When merchandise was returned for less than the original price because of a restocking policy, did Illinois require a full sales-tax refund?

Plain-English summary

A retailer should refund all sales tax from the original merchandise purchase even when a restocking or reshelving fee reduced the customer's price refund. The amount retained as the restocking fee was not taxable gross receipts.

Only the person that remitted tax to the Department could seek the corresponding credit or refund. That retailer first had to return the collected tax to the customer and document the repayment.

If the retailer documented that it returned all original tax, it could deduct all gross receipts from the original sale on the return for the period in which the refund occurred. If it returned only part of the tax, it could deduct only the gross receipts corresponding to that tax refund. Any unreturned excess collection had to be remitted to the Department or refunded to the customer.

The requester described policies that sometimes included or excluded shipping charges, but the Department's response gave the general merchandise-return rule rather than a separate conclusion for each shipping variation.

What this means for you

Keep evidence of the merchandise return, the customer's price refund, and the exact tax refunded. The tax credit depends on returning the tax burden to the customer, not simply retaining a restocking fee.

Common questions

Q: Was the retained restocking fee taxable?
A: No. The GIL said it was not taxable gross receipts.

Q: Could the retailer keep part of the original tax because the price refund was only 90%?
A: No. The GIL said all tax should be returned when the merchandise was returned.

Citations and references

• 86 Ill. Adm. Code 130.401(b)
• 86 Ill. Adm. Code 130.1501
• 35 ILCS 120/2-40
• 35 ILCS 105/3 and 86 Ill. Adm. Code 150.101

Subject

Miscellaneous

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0031.pdf

Original ruling text

ST 10-0031-GIL 04/01/2010 MISCELLANEOUS
This letter concerns returns of merchandise. See 86 Ill. Adm. Code 130.401(b).
GIL.)

(This is a

April 1, 2010

Dear Xxxxx:
This letter is in response to your letter dated July 23, 2009, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
This letter is a request for a sales tax ruling on returned merchandise.
I work as a tax advisor in the field of state and local taxes for a number of direct selling
companies (AKA multi level and network marketing).
In support of the request, I state the following:
I.

Background

These companies have entered into an agreement or arrangement with your state to
administer sales taxes on behalf of their independent sellers.
Under this agreement or arrangement, the company precollects the applicable sales tax
based on the suggested retail price (or actual sales price if known) of taxable products
including shipping charges if taxable and the ship-to-address.
All of these companies have a buy back policy.
Under the terms of their policy, the company will:

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•
•
•

Refund the full purchase price if their independent seller or customer of the
independent seller is not satisfied with the product including shipping charges or
Refund the full purchase price if their independent seller or customer of the
independent seller is not satisfied with the product excluding shipping charges.
Refund 90% of the purchase price of marketable products if returned within one
year from date of purchase including shipping charges or
Refund 90% of the purchase price of marketable products if returned within one
year from date of purchase excluding shipping charges.

II.

Ruling Requested

•

If the independent seller or their customer returns merchandise pursuant to this
policy and receives a full refund including shipping charges, are they entitled to a
full refund of the sales tax charged?
If the independent seller or their customer returns merchandise pursuant to this
policy and receives a full refund excluding shipping charges, are they entitled to a
full refund of the sales tax charged?
If the independent seller or their customer returns merchandise pursuant to this
policy and receives less than the original purchase price including shipping
charges, are they entitled to a full refund of the sales tax charged?
If the independent seller or their customer returns merchandise pursuant to this
policy and receives less than the original purchase price excluding shipping
charges, are they entitled to a full refund of the sales tax charged?
If the company is allowed to refund all or a percentage of the sales tax, is it
entitled to deduct the applicable sales amount and corresponding tax on the
return for the period when this adjustment is made?

•
•
•
•

Please contact me if you have any questions or need clarification of the information
provided or ruling requested.
Thank you for your assistance.

DEPARTMENT’S RESPONSE:
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. The tax is measured by the seller's gross receipts from retail sales made in the
course of such business. "Gross receipts" means the total selling price or the amount of such sales.
The retailer must pay Retailers' Occupation Tax to the Department based upon its gross receipts, or
actual amount received, from the sale of the tangible personal property. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property that is
purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These
taxes comprise what is commonly known as "sales" tax in Illinois. If the purchases occur in Illinois,
the purchasers must pay the Use Tax to the retailer at the time of purchase. The retailers are then
allowed to retain the amount of Use Tax paid to reimburse themselves for their Retailers' Occupation
Tax liability incurred on those sales.
Where a taxpayer under the Retailers' Occupation Tax Act pays to the Department an amount
of tax or penalty or interest not due under the provisions of the Act, either as the result of a mistake of
fact or an error of law, such taxpayer may file a claim for credit with the Department. See 86 Ill. Adm.

Code 130.1501. Only the remitter of the tax erroneously paid to the Department is authorized to
obtain a refund or credit. In order to obtain a credit, one must first demonstrate that he or she has
borne the burden of the tax erroneously paid. In other words, the retailer must give his or her
customer back the tax he or she has collected from him or her or the retailer is not entitled to the
credit or refund. Claims for credit shall state the requirements that are contained in subpart (b) of the
regulation. The repayment of the tax to the customer will satisfy the requirement of Section
130.1501(a)(2).
Any seller may deduct from his gross receipts any refunds made by him during the preceding
return period to purchasers, on account of tangible personal property returned to the seller, in case
the seller had theretofore included the receipts from the sale of such tangible personal property in a
return made by him, and had paid the tax imposed by the Retailers’ Occupation Tax Act with respect
to such receipts. However, if the seller collected the Use Tax on such a sale, he should refund such
tax to his customer to whom he makes a refund of the selling price.
When a retailer makes a charge for restocking or reshelving returned merchandise, the
receipts retained by the retailer to cover the restocking or reshelving fee are not considered taxable
gross receipts for purposes of the Retailers' Occupation Tax liability. When a customer returns
merchandise to the retailer, the retailer should refund all of the sales tax to the customer even though
he will not be refunding the entire purchase price because of a restocking or reshelving policy. 86 Ill.
Adm. Code 130.401(b). This same concept applies in all cases when merchandise is returned to the
retailer and a full or partial refund is provided by that retailer.
If a retailer can document that it returned all of the tax to the customer that was paid on the
initial purchase, it may deduct all the gross receipts from the original sale on its return for the period in
which the refund was provided. See for example 86 Ill. Adm. Code 130.401(b). If it fails to return all
of the tax to the customer that was paid on the initial purchase, it may only deduct the amount of
gross receipts that correspond to the amount of tax that was refunded. The remainder of the tax that
was not returned to the customer represents an over collection of tax. Illinois law requires that all
over collections of tax must either be turned over to the Department or refunded to the customer.
See 35 ILCS 120/2-40.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:msk