When must an Illinois retailer report later customer payments, and when does temporary storage avoid Use Tax?

Plain-English summary

A retailer using the gross-receipts method reported additional customer payments in the period it actually received them. That was Illinois's preferred method. A retailer using the gross-sales or accrual method instead paid tax upfront on the full selling price, and a taxpayer seeking to switch to that method had to notify the Department in writing.

The GIL separately explained two temporary-storage exemptions. Both required property to be brought into or received in Illinois temporarily and then shipped out for use solely outside Illinois. Qualifying property could also be processed, fabricated, manufactured, attached to, or incorporated into other property ultimately used solely outside the state.

The outside use had to be exclusive and permanent. If the buyer knew the property would return to Illinois, no exemption was available. If exempt property later returned and was used in Illinois, it became taxable.

What this means for you

Keep payment records aligned with the elected reporting method, and document the intended and actual destination of every item claimed under temporary storage.

Common questions

Q: When is a later installment taxed under the gross-receipts method?
A: In the reporting period when the retailer receives it.

Q: Can temporarily stored property return to Illinois after outside use?
A: Not under the rule described. A known return barred the exemption, and a later Illinois use made the property taxable.

Citations and references

• 86 Ill. Adm. Code 130.401 and 130.401(a) (reporting methods)
• 35 ILCS 105/3-55(e) and (f) (temporary storage)
• 86 Ill. Adm. Code 150.310(a)(4) and (a)(6) (temporary storage and centralized purchasing)
• 2 Ill. Adm. Code 1200.110(a)(4) and 1200.120 (PLRs and GILs)

Subject

Gross Receipts

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-10-0073.pdf

Original ruling text

ST 10-0073-GIL 08/11/2010 GROSS RECEIPTS
The standard method of reporting receipts from sales is to report on a gross receipts basis,
that is to report when payments are actually received. See 86 Ill. Adm. Code 130.401(a).
(This is a GIL.)

August 11, 2010

Dear Xxxxx:
This letter is in response to your letters dated May 27, 2009 and March 5, 2010, 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 of May 27, 2009, you have stated and made inquiry as follows:
On behalf of our client, hereinafter ‘Taxpayer’, we are requesting a Private Letter Ruling
(‘PLR’) pertaining to the Illinois Retailers' Occupation Tax (‘ROT’) and Use Tax (‘UT’)
implications of a retroactive purchase price adjustment on ‘lease finance’ transactions
and ‘direct purchase’ transactions as explained in more detail herein. An executed
Power of Attorney form authorizing FIRM to represent the Taxpayer in this matter is
enclosed. To the best of the knowledge of Taxpayer and FIRM: (1) the Illinois
Department of Revenue (‘Department’) has not previously ruled on the same or similar
issue for the Taxpayer or a predecessor; (2) the same or similar issue as not previously
submitted and withdrawn by Taxpayer or FIRM prior to the Department's issuance of a
PLR; and (3) Taxpayer is not under audit by or involved in litigation with the
Department.
I.

Overview and Statement of Facts

TAXPAYER, headquartered in CITY, Illinois, provides remote cardiac monitoring
services (‘Services’) directly to individuals (‘Customers’) pursuant to a prescription
issued by each individual Customer's physician. Taxpayer is a wholly-owned subsidiary
of ABC which, in turn, is a wholly owned subsidiary of XYZ, a healthcare technology and
solutions provider listed on the ___ Stock Exchange.

