using a certified service provider to file a return on its behalf, as provided in the Leveling the Playing Field law, is not eligible for the discount. Because Leveling the Playing Field is being extended to service providers, they will be responsible for both state and local taxes. Also, the local rate that is applied is determined on a destination basis.
Service occupation tax
Beginning Jan. 1, 2026, at the election of any serviceman maintaining a place of business in Illinois who does not make any retail sales of tangible personal property to purchasers in Illinois, the “sale of service” for purposes of the service occupation tax excludes sales in which the aggregate annual cost price of tangible personal property transferred as an incident to sales of services is less than 35% of the annual total gross receipts from all sales of service.19 Under existing law, a registered serviceman may elect that the service occupation tax be based on the serviceman’s cost price of the tangible personal property transferred as an incident to the sale of those services if the annual cost price does not exceed the threshold provided above.20 As amended, this election may also be made by any serviceman maintaining a place of business in Illinois who makes retail sales from outside the state to Illinois customers but is not required to be registered under the retailers’ occupation tax. Beginning Jan. 1, 2026, this election does not apply to any sale of service made through a marketplace that has not met the statutory transaction nexus threshold.
Beginning Jan. 1, 2026, the service occupation tax is imposed at the rate of 6.25% of 50% of the entire billing to the service customer for all sales of service made through a marketplace that has met the statutory transaction nexus threshold.21 The amount constituting 50% of the entire billing cannot be less than the cost price of the property to the marketplace serviceman or the marketplace facilitator on its own sales of service.
Retailers’ occupation tax rate if supporting documentation not provided
Effective June 16, 2025, a retailers’ occupation tax statute is amended to provide a default tax rate if documentation is not provided to support the delivery location of the property.22 Specifically, for sales sourced to the Illinois location to which the tangible personal property is shipped, delivered, or at which possession is taken by the purchaser, if the taxpayer fails to provide the information, schedules, or supporting documents necessary to determine the location, the Department will, instead of imposing a penalty for a unprocessable return, assess tax on the gross receipts of these sales at the rate of 15%.
Tax amnesty programs
The legislation includes three tax amnesty programs. The general tax amnesty program and franchise tax amnesty program are based on existing statutes that provided prior tax amnesty programs. The remote retailer amnesty program is entirely new.
General tax amnesty
The legislation enacts a general tax amnesty program for all taxes collected by the Illinois Department of Revenue that will be held from Oct. 1, 2025 through Nov. 15, 2025.23 The general tax amnesty applies to taxes due for any tax period ending after June 30, 2018 and before July 1, 2024. The program waives penalties and interest if the full tax owed is paid.
Franchise tax and license fees amnesty
Another tax amnesty program to be administered by the Illinois Secretary of State covers franchise tax and license fees imposed under the Business Corporation Act (BCA).24 This amnesty program also will be held from Oct. 1, 2025, through Nov. 15, 2025, and applies to taxes due for any tax period ending after June 30, 2019, and on or before June 30, 2025. The program waives interest and penalties, but the penalties and interest that may be imposed under the BCA are much more significant than the penalties and interest imposed by the Department.
Remote retailer tax amnesty
The legislation enacts a Remote Retailer Amnesty Program that will be held from Aug. 1, 2026, through Oct. 31, 2026.25 The amnesty program applies to the sale of tangible personal property by a remote retailer to an Illinois customer that occurs from Jan. 1, 2021, through June 30, 2026 (the eligibility period), and requires the remote retailer to ship or otherwise deliver the tangible personal property to an address in Illinois. During the amnesty period, the Department will accept returns and payment of state and local retailers’ occupation taxes at the “simplified retailers’ occupation tax rate” for eligible transactions that occur during the eligibility period. The simplified tax rate is the combined state and average local retailers’ occupation tax rate imposed on remote retailers participating in the program that equals: (i) 9% of the gross receipts from sales of tangible personal property subject to the 6.25% state rate; or (ii) 1.75% of the gross receipts from sales of tangible personal property that is subject to the 1% state rate and food for human consumption to be consumed off the premises where it is sold,26 regardless of the applicable tax rate.
The payment of the tax at the simplified rate relieves the remote retailer of any additional state or local retailers’ occupation taxes for the eligible transaction. If the remote retailer reports and remits the tax during the amnesty period, the Department will abate and not seek to collect any interest and penalties that may be applicable for the eligible transactions, and the Department will not seek civil or criminal prosecution of the remote retailer for the period of time for which amnesty has been granted.
