Did using an Illinois third-party marketing company create Illinois sales-tax nexus for an out-of-state e-commerce service provider or its clients?

Plain-English summary

Illinois did not decide whether the Illinois marketing-company relationship created nexus. It said nexus determinations require facts often best gathered in an audit and supplied only general principles.

The requester managed e-commerce operations for out-of-state apparel clients, including websites, warehousing, fulfillment, credit-card processing, order management, customer relationships, marketing, and sales-tax returns. It used a third-party marketing company located in Illinois to help drive sales.

The GIL's 2011 framework included agents and representatives

An Illinois retailer accepted Illinois purchase orders or maintained Illinois inventory used to fill Illinois orders. A retailer maintaining a place of business in Illinois registered as a Use Tax collector.

Under the Quill physical-presence analysis discussed in the letter, presence was not limited to an office or building. Illinois included any agent or representative of the seller, and the representative did not need to be a sales representative. Repetitive delivery and installation could also create Use Tax collection responsibilities.

The GIL did not say whether the marketing company acted as an agent or representative for the requester or its clients.

An out-of-state retailer without sufficient nexus did not have to collect Illinois Use Tax, but Illinois customers still had to self-assess and remit it.

What this means for you

E-commerce businesses using Illinois vendors

A vendor's Illinois location does not produce a yes-or-no answer from this letter. The actual relationship, authority, and activities would need factual examination.

Businesses evaluating current nexus

The GIL is nonbinding, leaves nexus unresolved, and discusses a 2011 physical-presence framework. It is not a current safe harbor.

Common questions

Q: Did Illinois rule that the marketing company created nexus?
A: No. The Department declined to decide.

Q: Could a non-sales representative count as physical presence under the framework described?
A: Yes. The GIL says an agent or representative need not be a sales representative.

Q: Who owed Use Tax if the seller lacked nexus and did not collect?
A: The Illinois customer had to self-assess and remit it.

Citations and references

• 86 Ill. Adm. Code 150.201(i) — retailer maintaining a place of business in Illinois.
• 86 Ill. Adm. Code 150.801 — Use Tax collector registration.
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992) — nexus framework discussed in the GIL.
• Brown's Furniture, Inc. v. Zehnder, 171 Ill. 2d 410 (1996) — Illinois physical-presence authority cited.

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-11-0100.pdf

Original ruling text

ST 11-0100-GIL 12/12/11 NEXUS
This letter discusses nexus. See Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). (This is a
GIL.)

December 12, 2011

Dear Xxxxx:
This letter is in response to your letter dated September 1, 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 the Senior Accountant with ABC. We are based out of CITY/STATE and need a
legal ruling in determining Nexus with the state of Illinois.
We provide e-commerce solutions to our clients who sell and manufacture clothing,
apparel and accessories. The specific service we provide is managing our client’s
websites in every capacity which includes warehousing, fulfillment, credit card
processing, customer relationship and order management, and marketing solutions.
For these services, we charge a fee to the client, subtract the fee and sales tax from the
total amount revenue [sic] that was collected through internet sales and send them a
check for the difference. As a value added service we manage, prepare sales tax
returns and make all payments. All of our clients are based out of STATE and have no
affiliation with any other state but we do use a third party marketing company XYZ to
help drive sales figures.
XYZ is based out of City, IL. Since they are based in Illinois, we need to know if this
relationship between our two companies determines Nexus in the state of Illinois.

DEPARTMENT’S RESPONSE:

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. However, the following information outlines the
principles of nexus.
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.
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