In connection with the provision of Taxpayer's Services to Customers, Taxpayer will
provide each Customer with a Cardiac Monitoring Device (‘Device’) to use during the
monitoring period, which is generally up to 30 days. While possession of the Device is
transferred to the Customer for a short period of time, title to the Device does not
transfer to the Customer and Taxpayer does not impose a separate charge for use of
the Device, apart from its charge for the Services. At the end of the monitoring period,
Customers are required to return the Device to the Taxpayer's CITY, Illinois facility.
XYZ manufactures the Devices outside of the United States. Taxpayer is the sole
authorized user of the Devices in the United States. Taxpayer acquires Devices in two
ways. First, Taxpayer directly purchases some of the Devices from XYZ (hereinafter
referred to as ‘Purchase Transactions’). Second, Taxpayer, in order to utilize third-party
financing, leases Devices from an unrelated financing company (‘Finance Company’)
located outside of Illinois (hereinafter referred to as ‘Financed Transactions’). For both
acquisition methods, XYZ ships the Devices directly to the Taxpayer in CITY, Illinois.
Additional Information Pertaining to Purchase Transactions
Taxpayer considers itself the consumer of the Devices for Illinois ROT/UT purposes.
XYZ, the foreign manufacturer/supplier, is not engaged in doing business in Illinois for
ROT/UT purposes and is not registered with the Department to collect or remit ROT or
UT. Accordingly, at the time each Device is purchased, Taxpayer self-assesses Illinois
UT based upon the sale price charged by XYZ, and remits the tax due on its monthly
Illinois Sales and Use Tax Returns.
Additional Information Pertaining to Financed Transactions
With respect to Financed Transactions, Taxpayer places all purchase orders for
Devices directly with XYZ. The orders and all of Taxpayer's rights and interest to the
Devices, if any, are assigned to the Finance Company. XYZ issues an invoice directly to
the Finance Company and the Finance Company pays the agreed upon sale price
directly to XYZ. As noted above, the Devices are drop shipped directly to Taxpayer's
Illinois facility. During the lease term, the Devices remain the property of the Finance
Company and Taxpayer does not hold any right, title or interest in the Devices other
than the right to use and possess the property under the terms of the lease. In
accordance with the assignment, therefore, title to the Devices passes directly from XYZ
to the Finance Company and, thus, a sale occurs between those parties. The leases
involved in the Financed Transactions are regarded by Finance Company and Taxpayer
as financing or capital leases for income tax and accounting purposes, and have a
nominal (one dollar) buy-out for each Device at the end of the lease term. Title to the
Devices is transferred to the Lessee at the end of the lease term, after the payment of a
nominal (one-dollar) buyout charge. Though title actually transfers from the Finance
Company to the Taxpayer (and a sale for sales tax purposes occurs) at the end of the
lease term, Taxpayer, for accounting and tax purposes, includes the Devices as assets
in its books and records and depreciates them throughout the lease term. A copy of the
master lease agreement between Finance Company and Taxpayer are provided for
review.
The Finance Company and the Taxpayer treat the leases as conditional sales for Illinois
sales/use tax purposes. Additionally, at the time the lease was entered into, the Devices
were located at Taxpayer's CITY, Illinois facility. Because the leased property was
located in Illinois at the time the lease of the Devices that were acquired in 2008 were

initiated, Finance Company considered the sales as Illinois sales, remitted ROT at the
rate of 10.25% and collected an equivalent reimbursement amount (separately stated
as sales tax on each invoice) from Taxpayer as each lease payment was received.
Retroactive Pricing Adjustment
In February 2009, during the process of closing the 2008 financial/accounting books for
its affiliated group (which includes XYZ, Corporation and Taxpayer), XYZ engaged in a
transfer pricing study. As a result of the study, it was determined that a significant
increase in the price charged for the Devices used by Taxpayer was appropriate
(hereinafter referred to as the ‘Price Increase’). In addition to imposing the Price
Increase on prospective transactions, XYZ determined that the Price Increase, based
upon the transfer pricing study, should be retroactive for the open 2008
calendar/accounting year for all devices delivered to Taxpayer throughout calendar year
2008. As a result, in February 2009, XYZ and Taxpayer booked retroactive accounting
entries to reflect the entire Price Increase for the Devices in the December 2008
accounting period, including an increase in Taxpayer's intercompany payable to XYZ.
The effect of this accounting entry was to increase the book value of the Devices. This
is the first and only adjustment of this nature between the parties, and historical pricing
for the Devices has been steady relative to each new release of the Devices as
technology advances.
With respect to Financed Transactions, the Price Increase did not alter the amounts due
to the Finance Company, or any other rights or obligations of Taxpayer or the Finance
Company under the lease/conditional sale agreement. Furthermore, Finance Company
did not make any additional payments to XYZ or receive any additional receipts or other
consideration from any party as a result of XYZ's Price Increase. As noted above, the
retroactive accounting entries made on Taxpayer's books and records for the December
2008 accounting period reflect the Price Increase for both Direct Purchases and
Financed Transactions that occurred during 2008. As further noted above, Devices
under the financing/capital lease are also accounted for on the books of the Taxpayer
and, as a result of the retroactive Price Increase, also required an accounting
adjustment to the asset's book value and depreciation calculations. All Devices financed
under the Lease Agreement in 2008 (and, thus, subject to the Price Increase) are still
under lease. Consequently, the Taxpayer has not yet acquired title to the Devices from
Finance Company and, thus, has not yet purchased the Devices pursuant to the end-oflease term nominal buyout provision. The Price Increase relates to Taxpayer's orders
for the Devices which were placed with XYZ and subsequently assigned to the Finance
Company.
II.

Rulings Requested

We respectfully request that the Department issue the following rulings:
1.

The UT due resulting from the retroactive Price Increase associated with Devices
acquired in Purchase Transactions (as described above) and delivered in 2008
should be reported in February 2009.

2.

The retroactive Price Increase and corresponding payments associated with
Devices acquired in Financed Transactions (as described above) and delivered
in 2008 are not subject to ROT or UT.

3.

In the event that the Department determines that the Price Increase associated
with Financed Transactions in the preceding paragraph (Rulings Requested No.
2) is subject to ROT or UT, the tax due should be reported in February 2009.

III.

Authority and Analysis in Support of Rulings Requested

A.

PURCHASE TRANSACTIONS:
i.

The Price Increase Associated with Purchase Transactions are Taxable.