Commentary
This budget legislation makes some significant changes that are intended to increase tax revenue. In particular, taxpayers should closely consider the income tax provisions because they generally are effective for the 2025 tax year. The change from Joyce to Finnigan was unexpected by the tax community and will increase the amount of income that some combined groups are required to apportion to Illinois. However, this may be beneficial to some taxpayers because throwback and throwout rules will be applied to the group as a whole.
The elimination of the subject to tax and tax avoidance exemptions for the interest and intangible addback requirements are designed to be targeted at 80/20 companies as they cannot be part of a unitary group in Illinois. In effect, this change eliminates two safe harbor exceptions to the interest and intangible expense addbacks. Also, note that a separate provision requires that the reduction in the amount of interest for which a deduction is allowed under IRC Section 163(j) is treated as allocable first to persons who are not foreign and then to foreign persons. It is not clear how this will be applied in practice, but there may be separate, and potentially complicated, record-keeping requirements if a foreign company is taking an interest expense deduction.
The inclusion of 50% of GILTI will increase the tax base in Illinois for some multinational taxpayers. While a new inclusion in the Illinois tax base presumably should have some sales factor representation which would tend to lower the Illinois sales factor and mitigate the amount of tax paid to Illinois, the legislation is silent as to the proper treatment. Given this silence, and a longstanding provision in Illinois law that expressly disallows the inclusion of dividends in the apportionment numerator, it may be implied that the GILTI inclusion in the base is treated as a dividend for Illinois sales factor purposes, resulting in exclusion from the sales factor calculation. However, further clarification on this point from the Department would be warranted.
The change to the apportionment of capital gain or loss from selling an interest in a pass-through entity is directed at sales occurring outside the state that are apportioned to Illinois. Based on this change, income from the sale of a partnership interest may be apportioned to the state even if the taxpayer’s commercial domicile is not in Illinois. This can result in significant and unexpected changes in treatment for a seller of a pass-through interest.
The Department notes that the income tax changes may affect required estimated payment amounts or require taxpayers to start making estimated payments.27 Taxpayers already making estimated payments are advised to recalculate their estimated payments based on the income tax changes discussed above.28 Taxpayers not currently making estimated payments should determine if the changes discussed above cause their tax liability to increase to more than the estimated payment requirement.29 Taxpayers may reduce or eliminated their late payment penalty for the underpayment of estimated tax by using the annualized income installment method when filing their tax return.
In the area of sales and use tax, the legislation follows the state trend of modifying the nexus standard for remote sellers by eliminating the transaction threshold. This benefits remote sellers that sell inexpensive items that may exceed the 200 separate transaction threshold but do not exceed the $100,000 sales threshold. Also, service providers should note that Leveling the Playing Field has been extended to service occupation tax and service use tax. They will need to implement procedures to use certified service providers and certified automated systems for tax collection beginning Jan. 1, 2026.
The legislation is noteworthy for enacting three tax amnesty programs. The general amnesty program and franchise tax amnesty program are similar to programs that were offered in prior years. However, the new tax amnesty program for remote retailers is unique. The program provides remote retailers with the option to use a simplified 9% state and local tax rate for sales of tangible personal property that are subject to the 6.25% state rate; or (ii) 1.75% for sales of tangible personal property that is subject to the 1% state rate and food for human consumption that is to be consumed off the premises where it is sold, regardless of the applicable tax rate. Thus, remote sellers that are interested in the program but do not have the data to determine the specific local tax rate for destination-based sourcing, or those that want to simplify their tax calculations, may use the simplified rate. However, this rate may be unfavorable for sales in jurisdictions that have a lower local tax rate.30 The Department is expected to provide guidance concerning this amnesty program prior to its commencement on Aug. 1, 2026.
1 P.A. 104-0006 (H.B. 2755), Laws 2025. This legislation contains numerous tax provisions. This SALT Alert highlights the major income tax and sales and use tax provisions but is not intended to cover all the tax amendments.
2 35 ILL. COMP. STAT. 5/304(e). The Joyce and Finnigan methods refer to two California tax matters, Appeal of Joyce Inc., Dkt. No. 66-SBE-070 (Cal. State Bd. of Equal. Nov. 23, 1966) and Appeal of Finnigan, Dkt. No. 88-SBE-022 (Cal. State Bd. of Equal. Aug. 25, 1988).
3 Informational Bulletin FY 2025-29, Legislative Income Tax Changes that May Increase Current Tax Year Liabilities, Illinois Department of Revenue, June 2025.
4 The only throwback sales that are included in the apportionment numerator are those of members that were not taxable in the destination.
