Direct farm businesses that sell food and/or other goods to customers are responsible for collecting state and local sales taxes. Direct farm businesses that purchase goods may be responsible for paying sales tax, but in some instances the purchases will be exempt.
Sales tax is levied on a business' receipts from the sale of tangible personal property to purchasers for use or consumption. Sales tax is actually a combination of occupation taxes that are imposed on a business' receipts from the sale of goods used or consumed by consumers, and use taxes that are imposed on consumers that purchase items for personal use or consumption from a business.
Sellers owe occupation taxes, which they reimburse themselves for by collecting a use tax from the consumer (86 IAC § 130.101(d)).
The Retailers' Occupation Use Tax Act and regulations govern occupation taxation. The Use Tax Act and regulations govern use taxation.
For an overview of occupation and use taxes (sales tax), see the State of Illinois Department of Revenue website.
Taxation of internet transactions is covered in the E-Commerce section.
Who must pay sales (occupation) tax?
Persons engaged in the business of selling tangible personal property in Illinois to purchasers for use or consumption must pay retailers' occupation taxes (86 IAC § 130.101). This includes agricultural producers (86 IAC 130.1905), agricultural cooperatives (86 IAC § 130.1945), nurserymen (86 IAC § 130.1965(c)), hatcheries (86 IAC § 130.1970), sellers of feed and breeding livestock (86 IAC § 130.2100), and vendors of meals (including restaurants and boarding houses) (86 IAC § 130.2145). If the direct farm business sells an item to a purchaser for resale, the transaction is exempt from occupation taxes (86 IAC § 130.120(c)). In a resale situation, the seller should obtain a certificate of resale from the purchaser to demonstrate that the transaction is indeed exempt (86 IAC § 130.1405). Some items are non-taxable or exempt from the occupation/use tax altogether (86 IAC § 130.120; 130.305-.351) (see direct farm purchases, below). Certain food items are taxed at a lower rate (see computation, below)
If a direct farm business operates a "place of public amusement" (e.g., a pumpkin patch) and auxiliary to the operation of that business refreshments, beverages, or other tangible personal property are sold to purchasers for use or consumption, occupation taxes apply (80 IAC § 130.2030(a)).
How is sales tax computed?
Tax liability is computed by applying the effective tax rate to the gross receipts from the sale (86 IAC § 130.101(a)(1); (b)). The term "gross receipts" is explained in the occupation tax regulations (86 IAC § 130.401). Illinois publishes a sales tax rate manual1 for businesses to reference in determining what rates apply in their location. The Department of Revenue also maintains a taxfinder website in which the user types in a location name to determine what rates apply.
The last section of the sales tax rate manual provides a breakdown of state sales tax rates. The state tax rate is 6.25% on general merchandise, and 1% on certain food purchases. 5% of the state sales tax on general merchandise goes to the state, 1% to the locality, and .25% to the county. 100% of the 1% state sales tax on food goes to the locality.
State sale tax rates for general merchandise and food sales vary depending on where the sale is made. For example, Champaign County has a combined general merchandise state sales tax rate of 6.50% (6.25% state and .25% county). So, if the direct farm business makes a sale of general merchandise subject to the occupation/use tax in an unincorporated area of Champaign County, the business would apply a 6.50% state sales tax rate to the sale. The City of Urbana has a 7.75% combined general merchandise state sales tax rate (6.25% state and 1.5% city). If the direct farm business hosts a farmer's market stand in the City of Urbana, sales at that stand of general merchandise would incur a 7.75% state sales tax. Any sale of food in Champaign County, or in the City of Urbana, is taxed at the 1% state sales tax rate, as no extra tax is imposed on food sales in those localities. An additional city or county tax on food does exist in some localities, however.
Some counties impose additional mass-transit taxes on general merchandise and/or food purchases. In this case, the retailer must determine the sales tax based on what township the purchase was made. Some municipalities impose an additional home-rule or non-home rule2 sales tax on purchases of general merchandise, in addition to the state sales tax. Also, some municipalities have created special taxation business districts within the municipality. These differentiations can be found in the sales tax rate manual.
Food for human consumption which is to be consumed off the premises, and is not for immediate consumption, is taxed at 1% (86 IAC § 130.310(a)). Food includes "any solid, liquid, powder or item intended by the seller primarily for human internal consumption, whether simple, compound or mixed, including foods such as condiments, spices, seasonings, vitamins, bottled water and ice (86 IAC § 130.310(b)). This definition is important in the case, for example, of a pumpkin patch that sells pie pumpkins and gourds. The pie pumpkin, if not intended for consumption on the premises, would be taxed at a 1% rate. The gourd, if not edible, is taxed at the 6.25% rate.