Illinois imposes the Retailer's [sic] Occupation Tax (‘ROT’) on persons, i.e., retailers,
engaged in the selling of tangible personal property (‘TPP’) at retail in Illinois. 35 ILCS
§§120/2. Illinois also imposes the Use Tax (‘UT’) on purchasers of TPP at retail for use
in Illinois. 35 ILCS §105/3. A seller that incurs ROT on a sale of TPP reimburses itself
through the collection of the UT from the purchaser. 86 Ill. Admin. Code §130.101(d).
In general, the ROT is imposed on the gross receipts from sales of TPP by a retailer. 35
ILCS §§ 120/2-10. Gross receipts are defined as ‘the total selling price or amount of
such sales.’ 35 ILCS §120/1. ‘Selling price’ generally means the consideration for a sale
valued in money, whether received in money or otherwise, including cash, credits,
services and property. 35 ILCS §§120/1, 105/2. The UT is imposed on the selling price
of the TPP. 35 ILCS §§105/3-10. The transfer must be for the purpose of use or
consumption and not for the purpose of resale in any form as TPP. 35 ILCS §§120/1;
105/2. If a retailer is not registered for ROT purposes in Illinois, nor required to collect
use tax from the purchaser, the purchaser must self-assess UT and remit the tax
directly to the Department. 35 ILCS §105/10.
XYZ sells Devices directly to Taxpayer for Taxpayer's own use and consumption.
Accordingly, XYZ is a retailer engaged in the business of making sales at retail. XYZ
does not have a physical location, property or the presence of employees or agents in
Illinois and, therefore, is not engaged in doing business in Illinois and is not required to
be registered to remit or collect Illinois ROT or UT. With regard to Purchase
Transactions, the Devices are delivered via common carrier to Taxpayer's Illinois facility
for use in Illinois. Taxpayer is unable to qualify for an exemption from tax and,
accordingly, self assesses UT on all Devices acquired through Purchase Transactions.
The retroactive Price Increase agreed to by XYZ (the retailer) and Taxpayer (the retail
purchaser) are additional receipts to the retailer that relate to certain prior sales of
Devices. The Price Increase is additional consideration pertaining to those retail sales
and, thus, increases the selling price (i.e., tax base) of the Devices and results in
additional Use Tax owed by the Taxpayer.
ii.

Additional UT owed as a Result of the Price Increase Should Be Reported in
February 2009.

As noted above, a seller's ROT liability is measured by the seller's gross receipts from
the sale of TPP. When filing and remitting ROT liability, the state's preferred method,
thus, is to report tax due when payments are received. ST 01-0037 GIL. From a selfassessing purchaser's perspective, UT is generally reported at the time a payment is
made to the retailer following the receipt of the vendor's invoice. The vendor's invoice is
the means by which a purchaser identifies the sales price or tax base from which to
determine the amount of tax due. This timing generally coincides with reporting/timing

requirements for registered retailers remitting ROT. Even with respect to deferred
payments (payment/credit plans extended by the retailer), the ROT is not due until the
payment is received by the Retailer (for a cash basis retailer), or until the billing for each
payment is issued (for an accrual basis retailer). 86 Ill. Adm. Code 130.401(a).
Furthermore the Use Tax act provides that:
Where [TPP other than property required to be registered with an agency
of the state] is sold under a conditional sales contract, or under any other
form of sale wherein the payment of the principal sum, or a part thereof, is
extended beyond the close of the period for which the return is filed, the
retailer, in collecting the tax ... may collect for each tax return period, only
the tax applicable to that part of the selling price actually received during
such tax return period.
With respect to the Purchase Transactions, neither the retailer (XYZ) nor the retail
purchaser (Taxpayer) had any knowledge of the Price Increase until February 2009
when the parties agreed to the retroactive increase. Either under a cash basis
methodology or an accrual basis methodology, the earliest appropriate tax reporting
period from a retailer's perspective would be February 2009, since prior to February
2009 there were no payments made associated with the Price Increase nor were there
any accruals for the Price Increase made by the retailer until February 2009. It was
during February 2009 when XYZ and the Taxpayer adjusted their 2008 accounting
books and records (specifically the adjustment was applied to the December 2008
accounting period) which had not yet been closed during the year-end close process.
Treatment of a self-assessing purchaser, where, as here, the retailer is not engaged in
doing business in Illinois, should be consistent with the treatment of the selling retailer,
especially considering Taxpayer's unique facts and circumstances involved here.
B.

FINANCED TRANSACTIONS:
i.

