Was inbound freight taxable when a distributor separately billed customers for moving inventory to the selling branch before the sale?

Plain-English summary

Inbound freight was part of taxable gross receipts even when separately stated on the customer's invoice. The distributor paid freight to move inventory from a supplier or another branch to the local selling branch before the sale.

Illinois treated those acquisition and repositioning charges as the seller's costs of doing business. Section 130.410 did not allow a deduction for incoming freight or transportation costs, and Section 130.415(e) applied the same rule to property moved to a point from which it would later be sold and delivered.

The GIL did not address the requester's outbound-freight treatment because the requester said that issue was not in question.

What this means for you

Calling a pre-sale inventory cost "inbound freight" and listing it separately does not remove it from the tax base under the cited historical rules.

Common questions

Q: Did separate billing make inbound freight nontaxable?
A: No. The GIL treated it as a taxable cost of doing business even when separately quoted and billed.

Q: Did this GIL decide all outbound-delivery charges?
A: No. Its question and answer concerned freight incurred before the sale.

Citations and references

• 86 Ill. Adm. Code 130.410
• 86 Ill. Adm. Code 130.415(e)
• 2 Ill. Adm. Code 1200.110 and 1200.120

Subject

Delivery Charges

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-10-0032.pdf

Original ruling text

ST 10-0032-GIL 04/01/2010 DELIVERY CHARGES
The Department’s regulation on the treatment of transportation and delivery charges under the
Retailers’ Occupation Tax Act may be found at 86 Ill. Adm. Code 130.415. (This is a GIL.)

April 1, 2010

Dear Xxxxx:
This letter is in response to your letter dated November 21, 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:
COMPANY is a distributor of industrial parts with 450 locations across the United
States. The inventory that we purchase from our suppliers is resold through our
network of regional distribution centers, shops and sales branches. COMPANY pays
incoming freight charges to suppliers for product shipped via common carrier to our
branches or directly to our customers. COMPANY also pays outbound freight charges
to deliver merchandise via common carrier to our customers. We separately state
Inbound Freight and Outbound Freight charges on our invoices to our customers. We
define Outbound Freight as any freight charges from a COMPANY facility or vendor
directly to our customer’s plant. The taxability of Outbound Freight is not in question.
Questions come up periodically from our customers regarding the taxability of Inbound
Freight. We define Inbound Freight as any freight charges from any vendor or
COMPANY branch to the local selling COMPANY branch prior to the actual sale of the
goods. We bill our customers for the Inbound Freight charges as a separate item on
our invoices, and it has been our experience that nearly every state views these
charges as a taxable transaction. The Inbound Freight charges happened prior to the
passage of title to our customer. Most states view Inbound Freight as a cost of the
acquisition of the inventory, and require us to charge tax on Inbound Freight.
We currently charge tax on Inbound Freight, and we are requesting clarification on this
issue. Please reply in writing confirming whether Inbound Freight is taxable under the

laws of your state. If the tax code in your state specifically addresses Inbound Freight,
a copy of the code would be appreciated. If this issue has been addressed in any
publications or newsletters, copies of those publications or newsletters would be
appreciated. We want to handle this issue correctly under the laws of each state, and
we need to have supporting documentation to give to our customers when questions
arise regarding this issue. Your assistance is appreciated.
If I can be of any further assistance, please feel free to contact me.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Cost of Doing Business Not Deductible” 86 Ill. Adm. Code
130.410, provides that “[i]n computing Retailers' Occupation Tax liability, no deductions shall be made
by a taxpayer from gross receipts or selling prices on account of the cost of property sold, the cost of
materials used, labor or service costs, idle time charges, incoming freight or transportation costs,
overhead costs, processing charges, clerk hire or salesmen’s commissions, interest paid by the
seller, or any other expenses whatsoever. Costs of doing business are an element of the retailer’s
gross receipts subject to tax even if separately stated on the bill to the customer.
This principle is further explained in the Department’s regulation, “Transportation and Delivery
Charges” 86 Ill. Adm. Code 130.415 which provides in subsection (e) that transportation or delivery
charges paid by a seller in acquiring property for sale are merely costs of doing business to the seller
and may not be deducted by such seller in computing his Retailers' Occupation Tax liability, even
though he passes such costs on to his customers by quoting and billing such costs separately from
the selling price of tangible personal property which he sells. The same is true of transportation or
delivery charges paid by the seller in moving property to some point from which the property (when
subsequently sold) will be delivered or shipped to the purchaser.
I hope this information is helpful. If you require additional information or want to view any of
the administrative rules mentioned in this letter, 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