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Sales Tax Exemptions - FAQs

The administrative code references listed below may be accessed at https://ilga.gov/agencies/JCAR/AdminCode on the Illinois General Assembly's website.

Sales — Certain transactions in Illinois are exempt from tax. 

PIO-101 - Illinois Sales & Use Tax Matrix

Commonly asked questions regarding sales tax transactions and exemptions can be found on this webpage.

Organizations — Qualified organizations, as determined by the department, are exempt from paying sales and use taxes on most purchases in Illinois. Upon approval, we issue each organization a sales tax exemption number (e-number). The organization must give this number to a merchant in order to make certain purchases tax‑free. More information is available on the PIO-37 webpage.

Common Questions about Sales Tax Transactions

What types of sales are exempt from tax?

Illinois allows several exemptions from occupation and use taxes. See the 86 Ill. Adm. Code Sections 130.120, 140.125, 150.301, and 160.110.

High Rate and Low Rate Sales Tax Questions

What is significant about retail sales of qualifying food, drugs, and medical appliances?

In a retail sale, qualifying food, drugs, and medical appliances are taxed at a lower rate of 1% than general merchandise which is taxed at 6.25%. (Locally imposed taxes may also apply.)

For more information on what food, drug, and medical appliance sales qualify for the reduced rate, see PIO-101, Illinois Sales and Use Tax Matrix. See also 86 Ill. Adm. Code Sections 130.310 and 130.311. 

How do I know what rate of sales tax to charge on food when I sell both food for immediate consumption and grocery-type items?

Whether food sold at retail is taxed at the 6.25% high rate as “food prepared for immediate consumption” or the 1% low rate as “food prepared for consumption off the premises where it is sold” depends upon two distinct factors.

  1. The first factor is whether the retailer selling the food provides an area for on-premises consumption of food. If so, a rebuttable presumption is created that all sales of food by that retailer are considered to be prepared for immediate consumption and subject to tax at the high rate. As a result of this presumption, even bulk food could potentially be taxable at the high rate. However, this presumption is rebutted if a retailer demonstrates that:
    • the area for on-premises consumption is physically separated or otherwise distinguishable from the area where food not for immediate consumption is sold; and
    • the retailer has a separate means of recording and accounting for collection of receipts from sales of both high-rate and low-rate foods.
  2. The second factor is the nature of the food item being sold. Some foods, such as hot foods, are always considered to be food prepared for immediate consumption, and thus subject to the high rate of tax.

See 86 Ill. Adm. Code 130.310 for more details on qualifying and non-qualifying food, soft drinks, and candy.

Are sales of candy taxed the same as other food?

No. Candy is taxed at the general merchandise sales tax rate of 6.25%. "Candy" is defined as a preparation of sugar, honey, or other natural or artificial sweeteners, in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. Candy does not include any preparation that contains flour or requires refrigeration. 86 Ill. Adm. Code 130.310(d)(7).

What is the sales tax rate for soft drinks?

"Soft drink" is any non-alcoholic beverage containing natural or artificial sweeteners. This includes, but is not limited to, soda, sport or energy drinks, sweetened tea, waters containing natural or artificial sweeteners, beverages containing 50 percent or less fruits or vegetable juice, and all other preparations commonly known as soft drinks. "Soft drinks" are taxed as general merchandise (high rate).

"Soft drink" does not include any beverage containing milk or milk products, soy, rice or similar milk substitutes, unsweetened teas, drinks with greater than 50 percent of vegetable or fruit juice by volume, and carbonated or uncarbonated water that contains no natural or artificial sweeteners. These items are taxed as food (low rate).

See Illinois Administrative Code, Title 86, Section 130.310 for more details on qualifying and non-qualifying Food, Soft Drinks and Candy. Visit the Chicago Home Rule Municipal Soft Drink Retailers' Occupation Tax page for more information.

Taxability Questions

For purposes of determining the selling price subject to sales tax, are incentives such as rebates, discounts, or coupons taxable?

In a retail transaction, incentives for retail purchasers, such as coupons, discounts, or rebates, are considered part of the selling price and subject to sales tax if the retailer receives reimbursement for offering the incentive, as with a manufacturer's rebate or an employee discount.

Incentives are not subject to sales tax if the retailer does not receive reimbursement for the cost of the incentive from any source.

See 86 Ill. Adm. Code 130.401 and 130.2125 for more information.

Are shipping and handling charges taxable?

In a sale at retail, shipping and handling charges are taxable when:

  • the transportation and delivery charges are not separately identified to the purchaser on the contract or invoice; or
  • the transportation and delivery charges are separately identified to the purchaser on the contract or invoice, but the seller does not offer the purchaser the option to receive the property in any manner except by the payment of transportation and delivery charges added to the selling price of the item (e.g., no pick-up option is offered to the purchaser, or the purchaser does not qualify for free transportation or delivery).

See 86 Ill. Admin. Code Section 130.415 for more information.

Is computer software taxable?

Retail sales of canned software (pre-written software) which is intended for general or repeated use, regardless of the form in which it is transmitted, including electronic means (i.e., downloaded), is subject to tax. A license of computer software is not taxable if specific conditions are met. 86 Ill. Adm. Code 130.1935 (a)(1). Additionally, sales of custom computer software are not taxable provided certain criteria are met. 86 Ill. Adm. Code 130.1935 (c)(1).

Are sales of maintenance agreements or warranty contracts taxable?

As part of a retail sale, charges for maintenance agreements or warranty contracts are taxable if they are included in the selling price of the tangible personal property but are not taxable if they are sold separately.

The seller of maintenance agreements and warranty contracts does incur use tax liability on the seller’s cost price of any tangible personal property transferred incident to the maintenance agreement. See 86 Ill. Adm. Code 140.301.

Is labor taxable?

Whether labor is subject to sales tax depends upon the circumstances under which the labor is performed:

  • If tangible personal property is not transferred, labor is not taxable.
  • If custom-made items are sold at retail, labor is taxable. See 86 Ill. Admin. Code Section 130.2140.

With regard to installation charges, labor charges that are contracted for separately from the selling price of the tangible personal property are not taxable. Labor charges that are a part of the selling price are taxable. See 86 Ill. Adm. Code Section 130.450.