Taxpayer's Financed Transactions are Conditional Sales Transactions

As discussed above, Taxpayer's Financed Transactions involve the acquisition of some
of the Devices through a financing lease with a third-party financing company. The
financing lease has a provision that allows the Taxpayer to purchase the Devices from
the Finance Company at the end of the lease term for one dollar. For purposes of
determining the tax consequences of leasing tangible personal property in Illinois, it
must first be determined whether the lease is a ‘true lease’ or a ‘conditional sale’ for
Illinois ROT and UT purposes. 86 Ill. Admin Code § 130.2010.
A ‘true lease’ generally has no bargain purchase buyout provision at the close of the
lease period. If a buy out provision does exist, it must be a fair market value purchase
option in order to ‘maintain the character of the true lease.’ 86 Ill. Admin. Code
§130.2010(a), (b); Let. Rul. ST 99-0169-GIL (May 17, 1999). Lessors of tangible
personal property under a true lease are deemed to be the users of that property and
are subject to UT when purchasing TPP which they rent or lease to others. Ill. Admin.
Code Sec. 130.2010(b). Consequently, lessors incur a UT liability based on their cost
price of the items they purchase for leasing purposes. The lessor must either pay the
UT to the seller or self-assess and pay it directly to the Department. 86 Ill. Admin. Code
130.2013(a). Moreover, as the ROT and UT are imposed at the time the assets are
acquired, the rent or lease of TPP is not subject to tax. 86 Ill. Admin. Code
§§150.305(e), 150.1201.

The Illinois Statutes do not define the term ‘condition sale.’ However, the Department's
regulations provide that when a transaction involves a lease with a dollar or other
nominal option to purchase the leased assets (i.e., buyout) at the end of the lease term,
the transaction is considered to be a conditional sale from the outset, and all of the
Illinois retailer's receipts from the transaction are subject to ROT. 86 Ill. Admin Code §
130.2010(a) The Department also provided the following general information pertaining
to conditional sale transactions:
The lessors/retailers owe Retailers' Occupation Tax on any installment
payments when they are received by the lessors/retailers. The
lessees/purchasers owe corresponding Use Tax on the amount of the
installment payments that are collected by the lessors/retailers. ST 000135-GIL.
Because of the nominal (one-dollar) buyout provision at the end of the lease term, the
Finance Company and the Taxpayer treated the leases involved in the Financed
Transactions as conditional sales for Illinois ROT/UT purposes. Additionally, at the time
that the lease was entered into, the Devices were located at Taxpayer's CITY, Illinois
facility. Because the property was located in Illinois at the time the lease was initiated,
Finance Company, a retailer registered for Illinois ROT/UT purposes, considered the
sales as Illinois sales and remitted ROT at the rate of 10.25% and an equivalent
reimbursement amount, which included UT, was separately stated as sales tax on each
invoice and collected from Taxpayer as each lease payment was received.
ii.

With regard to Financed Transactions, Finance Company’s Purchases from XYZ
are Exempt Purchases for Resale to the Taxpayer.

As outlined above, Taxpayer submits purchase orders for all Devices directly to XYZ.
With regard to those Devices that Taxpayer decides to acquire utilizing third-party
financing (i.e., a financing lease), Taxpayer assigns the purchase orders along with all
of Taxpayer's rights and interest, if any, to the Devices to Finance Company. When a
purchase order is assigned to Finance Company, XYZ invoices Finance Company
directly and ships the Devices to Taxpayer's Illinois facility, and Finance Company pays
for the Devices by rendering a payment directly to XYZ.
The term ‘sale at retail’ specifically excludes sales to a purchaser for purposes of resale.
35 ILCS §§ 105/2. A lessor/retailer may purchase property for resale from a supplier
when the property will immediately/subsequently be ‘leased’ to a lessee in qualifying
conditional sale transaction. See ST 94-0050-GIL, ST 02-0211-GIL.
As discussed above, Finance Company's ‘lease’ of the Devices to Taxpayer is a
conditional sale transaction, which is treated as a sale for ROT/UT purposes.
Consequently, Finance Company's purchases of the Devices from XYZ for subsequent
lease (i.e., conditional sale) to Taxpayer are exempt purchases for resale.
iii.

The Price Increase, as it Pertains to Leased Transactions is Not Subject to ROT
or UT
a.

The Price Increase Relates to the Sales Made by XYZ for Resale

As discussed above, XYZ engaged in a transfer pricing study and determined that it
would be appropriate to significantly increase the intercompany price charged for the
Devices ordered by Taxpayer. XYZ also determined that it was appropriate to impose
the Price Increase retroactively on Devices ordered by the Taxpayer during the 2008
calendar year. Taxpayer, who is dependent on XYZ as the sole supplier of the Devices
needed to provide its services, agreed to pay the additional amount on all Devices
delivered since January 1, 2008. This is the first Price Increase of this kind between the
parties and prices for the Devices have been steady (relative to the Device type and
version) for the last several years.
With regard to Financed Transactions, the sales made by XYZ that are subject to the
Price Increase are not retail sales but, rather, as discussed in the preceding section, the
sales are sales for resale made directly to the Finance Company. Taxpayer assigned its
purchase orders, rights and interest in the Devices, if any, to the Finance Company and,
to date, has not at any point held title to the Devices purchased in 2008, which are still
owned by the Finance Company under the lease agreement. Though XYZ sold the
Devices and issued invoices directly to the Finance Company, XYZ sought payment
directly from its wholly owned subsidiary, i.e., the Taxpayer. Finance Company held title
to the Devices and had no obligation to pay additional monies to XYZ. Taxpayer paid
the Price Increase to XYZ but, as indicated above, it was the Finance Company that
purchased the Devices for resale and Taxpayer did not actually purchase the Devices
from XYZ.
Because the Price Increase relates to sales of the Devices made by XYZ, which were
sold to Finance Company for resale and not to Taxpayer, the Price Increase paid by
Taxpayer is not subject to ROT or UT.
b.

