Illinois enacts significant tax bill to raise revenue

Executive summary

On June 16, 2025, Illinois Gov. JB Pritzker signed House Bill 2755, the state’s 2026 fiscal year budget. The $55.2 billion budget raises revenue by increasing taxes on corporations, tobacco products, sports betting transactions, short-term rentals and telecommunications, among other changes. It also establishes general and remote retailer tax amnesty programs. This article provides a highlighted summary of the more salient provisions for business taxpayers.

Corporate and individual income tax provisions

Taxation of global intangible low-taxed income (GILTI)

For tax years ending on or after Dec. 31, 2025, the bill reduces the dividends received deduction from 100% to 50% of the amount of GILTI under section 951A. Currently, GILTI is not subject to Illinois corporate income tax. The provision that disallows a deduction from Illinois taxable income for the amount of the GILTI deduction under section 250(a)(1)(B)(i) remains unchanged.

Income apportionment changes

For tax years ending on or after Dec. 31, 2025, the bill adopts the ‘Finnigan’ approach for calculating the sales factor apportionment of a combined group. Specifically, the numerator of a unitary group’s sales factor apportionment formula will include Illinois sourced sales from all entities in the group. Currently, Illinois utilizes the ‘Joyce’ method, where the sales factor numerator is limited to the Illinois sourced sales of only the combined group members with nexus in the state. For purposes of the state’s ‘throwback rule,’ the bill clarifies that in determining whether a combined group member is taxable in another state, the “taxpayer shall be considered taxable in any state in which any member of its unitary business group is considered taxable.”

Interest and intangible expense addition modifications

Currently, Illinois requires the addition of certain interest and intangible expenses paid or accrued to a related foreign party with 80% or more of its total business activity outside the U.S. during the tax year. However, several exceptions apply to the addback requirement. For tax years ending on or after Dec. 31, 2025, two exceptions from the addback requirement will be eliminated:

• Subject to tax exception: The bill repeals the exception for interest paid or accrued to a related party to the extent that the party receiving the interest income was subject to a net income tax in a foreign country or another state jurisdiction.
• Not for purposes of tax avoidance exception: The bill repeals the exception for interest paid or accrued to a related party to the extent the interest expense is paid in connection with an arm’s length agreement and is not for the purposes of Illinois corporate income tax avoidance.

Two remaining exceptions under current law would continue to apply, including the conduit exception, where the foreign related party pays the interest or intangible expense to an unrelated party during the same taxable year. Additionally, the addback will not be required if the taxpayer can demonstrate the modification is unreasonable or otherwise comes to an agreement with the state under an alternative apportionment method.

Furthermore, the legislation clarifies that when applying the section 163(j) interest expense limitation, the deductible business interest expense would be allocated first to non-foreign persons and then to foreign persons.

Capital gains and losses from the sale of certain pass-through entities

The bill provides that gains and losses from sales or exchanges of an S corporation or from an interest in a partnership, other than an investment partnership, are allocated to Illinois if the pass-through entity is taxable in Illinois. The gain and losses are allocated in proportion to the average of the pass-through entity’s Illinois apportionment factor in the year of the sale or exchange and the immediately two tax years immediately preceding the year of the sale or exchange.

Sales tax nexus and sourcing

Nexus thresholds revisited

Effective Jan. 1, 2026, Illinois will eliminate the 200-transaction threshold for determining economic sales tax nexus for both remote retailers and marketplaces. Economic sales tax nexus will be determined based solely on whether sales are $100,000 or more in the preceding 12-month period. The law requires remote retailers to determine quarterly whether the threshold has been met.

Illinois is the second state this year to remove the transaction threshold after Utah did so effective July 1, 2025. Indiana, North Carolina and Wyoming passed legislation to eliminate the transaction threshold last year, and over a dozen states in total have removed the transaction threshold since the 2018 South Dakota v. Wayfair decision. Remote sellers should consider review of their current economic nexus determinations, especially if nexus has been previously established in Illinois by a remote retailer because of the transaction threshold.

Sourcing continues modernization

Recall that the Leveling the Playing Field Act in 2021 required remote sellers (those with economic nexus, but not maintaining a place of business in Illinois) to collect tax based on the destination rate. At that time, retailers maintaining a place of business in Illinois but shipping from out of state continued to collect sales tax based on the transaction’s origin. If the ‘origin’ was outside of Illinois (i.e., the property was shipped from outside the state), the retailer would collect the 6.25% Illinois state rate. Due to legislation enacted last year, and effective Jan. 1, 2025, sellers maintaining a place of business in Illinois that are selling or shipping from outside the state collect the tax based on the destination rate.

