Did an Illinois seller that drop-shipped air purifiers from Canada have to collect Illinois tax when it kept no inventory or storefront?

Plain-English summary

The Department did not decide whether the air-purifier seller had Illinois nexus or a collection duty. The seller bought products from Canada, had them shipped directly to customers, and said it kept no inventory or storefront.

The GIL explains that Illinois declined to make nexus determinations in letter rulings because an auditor was better positioned to collect the necessary facts. It then described several historical categories:

• An Illinois retailer accepting orders in Illinois or filling Illinois orders from Illinois inventory owed Retailers' Occupation Tax and collected corresponding Use Tax.
• A retailer maintaining a place of business in Illinois registered as an Illinois Use Tax collector even when it did not owe Retailers' Occupation Tax.
• An out-of-state retailer without sufficient nexus had no collection duty, but the Illinois customer still owed Use Tax and had to self-assess.

For local tax, the 2011 letter said the key selling event was generally the seller's acceptance of the purchase order, and the local rate followed the seller's location rather than delivery.

The GIL's nexus discussion relied on Quill and a physical-presence test. That discussion is historical and noncurrent.

What this means for you

A remote or drop-ship seller should not use this letter to decide current Illinois nexus. Review current law and gather complete facts about order acceptance, inventory, agents, delivery and installation, and other Illinois activity. If the seller does not collect, the customer's Use Tax obligation may remain.

Common questions

Q: Did the Department say the seller had no nexus?
A: No. It expressly declined to decide nexus.

Q: Did no collection duty mean no Illinois tax was owed?
A: No. The letter says Illinois customers still owed Use Tax and had to self-assess when the seller did not collect.

Q: Is the Quill physical-presence rule current?
A: No. Treat it as historical only.

Subject

Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0017.pdf

Original ruling text

ST 11-0017-GIL 03/29/2011 NEXUS
This letter discusses nexus. See Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). (This is a
GIL.)

March 29, 2011

Dear Xxxxx:
This letter is in response to your letter dated January 25, 2011, 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:
I am writing to see if by state law I am required to charge 8.25% tax on an air purifier
that I sell. Our business is NAME. 90% of our products are Shaklee products where
Shaklee handles all the taxes.
However, I do carry a line of air purifiers that I purchase from Canada and directly ship
to the consumer. I keep no inventory and have no store front. Based on the attached
findings, it appears that I do not pay or charge taxes on these units. Is that correct? If
not, please explain.

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. 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 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 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 the Retailers’
Occupation Tax liability incurred on those sales.

Regarding nexus, the Department declines to make nexus determinations in the context of
Private Letter Rulings or General Information Letters because the amount of information required to
make those determinations is often best gathered by an auditor. The following information outlines
the principles of nexus. We hope it is helpful to you.
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or
maintains an inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then
liable for Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding
Use Tax incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.
A physical presence is not limited to an office or other physical building. Under Illinois law, it
also includes the presence of any agent or representative of the seller. The representative need not
be a sales representative. Any type of physical presence in the State of Illinois, including the vendor’s
delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410 (1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
Finally, in general, the imposition of the various local sales taxes in Illinois is triggered when
“selling” occurs in a jurisdiction imposing a tax. The Department’s opinion is that the most important
element of selling is the seller’s acceptance of the purchase order. Consequently, if a purchase order
is accepted in a jurisdiction that imposes a local tax, that tax will be incurred. See 86 Ill. Adm. Code
270.115(b), which can be found on the Department’s website. The tax rate is fixed by the location of
the seller, not the delivery location. The fact that the item being sold is shipped from out-of-State or
from another Illinois location is immaterial for purposes of local taxes if the sale occurs through order
acceptance in an Illinois jurisdiction imposing a local tax. For these transactions, the local tax will be
incurred.
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