The Price Increase Does Not Pertain to or Affect the Amount of ROT or
UT Due on the Retail Conditional Sale Transaction

Finance Company and Taxpayer entered into a financing lease transaction that is
regarded as a conditional sale for ROT/UT purposes. Finance Company is registered as
an Illinois retailer that is subject to the ROT. Illinois imposes the ROT on persons (i.e.,
retailers) engaged in the selling tangible personal property (‘TPP’) at retail in Illinois. 35
ILCS §§120/2 Illinois also imposes the UT on purchasers of TPP at retail for use in
Illinois. 35 ILCS §105/3. A seller that incurs ROT on a sale of TPP reimburses itself
through the collection of the UT from the purchaser. 86 Ill. Admin. Code §130.101(d). In
general, the ROT is imposed on the gross receipts from sales of TPP by a retailer. 35
ILCS §§ 120/2-10. Gross receipts are defined as ‘the total selling price or amount of
such sales.’ 35 ILCS §120/1. Like the ROT, the UT is imposed on the selling price of the
TPP purchased at retail. 35 ILCS §§105/3-10. ‘Selling price’ generally means the
consideration for a sale valued in money, whether received in money or otherwise,
including cash, credits, services land property. 35 ILCS §§120/1, 105/2.
Finance Company has remitted ROT to the Department and has collected UT, including
a reimbursement of local ROT, from Taxpayer on all lease payments received in
connection with the financing lease/conditional sale transaction. Finance Company was
not a party to the Price Increase transaction between XYZ and Taxpayer, and has not
received additional receipts or other consideration from either of those entities.
Furthermore, Finance Company's interest in the Devices as titleholder remained
absolute and, having no further obligations to either party outside the standard terms
involved in the financing lease, Finance Company's interest was not impacted by the

Price Increase agreement between XYZ and Taxpayer. Having received no additional
cash receipts or other consideration, the Price Increase, thus, has not impacted the
retailer's/Finance Company's gross receipts or the corresponding retail selling price,
which is the tax base for purposes of the ROT required to be remitted by the Finance
Company as well as the UT required to be paid by the Taxpayer, which was collected
by the Finance Company.
Taxpayer's interest and rights to the Devices, which are determined under the terms of
the financing lease agreement, also were not impacted by the Price Increase since
Taxpayer will take full title (XYZ does not and will not have an interest in the Devices
during or after the lease term) to the Devices after making the payments to Finance
Company that are required under the lease agreement, including the nominal one-dollar
buyout, regardless of whether Taxpayer makes any payments to XYZ associated with
the Price Increase. In essence, Taxpayer's agreement to make additional payments
relating to prior (2008) deliveries of the Devices, financed or otherwise, was an
accommodation, not a legal obligation, to its sole source supplier upon which Taxpayer
is dependent to continue its operations in future years. Under accounting and income
tax rules, which do not control ROT and UT implications, Taxpayer treats the Devices
acquired via financing leases as its own assets subject to depreciation, even though
Finance Company holds legal title to the assets. For accounting and income tax
purposes, Taxpayer has included the retroactive Price Increase in the asset
acquisition/book value and depreciable base of the Devices. As noted above, the
retroactive Price Increase and corresponding accounting income tax adjustments made
to Taxpayer's accounting books and records does not impact the retailer's/Finance
Company's gross receipts or the sales price involved in the retail financing
lease/conditional sale transaction. To date, Taxpayer has not taken title to the Devices
delivered in 2008, which are still within the term of the lease agreement. Consequently,
no additional ROT or UT is owed by the Finance Company or the Purchaser on the
conditional sale transactions as a result of the Price Increase.
iv.

In the event that the Department ultimately determines and/or rules that the Price
Increase associated with Financed Transactions is subject to ROT or UT, the tax
due should be reported in February 2009, the reporting period in which the
parties first became aware of and agreed to the retroactive Price Increase.

The discussion in Section III(A)(ii) pertaining to Purchase Transactions above is equally
relevant to Financed Transactions and is incorporated here via reference. For the same
reasons articulated in the referenced section above, February 2009 would be the
appropriate reporting period in the event the Department determines that the retroactive
Price Increase is subject to ROT or UT.
We have been unable to locate authority contrary to Taxpayer's views and the rulings
requested above.
If any additional information or documentation is needed to issue the requested rulings,
or if you have any questions, please contact me.

