In Illinois, as in many states, three things are the chief subjects of taxation: property, income and consumption. That last one is where sales and use tax come from. A consumption tax is a tax assessed on what a taxpayer uses, as opposed to income tax, a tax on wages, and property tax, a tax on what a taxpayer owns. In Illinois, consumption tax takes the form of four related taxes which are commonly referred to by the abbreviations ROT, SOT, RUT and SUT.
ROT is the Retail Occupation Tax and SOT is the Service Occupation Tax. The difference between is just the nature of what’s being purchased, goods for retail and service for service. Otherwise the taxes are largely the same thing. These are what most people would call sales tax. You got to a store or a service provider and tax is added to your bill. That’s ROT or SOT. The business collects the tax at the time the purchase is made and later remits those taxes to the state on its regularly filed sales tax returns. The tax is technically assessed on the consumer but it’s the business’s job to collect. Failure to do so or filing false sales tax returns can carry harsh penalties for business.
RUT and SUT are the Retail Use Tax and the Service Use Tax. Use tax isn’t as well known as sales tax, probably because you’ll never see a line item for it on a receipt. The point of use tax is to catch what sales tax misses. It’s assessed on goods and services used in the State of Illinois for which the consumer paid less than Illinois’s sales tax rate–currently that’s 6.75%. That means if you buy something online or by catalog and pay no sales tax on that purchase, you now owe use tax on it (if you use the good or service within Illinois) equal to 6.75% for most products and services (certain purchases are eligible for a reduced rate, e.g. food and some prescription drugs, while other purchases like automobiles incur higher rates). Similarly, if you purchase something in another state and pay less than Illinois’s sales tax rate and you use the item in Illinois, you owe use tax equal to the sales tax difference. That is, if you pay 4% sales tax for something and use it in Illinois, you owe use tax equal to 2.75%, the Illinois rate of 6.75% less the 4% you paid.
Unlike sales tax, it is the job of the consumer, not the merchant or service provider, to collect use tax and remit it to the state. It is thus the consumer who might face penalties for failure to pay the tax owed. For the last several years, Illinois income tax returns (Forms IL-1040) have included line items regarding use tax.
In the case of all four taxes–ROT, SOT, RUT, SUT–the penalties for failure to file or for filing incorrect returns, can be severe. For years the Attorney General has been aggressive in investigating and prosecuting sales and use tax evaders. Gas station owners have gotten into the news repeatedly but other business have been targeted, including restaurants, liquor stores, doctor offices, and especially business that deal in frequent cash transactions.
Horowitz Law Offices has represented numerous taxpayers before the Illinois Department of Revenue regarding sales and use tax audits, motions before the Board of Appeals, and all other Illinois tax matters. You are welcome to contact us at 312-787-5533 or firstname.lastname@example.org