House Bill 2755 applies ‘Leveling the Playing Field’ to the service occupation tax (SOT) and the service use tax (SUT). Effective Jan. 1, 2026, a ‘serviceman’ with nexus in the state is now required to collect and remit both state taxes and applicable local taxes when a service is provided from outside the state to an Illinois customer. Previously, these servicemen collected and remitted only the state 6.25% tax.

Illinois schedules multiple amnesty programs

General tax amnesty programs in brief

House Bill 2755 directs the Illinois Department of Revenue to establish an amnesty program for all taxpayers owing any tax collected by the department for the period from Oct. 1, 2025, through Nov. 15, 2025, for taxes due after June 30, 2018, and before July 1, 2024. Eligible taxpayers granted amnesty will receive both penalties and interest waiver. The department will not seek civil or criminal prosecution for taxpayers granted amnesty. Failure to pay the taxes due for applicable periods will invalidate any penalties or interest waiver granted.

Participation in the amnesty program does not prohibit a taxpayer from claiming a refund for an issue unrelated to the issues for which the taxpayer claimed amnesty. Taxpayers may also claim a refund for any overpayment of tax resulting from estimating a non-final liability for the amnesty program pursuant to the state provisions relating to federal adjustments.

Additionally, a franchise tax and license fee amnesty is scheduled to occur over the same period as the general tax amnesty program, and is limited to franchise tax or license fee liabilities for tax periods ending after June 30, 2019, and on or before June 30, 2025. The Illinois Secretary of State will waive all interest and penalties upon payment of the franchise tax and license fees due.

Remote retailer amnesty program

The bill also establishes a Remote Retailer Amnesty Program for remote retailers that owe state or local retailers’ occupation taxes on certain transactions for the period Aug. 1, 2026, through Oct. 31, 2026, for sales that occurred from Jan. 1, 2021, through June 30, 2026. Eligible transactions include sales of tangible personal property by a remote retailer to an Illinois customer that required the retailer to ship or otherwise deliver the property to an address in Illinois.

Qualifying remote retailers participating in the program will report any remote taxes due on eligible transactions at a ‘simplified retailers’ occupation tax rate’ in lieu of any state and local retailers’ occupation taxes at the rates provided by law. The amnesty tax rate is the greater of either 1) 9% of gross receipts from sales of tangible personal property subject to the 6.25% state rate or 1.75% of gross receipts from the sales of tangible personal property subject to the 1% state rate and for food for human consumption that is consumed off premises, but excluding cannabis products and alcoholic beverages, or 2) tax collected but unremitted. Retailers granted amnesty will receive waiver of interest and penalties.

Few states have adopted amnesty programs in recent years, with the last state amnesty program run by Massachusetts in late 2024. The last Illinois program ended Nov. 15, 2019. The newly scheduled Illinois programs offer attractive opportunities for taxpayers to become compliant with the state and local taxes and mitigate historic and ongoing exposures. Additionally, states rarely offer waiver of both penalties and interest with longer periods for eligible taxes. Remote retailers should consider not only the simplified rate calculations in the remote retailer amnesty program, but also a review of current processes to ensure ongoing compliance.

Miscellaneous tax changes

The following are brief summaries of several other tax changes:

• Effective July 1, 2025, the definition of ‘tobacco products’ is amended to include products made or derived from tobacco, or that contain nicotine whether natural or synthetic, including nicotine pouches, lozenges and gum. Beginning July 1, the tax rate on the wholesale price of tobacco products is also increased to 45% from 36%.
• Effective July 1, 2025, the state will impose a tax on companies that operate online or mobile sports wagering for the privilege of doing business in Illinois. The tax will be $0.25 per wager for the first 20 million wagers and $0.50 per wager beyond that threshold. The receipts must be deposited into the state’s Sports Wagering Fund monthly.
• Effective July 1, 2025, several definitions related to the Hotel Operators’ Occupation Tax are amended to eliminate the exclusion of short-term rentals for the purposes of re-renters of hotel rooms. This effectively requires certain rental platforms to collect the hotel tax on short-term rentals.
• Effective July 1, 2025, the tax on intrastate telecommunications increases from 7% to 8.65%. The 1.65% increase is designated as a 9-8-8 surcharge that will be used to support and enhance the Suicide and Crisis Lifeline hotline.
• Effective Jan. 1, 2026, a new Advancing Innovative Manufacturing for Illinois Tax Credit of up to 7% of the applicant’s qualifying capital investment for the year the credit is sought.

Taxpayers with questions about any of the tax changes adopted by the fiscal year 2026 budget should speak to their Illinois tax advisers for more information.