In your letter of March 5, 2010, you have stated and made inquiry as follows:
As we have discussed, (‘FIRM, or we’) is submitting this Addendum to supplement our
client’s, TAXPAYER(hereinafter ‘Taxpayer’), request for Private Letter Ruling (‘PLR’)

dated May 27, 2009. This Addendum presents additional facts that we believe are
relevant to the issues upon which the Taxpayer is seeking a ruling from the Illinois
Department of Revenue (‘Department’). We have also provided some clarification on
the issues original [sic] addressed in our ruling request. Finally, we have raised a new
issue relating to the application of the Illinois temporary storage exemption to the
Taxpayer’s Cardiac Monitoring Devices (‘Devices’).
I.

Supplemental Facts

The facts below are in supplement to those presented in the May 27, 2009 request for
PLR. As such, these facts are meant to be read in conjunction with the facts presented
in the prior request.
Overview and Statement of Facts
XYZ is a COUNTRY Corporation and the parent corporation of XYZ123, an
COUNTRY2 corporation.
XYZ123 directly and indirectly owns 100% of
CORPORATION, a STATE Corporation. CORPORATION owns 100% of TAXPAYER,
also a STATE Corporation. The Taxpayer was formerly known as CORPORATION1.
Retroactive Pricing Adjustment
In our original ruling request, we had indicated that XYZ engaged in a transfer pricing
study. We now know that the transfer pricing study was issued to XYZ123. Attached is
a copy of the transfer pricing study dated March 3, 2009.
We had also indicated that as a result of the transfer pricing study, it was determined
that a significant increase in the price charged for the Devices used by the Taxpayer
was appropriate. We are now in possession of the sales agreement between XYZ123
and the Taxpayer for the Devices. Attached is a copy of the sales agreement. Please
note that the agreement is between XYZ123 and ABC. ABC was the former name of
the Taxpayer.
Although the agreements calls for the parties to establish the price for the Devices and
once said price had been established, XYZ123 may not increase the price until after
December 31, 2011. As a result of the transfer pricing study and prior to the final report
being issued, XYZ123 and the Taxpayer agreed to adjust the sales price retroactively
for all Devices delivered during the 2008 calendar/accounting year. This adjustment
was made in February 2009 and reflected on both parties’ financial statements for the
month ending December 2008. It is anticipated that this price adjustment was an
isolated incident and similar event, although possible, are not anticipated to occur in the
future.
As stated in the initial ruling request, Taxpayer acquires the Devices in one of two ways.
First, Taxpayer directly purchases the Devices from XYZ. Second, the Taxpayer uses
an unrelated third party financing company (‘Finance Company’) located outside Illinois
to lease (i.e. engage in a conditional sale in Illinois) the Devices. The retroactive price
adjustment applied to all direct purchase Devices that were delivered in 2008.
However, the Devices that were purchased by the Finance Company did not reflect the
retroactive price adjustment; the Taxpayer paid the price adjustment directly to XYZ.
Temporary Storage Exemption

XYZ manufactures the Devices outside of the United States. Taxpayer is the sole
authorized user of the Devices in the United States. As mentioned above, Taxpayer
acquires Devices in two ways: direct purchases from XYZ (hereinafter referred to as
‘Purchase Transactions’); and via third-party financed leases from the Finance
Company (hereinafter referred to as ‘Financed Transactions’).
In Purchase
Transactions the Taxpayer acquires title to the devices outside Illinois, but takes
possession of the devices upon shipment to the Taxpayer via common carrier in CITY,
Illinois. For Financed Transactions, the Taxpayer treats the leases as conditional sales
for Illinois sales/use tax purposes. Additionally, at the time the lease was entered into,
the Devices were located at Taxpayer’s CITY, Illinois facility.
In connection with the provision of Taxpayer’s Cardiac Monitoring Services (‘Service(s)’)
to customers, Taxpayer will provide each customer with a Device to use during a 21day monitoring period. While possession of the Device is transferred to the Customer
for a short period of time, title to the Device does not transfer to the customer and
Taxpayer does not impose a separate charge for use of the Device, apart from its
charge for the Services. At the end of the monitoring period, customers are required to
return the Device to the Taxpayer’s CITY, Illinois facility to process the device for the
next patient’s use.
Each device is designed and manufactured to endure several years of patient use;
however the cables and electrodes peripheral to the device are disposed [sic] after each
patient use. Upon receipt of a returned device in Illinois it is sterilized and the
aforementioned cables and electrodes are replaced to prepare the device for the next
patient’s use.
II.

Additional Ruling Requested

We respectfully request that the Department issue the following rulings:
The temporary storage exemption from Illinois Use Tax (‘UT’) will allow the repeated
return to Illinois of Purchased Devices from outside the state for the purpose of further
preparation/processing by the taxpayer and additional use outside the state without the
imposition of UT.
The Expanded Temporary Storage Exemption from Illinois UT will allow the repeated
return to Illinois of Financed Transactions from outside the state for the purpose of
further preparation/processing by the taxpayer and additional use outside the state
without the imposition of Retailers' Occupation Tax (‘ROT’).1
III.

