On June 16, 2025, Illinois Governor JB Pritzker signed Public Act 104-0006 (HB 2755, the Bill), which modifies Illinois's income, franchise, and sales and use tax laws, as well as certain tax credit and incentive provisions, as part of the state's FY26 budget. Key changes in the Bill include:

• Switching from the Joyce to Finnigan method for apportioning income of multistate businesses
• Modifying the tax treatment of global intangible low-taxed income (GILTI)
• Repealing certain exceptions for the related-party interest and intangible expense addback requirements
• Establishing an ordering rule for the IRC Section 163(j) interest expense limitation that is allocated to interest expense paid to a foreign related party
• Modifying rules for the allocation and apportionment to Illinois of gain or loss from the sale of a passthrough entity interest
• Creating the Advancing Innovative Manufacturing for Illinois Tax Credit
• Extending the hotel occupancy tax to short-term rentals
• Making various changes to the state's sales and use tax¹ provisions for remote retailers, marketplace facilitators and servicemen, including the elimination of the 200 separate transaction nexus thresholds
• Increasing taxes imposed on sports wagering

The Bill also establishes three separate tax amnesty programs — a general tax amnesty program applicable to taxes administered by the Illinois Department of Revenue, a franchise tax amnesty program, and a remote retailer amnesty program. A detailed discussion of these amnesty programs is provided in Tax Alert 2025-1373.

Income tax changes

Switch from Joyce to Finnigan

For tax years ending on or after December 31, 2025, the Bill switches Illinois's method for apportioning the income of multistate businesses from Joyce to Finnigan. Under the prior Joyce method, only members of a unitary group with nexus in Illinois sourced sales to the state for apportionment purposes. Under the Finnigan method, if one member of a unitary group has Illinois nexus, the Illinois sales of all members of the unitary business group will be sourced to the state. The Illinois sales of non-nexus members will be aggregated and attributed to the nexus members based on a ratio of a nexus member's Illinois sales to total Illinois sales of all nexus members. For purposes of applying any Illinois sourcing provision that relies on being taxable in another state (e.g., throwback and throwout), if any member of the unitary group is taxable in the other state, then all members are deemed taxable in that other state.

Other than the sourcing of gains from the sale of a partnership interest (discussed later), there were no other substantive changes to the Illinois apportionment provisions.

EY observes: This change marks a departure from Illinois's decades-old use of the Joyce rule. Taxpayers should be aware that because the unitary group members determine their respective Illinois apportionment, continuing to gather and evaluate information at the individual entity level remains important.

GILTI income

For tax years ending on or after December 31, 2025, the Bill modifies the Illinois income tax subtraction modification for foreign dividends to include a deduction for 50% of GILTI regardless of any previously applicable ownership percentages. The Illinois addition modifications for the IRC Section 250 deduction remain in place. Taxpayers that previously received 100% or 65% deductions will now see 50% of gross GILTI included in their tax base.

Limiting exceptions to interest and intangible expenses paid to foreign related parties

For tax years ending on or after December 31, 2025, the Bill eliminates certain exceptions to the interest expense and intangible expense addbacks for payments to related parties. The repealed exceptions are those for a recipient's income being subject to tax in a foreign country or the expense not being for tax avoidance purposes using arm's-length rates. With the repeal of those exceptions, only two remain — one for interest or intangible expenses paid in the same year to a person that is not a related party (i.e., the conduit exception), and another when the adjustment is unreasonable based on clear and convincing evidence.

EY observes: The Department of Revenue (Department) is expected to revise the existing addback regulation for these changes and provide guidance as to what documentation may be required to claim an exception.²

Ordering rule for the IRC Section 163(j) limitation for the foreign related party interest expense addback

For tax years ending on or after December 31, 2025, the Bill establishes an ordering rule for the IRC Section 163(j) business interest expense limitation for deductible interest expense paid to a foreign related party. Under prior law, the limitation was applied pro-rata based on the percentage of interest expense paid to the foreign related party over the total interest expense subject to the limitation. Under the Bill, the limitation is first treated as being attributable to interest expense paid to persons who are not foreign related parties. Any remaining limitation is then attributable to interest expense paid to foreign related persons.

EY observes: The provision of an ordering rule means that taxpayers may have more foreign related party interest expense potentially subject to addback than what was deducted for federal income tax purposes.

