Illinois expands destination sourcing rules for certain service transactions

What changed

• Current rule: Destination sourcing primarily applies to retail sales of tangible personal property.
• New rule: Destination sourcing rules will also apply to certain sales of service when tangible personal property is transferred incident to the service.
• Effective date: January 1, 2026.

Examples of how this applies

Destination sourcing means sales tax is calculated based on where the customer receives or uses the product, not where the seller is located. Under this change, Illinois sellers must apply the state and local tax rates in effect at the customer’s address for covered service transactions.

For example:

• A service provider installs equipment at a customer’s Illinois location and transfers tangible personal property as part of the service. Sales tax is sourced to the customer’s location, not the provider’s office.
• A marketplace service provider sells a taxable service that includes parts shipped to an Illinois customer. The applicable tax rate is based on the delivery address.
• A business performs services from a single Illinois location but serves customers across multiple cities. Transactions that include taxable tangible personal property must be reported using the destination jurisdiction for each customer.

These examples illustrate sourcing changes only. Taxability of the service itself continues to depend on existing Illinois rules.

Who this will affect

• Service providers transferring tangible personal property as part of a service
• Marketplace service providers and facilitators
• Sellers reporting Service Occupation Tax transactions
• Businesses making destination-based sales into multiple Illinois jurisdictions

If you use TaxCloud: TaxCloud applies destination-based sourcing rules automatically where required, including upcoming expansions affecting service transactions, so sellers do not need to manage jurisdiction logic manually.

What sellers should review now

• Identify service transactions that include transfers of tangible personal property.
• Confirm those transactions will need to be sourced to the customer’s location beginning January 1, 2026.
• Review multi-location reporting setups for destination-based service transactions.
• After sourcing logic is updated, prepare to report January 2026 activity correctly on ST-1 and ST-2 returns.