Authority and Analysis in Support of Rulings Requested
A.

PURCHASE TRANSACTIONS

Although the contract between the Taxpayer and XYZ did not call for a price adjustment
to be made for Devices that were purchased and delivered in 2008, the parties
nonetheless mutually agreed to make the price adjustment. The parties agreed to make
the price adjustment after a transfer pricing study was undertaken. The price

1

This assumes proper application by the taxpayer to utilize this exemption and authorization by the State of Illinois.

adjustment was made in February 2009 and was booked by both parties on their
December 2008 financial records.
From a practical standpoint, the Taxpayer had no way of knowing that their acquisition
of Devices that were acquired and delivered in say, January 2008, would later be
adjusted by the parties. The actual adjustment took place in February 2009. From a
penalty perspective, the Taxpayer should not be penalized for not reporting the
adjustment in the actual month of the delivery during 2008, if they had no way of
knowing what the adjustment would have been until February of the following year.
Although not currently contemplated, it is possible that retroactive pricing adjustments
will occur for future Device purchases by the Taxpayer.
B.

FINANCED TRANSACTIONS

The pricing adjustment also applies to Financed Transaction. However, in the case of
the Financed Transactions, the Taxpayer and not the Finance Company paid the
retroactive price adjustments directly to XYZ. The price adjustment did not run through
the Finance Company. The payment of the price adjustments by the Taxpayer should
not change the character of the Financed Transactions. Finance Company’s purchases
from XYZ for subsequent leases to Taxpayer should be deemed conditional sales to the
Taxpayer and should be treated as exempt purchases for resale.
The price adjustments related to the sale of the Devices made by XYZ, which were sold
to Finance Company for resale and not to Taxpayer, as such, the price adjustment paid
by Taxpayer should not be subject to ROT or UT.
Similar to the purchased transactions, we do not anticipate the retroactive price
adjustments to be a reoccurring issue for future financing of the Devices by the
Taxpayer. However, the Taxpayer will continue to acquire Devices from XYZ using a
third party Finance Company.
C.

TEMPORARY STORAGE EXEMPTION: 86 Ill. Adm. Code

PURCHASE TRANSACTIONS
As discussed above, the title to Purchased Devices is acquired by the taxpayer outside
the State of Illinois and the devices are shipped via common carrier into Illinois and
stored for shipment outside the state and the provision of services to patients.
Currently, the taxpayer pays Illinois UT on each device it acquires.
86 Ill. Adm. Code 150.310 indicates that tangible personal property acquired outside of
the state that is subsequently brought into the state, stored temporarily and
subsequently used solely outside the state is exempt from tax as it is subject to the
state’s temporary storage exemption. 86 Ill. Adm. Code 150.310(a)(4) indicates that
this exemption will not be tainted if the property during its time in Illinois is altered by
converting, fabricating, manufacturing, printing, processing or shaping, and, as altered,
so long as it is used solely outside the state.
In this matter, devices are acquired outside the state and shipped into the state where
possession is taken by the taxpayer. Given that these devices will be used outside of
Illinois in the provision of a cardiac monitoring service and their only contact with the