5 Throwback sales in the numerator only include sales to a destination in which none of the unitary members has nexus in that destination.
6 35 ILL. COMP. STAT. 5/304(e).
7 35 ILL. COMP. STAT. 5/203(a)(2)(D-17), (b)(2)(E-12), (c)(2)(G-12), (d)(2)(D-7). The changes discussed in this section apply to corporations, individuals, trusts and estates, and partnerships.
8 IRC Sec. 163(j) currently limits business interest deductions to 30% of a taxpayer’s adjusted taxable income.
9 As explained by the Department, this change aligns Illinois with IRC Sec. 59A(c)(3) and the treatment of federal consolidated returns at the federal level. Informational Bulletin FY 2025-29, Legislative Income Tax Changes that May Increase Current Tax Year Liabilities, Illinois Department of Revenue, June 2025.
10 35 ILL. COMP. STAT. 5/203(a)(2)(D-17), (D-18), (b)(2)(E-12), (E-13), (c)(2)(G-12), (G-13), (d)(2)(D-7), (D-8).
11 35 ILL. COMP. STAT. 5/203(b)(2)(O).
12 35 ILL. COMP. STAT. 5/303(b)(4), 5/304(a)(3)(C-5)(iii)(a-5). The effective date of this provision is not expressly stated, but the Department has confirmed that this provision is effective for tax years ending on or after June 16, 2025. Informational Bulletin FY 2025-29, Legislative Income Tax Changes that May Increase Current Tax Year Liabilities, Illinois Department of Revenue, June 2025.
13 35 ILL. COMP. STAT. 5/303(b)(3).
14 35 ILL. COMP. STAT. 105/2, 110/2, 115/3(b), 120/2(b-1). Note that Illinois has a unique sales and use tax system comprised of four different taxes: (i) retailers’ occupation tax; (ii) service occupation tax; (iii) service use tax; and (iv) use tax. Occupation taxes are imposed on sellers’ receipts and use taxes are imposed on amounts paid by purchasers. For purposes of the transaction threshold, the retailer must determine, on a quarterly basis, ending on the last day of March, June, September, and December, whether it meets the threshold for the preceding 12-month period. If the retailer meets the threshold for the 12-month period, the retailer is considered a retailer maintaining a place of business in Illinois and is required collect and remit the tax imposed and file returns for one year. Note that similar provisions apply to service providers making sales to purchasers in Illinois from outside the state.
15 35 ILL. COMP. STAT. 105/2, 120/2(b).
16 35 ILL. COMP. STAT. 105/2d(b), (b-5), 110/2d, 115/3(d), 120/2(c), (c-5). Beginning Jan. 1, 2026, a marketplace facilitator whose cumulative gross receipts from sales of tangible personal property to purchasers in Illinois by the marketplace facilitator and by the marketplace sellers selling through the marketplace are $100,000 or more is considered the retailer for each sale of tangible personal property made through its marketplace.
17 35 ILL. COMP. STAT. 185/5-5, 185/5-10, 185/5-25, 185/5-27, 185/5-30. In 2019, Illinois enacted Leveling the Playing Field, effective July 1, 2021, to assist remote retailers with their state and local tax compliance by providing certified service providers and certified automated systems without charge. 35 ILL. COMP. STAT. 185-1 et seq. As originally enacted, the act was intended to simplify use and occupation tax compliance for remote retailers.
18 35 ILL. COMP. STAT. 115/9.
19 35 ILL. COMP. STAT. 110/2. The threshold is 75% for servicemen transferring prescription drugs or engaged in graphic arts production.
20 35 ILL. COMP. STAT. 110/3-10.
21 Id.
22 35 ILL. COMP. STAT. 120/5.
23 35 ILL. COMP. STAT. 745/10.
24 805 ILL. COMP. STAT. 8/5-10.
25 35 ILL. COMP. STAT. 120/2-13.
26 This excludes alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, and food that has been prepared for immediate consumption.
27 Informational Bulletin FY 2025-29, Legislative Income Tax Changes that May Increase Current Tax Year Liabilities, Illinois Department of Revenue, June 2025.
28 The first estimated payment after June 16, 2025 should include the additional amounts that would have been due with the previous quarterly payments, as well as the full current quarterly payment.
29 The first estimated payment should be made by the next quarterly estimated payment due date and should include the current estimated payment due and the amount of all the previous quarterly payments due based on the changes.
30 In contrast, the 9% rate is favorable in Chicago, which has a combined sales tax rate of 10.25%.
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