Gains and losses from the sale of partnership and Subchapter S corporation interests

The Bill modifies rules for allocating and apportioning gain or loss from the sale or exchange of a partnership or Subchapter S corporation (collectively, pass-through entity (PTE)) interest to Illinois. Under the new provision, the gain on the PTE interest — other than an interest in an investment partnership — is allocated or apportioned to Illinois based on the average of the current year and prior two year's Illinois apportionment percentage of the PTE that was sold or exchanged.³ When the gain on the sale of the PTE is allocable, this average percentage of the gain or loss is directly allocable to Illinois. Under prior law, the sale or exchange was allocated to the partner's or shareholder's commercial domicile.

When the gain (excluding losses) on the sale or exchange of the PTE is apportionable income, the average percentage of the gain amount is included in the numerator of the apportionment factor with the entire gain in the denominator. Under prior law, the gain was sourced to the location of the income-producing activities or to the commercial domicile of the customer if the partner was a dealer with respect to PTE interests.

EY observes: When the gain is treated as apportionable, special consideration should be given as to whether the occasional sale rule applies. The lack of a specified effective date for these provisions means they are effective upon enactment. Taxpayers should carefully review how the new allocation and apportionment rules may affect the tax treatment of PTE sales.

Sales, use, excise and other transaction taxes

Hotel operators' occupation tax

The expansion of the hotel operators' occupation tax in July 2024 to include re-renters will now capture all short-term rentals by any person, including those who operate online platforms for vacation and similar temporary stays. (Pub. Act 103-0592; discussed in Tax Alert 2024-1178.) Effective July 1, 2025, the definition of "hotel" is expanded to include short-term rentals and the definitions of "rent" and "rental" are amended to delete language that had excluded fees, charges or commissions received from a short-term rental.

Remote retailers, marketplace facilitators and serviceman

The Bill amends economic nexus provisions under the retailer's occupation tax (ROT), use tax, the service use tax (SUT) and the service occupation tax (SOT) for remote retailers, marketplace facilitators and servicemen by eliminating the 200 separate transactions threshold. Beginning January 1, 2026, the Bill will treat a retailer, marketplace facilitator or serviceman as maintaining a place of business in the state if the following economic nexus threshold is met:

• Retailers - Cumulative gross receipts of $100,000 or more from sales, of tangible personal property to purchasers in Illinois from outside the state (change made to ROT and use tax),
• Marketplace facilitators - Cumulative gross receipts of $100,000 or more from sales of tangible personal property or services to Illinois purchasers by the marketplace facilitator and by marketplace sellers/marketplace servicemen selling through the marketplace (change made to ROT, use tax, SUT, and SOT)
• Servicemen - Cumulative gross receipts of $100,000 or more from sales of services to Illinois purchasers from outside the state (change made to the SUT)

The Bill makes clarifying changes to SOT provisions. Beginning January 1, 2026, a serviceman maintaining a place of business in Illinois that makes sales of services to Illinois customers from a location outside the state will be treated as engaging in the business of making such sales in Illinois for purposes of the SOT.

Such servicemen will be liable for all applicable state and local SOTs administered by the Department on all tangible personal property transferred incidental to the sale of services made by the serviceman to an Illinois customer from a location outside the state. A similar liability applies to marketplace facilitators that meet the SOT's $100,000 threshold. Further, under the SOT, a marketplace facilitator is entitled to any credits, deductions or adjustments to the sales price otherwise provided to a marketplace serviceman (e.g., discounts, coupons, rebates, vendors' discounts). The Bill requires marketplace facilitators to collect and remit tax, make certain certifications to marketplace servicemen, and retain specific records. The Bill also requires marketplace servicemen to provide marketplace facilitators with certain information.

The SUT repeals provisions that held marketplace facilitators and affiliated marketplace servicemen jointly and severally liable for a tax liability from the sale of a service by the marketplace serviceman on the marketplace. A marketplace facilitator is required to collect and remit taxes under the SUT, except when it is relieved of the obligation to remit the tax because it paid the Department SOT on the same transaction. A marketplace serviceman that maintains a place of business in Illinois may have to collect and remit tax when the Department is prohibited from enforcing a marketplace facilitator's obligation to collect and remit tax.

Retailers, marketplace facilitators and servicemen will determine whether they meet the applicable threshold for the preceding 12-month period on a quarterly basis on the last day of March, June, September and December. If the retailer meets the threshold for the preceding 12-month period, it will be required to collect and remit the required tax.

