Would an Illinois school district owe sales tax if it supplied diesel fuel to a private pupil-transportation contractor and recovered the cost?

Plain-English summary

A school district's exempt status did not automatically make its sale of diesel fuel to a private bus contractor tax-free. The district asked whether it could buy fuel for a contractor using a leased district facility and either invoice the contractor monthly for the cost or require the contractor to provide its own fuel.

The Department would not advise the district how to structure the transportation contract. It gave the general rule that governmental bodies incur Retailers' Occupation Tax when selling tangible personal property to the public for use or consumption, except for an item sold in performing a governmental function under 86 Ill. Adm. Code 130.2055.

The response also explains the broader exempt-organization rule: an Illinois E number can protect an organization's qualifying purchases, but exempt organizations generally remain subject to Retailers' Occupation Tax on their own sales. For qualifying nonprofit organizations, the regulation listed narrow exceptions for sales to members, noncompetitive sales, and occasional dinners or similar activities.

What this means for you

A public body considering a fuel-cost-reimbursement arrangement needed to determine whether the arrangement was a taxable retail sale and whether the governmental-function exception applied. This GIL did not decide those facts. If the seller did not collect Use Tax on a taxable sale, the purchaser could be responsible for remitting it directly.

Common questions

Q: Did the Department approve monthly reimbursement for district-purchased fuel?
A: No. It expressly declined to advise how the transportation contract should be structured.

Q: Are all sales by a governmental body exempt?
A: No. The letter's heading states the general rule that governmental bodies incur Retailers' Occupation Tax on sales of tangible personal property, subject to the governmental-function exception.

Q: Does an exemption number make all of an organization's sales tax-free?
A: No. The response says an E number generally protects qualifying purchases; an exempt organization's own retail sales remain taxable unless a limited exception applies.

Subject

Exempt Organizations

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-11-0043.pdf

Original ruling text

ST 11-0043-GIL 05/27/2011 EXEMPT ORGANIZATIONS
Governmental bodies incur Retailers Occupation Tax liability when selling tangible personal
property to the public for use or consumption. The only exception is the sale of an item by a
governmental body in the performance of its governmental function. See 86 Ill. Adm. Code
130.2055. (This is a GIL.)

May 27, 2011

Dear Xxxxx:
This letter is in response to your letter dated September 27, 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 you have stated and made inquiry as follows:
Our school district is in the process of preparing a RFP for pupil transportation services.
As part of that bid we offer the contractor the ability to lease our current property. On
that property is a diesel fuel storage tank that we currently use. In a group discussion
today the question arose as to how we would use that fuel.
Our question is?
If we lease our current facility to a contractor and we supplied and paid for the fuel
would it be legal to ;
a.
b.

Invoice contractor monthly to recoup our costs; or
Have contractor provide the fuel and build those costs into the bid.

The question arose during discussion because we know there is a difference in our per
gallon cost vs a contractor’s per gallon cost as local government entity the [sic] District
pays a [sic] less taxes on fuel purchases.
Please, if possible, respond to this question via email.

DEPARTMENT’S RESPONSE:
Although we cannot advise you regarding how to structure your transportation contracts, we
can set forth the relevant aspects of the sales tax structure in Illinois.
For example, 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. If the retailer does not
collect the Use Tax from the purchaser for remittance to the Department, the purchaser is responsible
for remitting the Use Tax directly to the Department. See 86 Ill. Adm. Code 150.130.
Organizations that are recognized as non-profit under Internal Revenue Code Section
501(c)(3), are not necessarily exempt organizations pursuant to Illinois tax law. Such organizations
must obtain an exemption identification number (an “E number”) to qualify. See 86 Ill. Adm. Code
130.2007.
Organizations that make application to the Department of Revenue and are determined to be
exclusively religious, educational, or charitable, receive an E number. The E number evidences that
the Department recognizes the organizations as exempt from incurring Use Tax when purchasing
tangible personal property in furtherance of their organizational purposes. If an organization does not
have an E number, then its purchases are subject to tax. Please be aware that currently only sales to
organizations holding the E number are exempt, not sales to individual members of the organization.
While organizations that have received an E number are, as a general matter, subject to
Retailers’ Occupation Tax upon their own sales of tangible personal property, there are three limited
exceptions where such organizations are authorized to engage in a restricted amount of retail selling
activity without incurring Retailers' Occupation Tax liability. The limited exceptions available to not-forprofit organizations described in 86 Ill. Adm. Code 130.2005 include: (1) Sales to Members (see 86 Ill.
Adm. Code 130.2005(a)(2)); (2) Noncompetitive Sales (see 86 Ill. Adm. Code 130.2005(a)(3)); and
(3) Occasional Dinners and Similar Activities (see 86 Ill. Adm. Code 130.2005(a)(4)).
Thus, if an organization holding an E number makes sales to both members and nonmembers,
then it would not qualify for that part of the exemption concerning sales to members. Further, if any of
the materials the E-number holder sells are available through business establishments, then its sales
would generally be in competition with business establishments and, thus, it would not qualify for that
part of the exemption concerning noncompetitive sales and, as such, its sales would be taxable.
Lastly, turning to the third part of the exemption, Occasional Dinners and Similar Activities, the
Department’s regulation provides, in part, that E-number holders may “occasionally” conduct certain
activities they may not be subject to tax whether or not such activities are open to the public. Note,
however, the regulation defines “occasional” to mean not more than twice in any calendar year. 86 Ill.
Adm. Code 130.2005(a)(4).

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