Restaurants, concession stands, snack shops, and other establishments that sell food primarily (more than 50%) in individualized servings are deemed to sell food for immediate consumption, and are taxed at the 6.25% rate (86 IAC § 130.310(b)(2)(B)). Also, any sales of hot food are taxed at the higher rate (86 IAC § 130.310(b)(2)(C)). Delicatessens, bakeries, markets and dairies that sell food primarily (more than 50%) in quantities greater than individual-sized servings are subject to the 1% rate. However, if the facility provides an area for the consumption of the food item on the premises (86 IAC § 130.310(b)(3)), the food is subject to the higher tax rate unless there is a separate system utilized to calculate sales of food for consumption on the premises and the area where food is sold for on-premises consumption is physically partitioned from other areas (86 IAC § 130.310(b)(3)).
The sale of soft drinks is taxed at the higher 6.25% rate regardless of where consumed (86 IAC § 130.310(b)(5)). Milk, coffee, tea, non-carbonated water, or fruit or vegetable drinks containing 50% or more juice are not soft drinks, and therefore if not consumed on premises, are subject to the 1% reduced rate (86 IAC § 130.310(b)(5)). Alcohol is subject to the higher rate (86 IAC § 130.310(b)(4)).
The regulations provide for methods of calculating tax on sales of items subject to differing tax rates (86 IAC § 150.525).
The retailer should provide the customer with a receipt showing details of the transaction (86 IAC § 150.601). Use tax should be stated as a separate item on the receipt (86 IAC § 150.401(b)). If it is not, the Department of Revenue will assume that the tax is not collected unless a sign is visible indicating that the sales price includes the tax (86 IAC § 150.401(c)). It is unlawful to represent to a customer that the sales tax will be absorbed by the seller, or that it will not be added to the sales price (86 IAC § 150.515).
How are sales taxes paid?
On the twentieth day of every calendar month, the business files a sales tax return for the preceding month with the Department of Revenue (86 IAC § 130.510(a)). This can be done electronically if certain conditions are met. Instructions on how to telefile can be found here. The electronic service is free-of-charge. The Department of Revenue may authorize quarterly filings if the average monthly sales tax liability does not exceed $200 (86 IAC § 130.502), or yearly if average monthly liability does not exceed $50 (86 IAC § 130.510). The tax is due at the time of filing (86 IAC § 130.525). Weekly payments are required when sales tax liability exceeds certain amounts. Returns must be filed for every reporting period, even if no tax is collected (86 IAC § 130.545). Each filing must contain a verification that the filing is made under penalty of perjury (86 IAC § 130.560).
The retailer can deduct, as an allowance for collecting the tax, 1.75% of the use tax collected, or $5.00 per calendar year, whichever is greater (86 IAC § 150.905). Retailers cannot claim the deduction if the tax is paid late.
Department of Revenue regulations explain what type of occupation tax records must be kept (86 IAC § 130.801-.825; 150.1305).
When a direct farm business purchases items from another retail business that are related to farm production, the purchase is exempt from the 6.25 % sales (use) tax (see 35 ILCS § 105/3-5). These include: farm chemicals; certain farm machinery and equipment and replacement parts (greenhouse structures such as horticultural polyhouses or hoop houses qualify as machinery or equipment, as well as lighting and mesh tables for the greenhouse, and carts protecting the plants during shipment); and, precision farming equipment such as computers and GPS devices. Farm production includes raising livestock, crops for human and livestock consumption, production of seed stock for purposes of providing a food product or for propagation of feed grains for animal consumption, animal husbandry, floriculture, viticulture, aquaculture, and horticulture (see 35 ILCS § 105/3-35; 86 IAC § 130.120 and .1955).
When a direct farm business purchases certain real or tangible personal property incident to the purchase of service from a serviceman that is farm machinery or equipment primarily for the purpose of farm production, the goods are exempt from the 6.25% service occupation/use tax (see 35 ILCS § 110/3-5). Farm machinery is defined in the statute (see 35 ILCS § 110/3-5(7)). The sale of farm chemicals incident to a spraying service is exempt from service use tax (see 86 IAC § 140.125(m)).
1 The Department of Revenue updates manuals periodically. The user should always check for the most recent version.
2 For an explanation of what home-rule and non home-rule forms of government are, click here.
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