Illinois retailers taxed $186M by capping sales tax credit

A cap on the retailers’ sales tax credit will effectively hikes taxes on Illinois retailers by $186 million. Retailers are already facing razor-thin margins, but the record $53.1 billion state budget required $1.1 billion in new taxes.

A proposed cap on the money Illinois retailers keep as compensation for collecting sales taxes for government awaits Gov. J.B. Pritzker’s signature as part of the record $53.1 billion state budget.

The cap would effectively hike taxes on retailers by $186 million next fiscal year. Expect Pritzker to sign it; it was his idea.

Illinois retailers collect sales and use taxes on behalf of state and local governments. They currently receive 1.75% of the sales taxes as reimbursement for collecting, administering and sending the money to taxing bodies.

But Pritzker’s 2025 budget caps the amount of sales taxes retailers can retain at just $1,000 per month. There was previously no cap.

Budget experts predicted the sales tax credit cap would generate $101 million in new revenue for the state and $85 million for local governments. Retail experts argue it unfairly shifts costs onto retailers, regardless of their size.

“They’re paying the cost of tax collection and remittance on behalf of the state for every transaction that occurs, particularly electronic transactions which now account for more than 80% of all transactions, so it’s not fair to shift more of that cost onto the backs of retailers regardless of their size,” Rob Karr, president of the Illinois Retail Merchants Association, told The Center Square.

Karr warned the sales tax credit cap would impact retailers of all sizes, from independent grocers to corner hardware stores. In addition to the Illinois Retail Merchants Association, the Illinois Chamber of Commerce also opposed the cap when Pritzker first proposed it in February.

In a statement, the chamber called the cap “a stealth tax increase on our retail sector, who are managing increased operating expenses due to rising labor and raw materials forcing them to operate on already razor-thin margins.”

Illinois levies the highest sales taxes in the Midwest at a combined state and average local sales tax rate of 8.86%, the seventh-highest in the nation.

Illinois’ poor ranking stems from the fact the state not only levies high state-level sales taxes but local governments also impose some of the highest local sales taxes in the nation.

Chicagoans pay the second-highest sales tax rate of any major city, according to the most recent analysis from the Tax Foundation.

Illinois already ranks 37th in the nation for its state business tax climate and worse than any neighboring state.

Capping the retailers’ discount will hurt businesses, especially in Chicago. Because retailers can only absorb so much and still stay in business, expect that $186 million to be passed on to Illinoisans when they next visit their local retailer.