state prior to interstate shipment will be storage and processing (i.e., sterilization and
replacement of cables and electrodes), it is asserted that these devices would qualify for
the temporary storage exemption under 86 Ill. Adm. Code 150.310. This assertion is
based on the fact that the activities performed on the device (sterilization and
replacement of cables and electrodes) would qualify as one of the enumerated activities
(i.e. converting, fabricating, manufacturing, printing, processing or shaping, of property)
that will not taint the application of the Illinois temporary storage exemption 86 Ill. Adm.
Code 150.310(a)(4).
FINANCED TRANSACTIONS
As discussed above, relative to Financed Transactions, the Taxpayer treats the leases
as conditional sales for Illinois sales/use tax purposes. Additionally, at the time the
leases are entered into, the Devices are located at Taxpayer’s CITY, Illinois facility.
Because the leased property is located in Illinois at the time of the lease of the Devices,
the Finance Company considers the sales as Illinois sales and has remitted ROT at the
rate of 10.25% and collected an equivalent reimbursement amount (separately stated
as sales tax on each invoice) from Taxpayer as each lease payment was received.
86 Ill. Adm. Code 150.310(a)(6) indicates that persons holding a valid Expanded
Temporary Storage Permit may claim the Expanded Temporary Storage Exemption by
providing their Illinois suppliers with a certification that the tangible personal property
received in Illinois will be temporarily stored in Illinois for the purpose of being
subsequently transported outside this State for use or consumption. 86 Ill. Adm. Code
150.310(a)(6) further indicates that this exemption will not be tainted if the property
during its time in Illinois is altered by converting, fabricating, manufacturing, printing,
processing or shaping and, as altered, so long as it is used solely outside the state.
In this matter, financed devices are leased in the state, but will be used outside of
Illinois as part of the cardiac monitoring service and the devices [sic] only contact with
the state prior to interstate shipment will be storage and processing (i.e. sterilization and
replacement of cables and electrodes), it is asserted that these devices would qualify for
the Expanded Temporary Storage Exemption (once the taxpayer is properly registered
for such purposes) under Ill. Adm. Code 150.310(a)(6)(D). This assertion is based on
the fact that the activities performed on the device (sterilization and replacement of
cables and electrodes) would qualify as one of the enumerated activities (i.e.
converting, fabricating, manufacturing, printing, processing or shaping, of property) that
will not taint the application of the Illinois temporary storage exemption. 86 Ill. Adm.
Code 150.310(a)(6).
With respect to sales and use tax compliance in other states outside Illinois, the
Company is in [sic] process of analyzing it [sic] compliance requirements.
PROCEDURAL MATTERS
FIRM, as an authorized agent for the taxpayer, is requesting this Private Letter Ruling
on behalf of said taxpayer. Please contact me should you have questions or require
additional information. If you are inclined to rule unfavorably on any part of this Private
Letter Ruling request, we respectfully request a conference to discuss this matter in
further detail and reserve the right to withdraw any and all parts of the Private Letter
Ruling request.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). The Department has determined that the issues presented in your letters are
ones of general applicability and therefore declines to issue a Private Letter Ruling. However, we
hope the following will be helpful in addressing your question.
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. The tax is
based on the amount of gross receipts received by the retailer on the sale of that property. "Gross
receipts" means all the consideration actually received by the seller, except traded-in tangible
personal property personal property. See 86 Ill. Adm. Code 130.401.
Retailers who report and pay Retailers' Occupation Tax on gross receipts actually received on
sales of tangible personal property file on the "gross receipts" basis. See 86 Ill. Adm. Code 130.401.
The gross receipts basis is the preferred method for filing sales tax returns. Retailers who report and
pay Retailers' Occupation Tax up front on the total selling price of tangible personal property, even
though all gross receipts have not yet been received from the purchaser, file on the "gross sales"
basis. A procedure is available for taxpayers who desire to change to the gross sales (accrual) basis
where they notify the Department, in writing, of their intention to change reporting methods. See 86
Ill. Adm. Code 130.401(a).
A Retailer who reports and pays Retailers' Occupation Tax on the "gross receipts" basis who
subsequently receives additional gross receipts for a sale of tangible personal property made in a
prior reporting period should report and pay Retailers' Occupation Tax on the additional gross
receipts in the reporting period in which the “gross receipts” are received.
You also inquired about the temporary storage exemption and expanded temporary storage
exemption. A temporary storage exemption from the imposition of use tax is available where tangible
personal property is “acquired outside this State and which, subsequent to being brought into this
State and stored here temporarily, is used solely outside this State or is physically attached to or
incorporated into other tangible personal property that is used solely outside this State, or is altered
by converting, fabricating, manufacturing, printing, processing or shaping, and, as altered, is used
solely outside this State.” 35 ILCS 105/3-55(e). See also 86 Ill. Adm. Code 150.310(a)(4).
Subsection (f) of Section 3-55 also provides a sales and use tax exemption for personal
property purchased from an Illinois retailer by a taxpayer engaged in centralized purchasing activities
in Illinois who will, upon receipt of the property in Illinois, temporarily store the property in Illinois for
the purpose of subsequently transporting it outside the State for use or consumption thereafter solely
outside the State or for the purpose of being processed, fabricated, or manufactured into, attached to,
or incorporated into other tangible personal property to be transported outside this State and
thereafter used or consumed solely outside this State. 86 Ill. Adm. Code 150.310(a)(6). ‘Centralized
purchasing’ is defined as the procurement of tangible personal property by persons who purchase
tangible personal property solely for use or consumption outside Illinois, who take delivery of that
tangible personal property in Illinois and who temporarily store that tangible personal property in
Illinois prior to transporting it outside the State for use or consumption solely outside Illinois.

Both of the exemptions only apply to transactions in which the tangible personal property is
acquired for temporary storage and after the temporary stay in Illinois the tangible personal property
is shipped out of Illinois and used solely outside Illinois, never to return to Illinois. If the person knows
at the time the tangible personal property is brought into Illinois or at the time of the purchase of the
tangible personal property in Illinois that after the temporary stay the tangible personal property will
return to Illinois, the exemption cannot be claimed. In the event that tangible personal property for
which the temporary storage exemption has been claimed is temporarily stored in Illinois and
transported outside this State for use or consumption, but for some reason subsequently returns to
Illinois and is used here, the tangible personal property will be subject to tax. See 86 Ill. Adm. Code
150.310.
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,

Richard S. Wolters
Associate Counsel
RSW:msk