The law also clarifies consumers may have a use tax liability for any taxable transaction for which a certified service provider (CSPs) acting on behalf of a remote retailer or marketplace facilitator does not collect and remit the proper amount of tax due.

The SOT rules allow service providers who meet de minimis thresholds for the cost ratio of personal property transferred to remit tax based on the cost price of the property transferred. Beginning January 1, 2026, this election is also allowed for servicemen maintaining a place of business in the state who are not required to register to remit ROT. With respect to sales of service subject to SOT and SUT made via the marketplace, the rate is 6.25% of 50% of the entire billing to the service customer for all sales of services made through a marketplace that has met the economic nexus threshold. The Bill provides that in no event will 50% of the entire billing be less than the cost price of the property to the marketplace serviceman or marketplace facilitator on its own sales of services.

The Bill amends provisions of the Leveling the Playing Field for Illinois Retail Act to add specific references to retailers and servicemen maintaining a place of business in this state. To protect existing local tax revenue, the Bill also clarifies that sourcing rules remain unchanged for all sales made to Illinois customers from an in-state location by servicemen (in addition to retailers) maintaining a physical presence in Illinois i.e., an in-state serviceman. Lastly, it provides that in addition to remote retailers, a certified service provider (or CSP) may act as an agent to perform sales and use tax functions of retailers and servicemen maintaining a place of business in Illinois. Various CSP-related provisions have been amended to add references to such businesses.

Tax in lieu of penalty related to ROT sourcing

The Bill allows the Department to assess a 15% tax on the gross receipts of sales sourced under the ROT to the Illinois location to which tangible personal property is shipped or delivered or at which the purchaser takes possession, when the taxpayer does not provide the documents (e.g., information, schedules, other supporting documentation) necessary to determine the location. Tax imposed under this provision is in lieu of imposing a penalty. This change took effect upon becoming law.

Sports wagering

Effective July 1, 2025, a wager tax will be imposed on each master sports licensee for each individual wager placed with a master sports licensee over the Internet or through a mobile application. The amount of tax is $0.25 per wager for the first 20 million annual combined Tier 1 and Tier 2 wagers,⁴ increased to $0.50 per wager for each wager over 20 million.

Telecommunications Excise Tax Act

Beginning July 1, 2025, the tax imposed on intrastate and interstate telecommunications is increased from 7% to 8.65%, with the increase being designated as the statewide 9-8-8 surcharge ("9-8-8" is a universal telephone line for national suicide prevention and mental health concerns).To prevent multistate taxation of interstate telecommunications, a taxpayer who provides proof that it paid tax to another state on the "act or privilege" subject to Illinois tax, will be allowed a credit against the telecommunications excise in an amount equal to the tax due and paid in the other state.

Other changes

Among other changes, additional tax-related provisions include:

• Creating the Advancing Innovative Manufacturing for Illinois Tax Credit Act. For tax years beginning on or after January 1, 2026, any taxpayer, entitled to a credit under an Advancing Innovative Manufacturing for Illinois Agreement with the Department of Commerce and Economic Opportunity (DCEO), may claim the credit against its income tax in the year of the credit award. The amount of credit available is a percentage of the applicant's total capital improvement investment for the year for which the credit is sought, with the percentage ranging from 3% up to 7% depending on the amount of the capital investment. Any unused credit may be carried forward for 10 years. If the taxpayer earning the income tax credit is a partnership or subchapter S corporation, the credit may be passed through to the partners or shareholders.
• Limiting qualification for the Economic Development for a Growing Economy (EDGE) tax credit to capital improvements of at least $100 million and retention of at least 500 full-time jobs. Further, the election to utilize an EDGE credit award against the withholding tax must be made in an agreement with the DCEO and remains in effect for the duration of the agreement.
• Expanding, effective July 1, 2025, the definition of "tobacco products" to include "any product that is made from or derived from tobacco, or that contains nicotine whether natural or synthetic, that is intended for human consumption or is likely to be consumed," but does not include smoking cessation products or nicotine replacement therapy products.

While not part of the budget, Public Act 104-0004 (HB 742, enacted June 16, 2025) delays by one year to July 1, 2026, the effective date of the Interchange Prohibition Act, which prohibits payment processors, acquirer banks or card issuers from charging merchants an interchange fee for the tax (limited to Illinois sales or excise taxes) or the gratuity portion of any electronic payment. (See Tax Alert 2024-1178). The Act is subject to ongoing litigation.