New sourcing rules, eliminated thresholds, and expanded compliance obligations beginning January 1, 2026

Servicepersons and marketplace facilitators who maintain a place of business in Illinois — but live out of state — will face meaningful changes to Illinois state and local Service Occupation Tax (SOT) beginning January 1, 2026. The Illinois Department of Revenue (IDOR) has issued guidance clarifying new sourcing rules, eliminated thresholds and added compliance requirements that will directly affect how certain businesses calculate, report and remit taxes on transfers of tangible personal property (TPP) as part of a sale of service.

These changes are especially relevant for service-based businesses and marketplaces that transfer tangible personal property as part of a service and have customers or operations connected to Illinois.

Understanding these changes now can help businesses avoid unexpected liabilities and penalties in 2026 and beyond.

Key Changes Effective January 1, 2026

Eliminated threshold: The 200-transaction threshold will no longer apply to either out-of-state servicepersons who maintain a business in Illinois and make sales to Illinois or marketplace facilitators who transfer TPP to Illinois purchasers as part of a sale of service. Instead, liability is tied primarily to gross receipts and physical or economic presence.

Destination-based sourcing expands: Servicepersons maintaining a place of business in Illinois must apply destination-based sourcing to sales of service that previously may have been sourced outside Illinois. This increases the importance of capturing accurate customer location data.

Insufficient location data: If a taxpayer does not provide the proper taxing location for a destination-based sale,IDOR may assess tax at a rate of 15% of gross receipts. Penalties on unprocessable returns won’t apply to those types of sales.

Calculating SOT as a Serviceperson

A serviceperson is considered to be any person engaged in the occupation of making sales of service. SOT applies only when TPP is transferred as part of that service.

Servicepersons may calculate SOT using one of four methods:

1. SOT on the separately stated selling price of TPP transferred.
2. SOT on 50% of the entire bill.
3. SOT on the serviceperson’s cost price if registered as a de minimis serviceperson under Section 2a of the Retailers’ Occupation Tax Act.
4. Use tax on the serviceperson’s cost price if a de minimis serviceperson not otherwise required to be registered.

A serviceperson whose Illinois presence is based solely on meeting the $100,000 gross receipts threshold generally cannot elect the fourth calculation method if they also make retail sales to Illinois purchasers.  

Marketplace Facilitators

Beginning January 1, 2026, marketplace facilitators that meet or exceed $100,000 in gross receipts from sales of service to Illinois purchasers are responsible for collecting and remitting applicable state and local SOT on all transfers of TPP made through the marketplace — including their own sales and those made on behalf of marketplace servicepersons.

For marketplace sales involving TPP, SOT is imposed at 50% of the entire billing to the Illinois customer. Marketplace facilitators must register with IDOR, file returns and remit tax accordingly.

Reviewing Sales of Service

Marketplace facilitators must evaluate their sales activity quarterly (March, June, September and December) using a rolling 12-month lookback period.

• If the threshold is met, the facilitator must collect and remit SOT for one year on its own sales and marketplace sales.
• At the end of the year, the facilitator must reassess whether the threshold continues to be met.
• If the threshold is no longer met, IDOR and marketplace servicepersons must be notified to discontinue collection responsibilities. Failure to notify IDOR keeps the registration active.

If a facilitator is no longer required to remit SOT on behalf of marketplace servicepersons, it must continue rolling quarterly reviews to determine if obligations resume. Businesses should also review sales for the 12-month lookback period ending on December 31, 2025, to determine if they met the $100,000 if they previously met the 200-transaction threshold.

Previously Met the 200-Transaction Threshold

Businesses that previously met the 200-transaction threshold but don’t meet the $100,000 gross receipts threshold must review their 12-month sales ending December 31, 2025.

Don’t begin to remit state and local SOT if you didn’t meet the threshold. Instead, impacted taxpayers should review and determine, on a rolling quarterly basis, whether the $100,000 threshold has been met.

IDOR will automatically change registration statuses to “voluntary service use tax” if the taxpayer, who isn’t otherwise considered a serviceperson maintaining an Illinois business, met the 200-transaction threshold in the past but not the $100,000 in cumulative gross receipts threshold from sales of service to purchasers in Illinois on their own sales. IDOR will notify taxpayers of their updated registration.

Need assistance evaluating how these rules affect your organization — and how to strengthen compliance while minimizing exposure? Anders State and Local Tax advisors can help you strengthen compliance and discover opportunities to reduce your tax burden. Request a meeting below for more information, including associated cost.