Were separately listed average shipping charges excluded from Illinois sales tax when the amount sometimes exceeded actual delivery cost?

Plain-English summary

An Illinois seller used a third-party shipper and listed products and shipping on separate invoice lines. It charged customers an average shipping amount, producing a small profit on some shipments and a loss on others, and asked whether Illinois sales tax applied.

IDOR said a separate invoice line by itself did not prove that delivery was separately agreed from the sale of the goods. The best evidence was a separate delivery contract. Documentation could also suffice if the customer could take the goods at the seller's location for the product price or choose seller delivery for that price plus an ascertained or ascertainable delivery charge.

When those requirements were met, the actual transportation or delivery service charge was outside the property's selling price. But any amount charged above the seller's delivery or transportation cost was taxable under the rule IDOR described.

The GIL did not calculate the tax result for each averaged shipment. It also warned that delivery-charge rulemaking was proposed at the time.

Common questions

Was a separate shipping line enough? No. It did not by itself prove a separate agreement.

What documentation was strongest? A separate delivery contract, or documentation of a real pickup option and an ascertainable delivery charge.

What if the delivery charge exceeded actual cost? The excess was subject to tax.

Did an overall annual shipping loss eliminate tax on profitable shipments? The GIL did not address netting across transactions; it stated that charges exceeding delivery cost were taxable.

Citations and references

• 86 Ill. Adm. Code 130.415(d)
• Nancy Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0029.pdf

Original ruling text

ST 12-0029-GIL 06/15/2012 DELIVERY CHARGES
Charges designated as delivery or transportation charges are not taxable if it can be
shown that they are both agreed to separately from the selling price of the tangible
personal property which is sold and that such charges are actually reflective of the costs
of shipping. See 86 Ill. Adm. Code 130.415. (This is a GIL.)
June 15, 2012
Dear:
This letter is in response to your letter dated May 7, 2012, 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:
This letter is to request a determination letter based on the information/scenario below.
COMPANY is currently located in CITY1, Illinois. Our products are warehoused at third
party locations CITY2, Illinois, CITY3, STATE1 and CITY4, STATE2.
Based on Title 86 Part 130 Section 130.415, D – If the seller and the buyer agree upon
the transportation or delivery charges separately from the selling price of the tangible
personal property which is sold, then the cost of the transportation or delivery service is
not a part of the ‘selling price’ of the tangible personal property which is sold, but
instead is a service charge, separately contracted for, and need not be included in the
figure upon which the seller computes his Retailers' Occupation Tax liability. Delivery
charges are deemed to be agreed upon separately from the selling price of the tangible
personal property being sold so long as the seller requires a separate charge for
delivery and so long as the charges designated as transportation or delivery or shipping
and handling are actually reflective of the costs of such shipping, transportation or
delivery. To the extent that such charges exceed the costs of shipping, transportation
or delivery.
To the extent that such charges exceed the costs of shipping,
transportation or delivery, the charges are subject to tax. The best evidence that
transportation or delivery charges were agreed to separately and apart from the selling
price, is a separate and distinct contract for transportation or delivery. However,
documentation which demonstrates that the purchaser had the option of taking delivery
of the property, at the seller’s location, for the agreed purchase price, or having delivery
made by the seller for the agreed purchase price, plus an ascertained or ascertainable
delivery charge, will suffice.

ST 12-0029-GIL
June 15, 2012
Page 2
Scenario 1: A direct to consumer order currently has two line items separating
products sold and shipping charges. We have a third party company who ships all
products on our behalf. We receive an invoice from the shipping company for all
products shipped. Although we receive a separate invoice from shipping company, we
use an average cost when invoicing our customers for shipping/delivery charges.
Because the amount charged to the customer is an average cost, in some instances we
have a slight profit and other instances, we have a loss. Overall, we believe that
shipping is a net loss for COMPANY.
Question 1: Based on the above facts, are we required to collect sales tax on shipping
charges for products shipped within Illinois?
Based on the scenario above, please provide answer via determination letter. If you
have any questions, please contact me at XXX-XXX-XXXX.
DEPARTMENT’S RESPONSE:
If a seller delivers the tangible personal property to the buyer, and the seller and the buyer agree
upon the transportation or delivery charges separately from the selling price of the tangible personal
property which is sold, then the cost of the transportation or delivery service is not a part of the
"selling price" of the tangible personal property personal property which is sold, but instead is a
service charge, separately contracted for, and need not be included in the figure upon which the
seller computes his or her tax liability. See the Department’s regulation at 86 Ill. Adm. Code
130.415(d).
A separate listing on an invoice of such charges is not sufficient to demonstrate a separate
agreement. The best evidence that transportation or delivery charges were agreed to separately and
apart from the selling price is a separate and distinct contract for transportation or delivery. However,
documentation which demonstrates that the purchaser had the option of taking delivery of the
property, at the seller's location, for the agreed purchase price, or having delivery made by the seller
for the agreed purchase price, plus an ascertained or ascertainable delivery charge, will suffice. Note,
as stated in Section 130.415 of the Department’s regulations, if the charges for transportation or
delivery exceed the cost of delivery or transportation, the excess amount is subject to tax. For further
information, see Nancy Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).
Please be advised that the Department has filed proposed rulemaking concerning the taxation of
delivery charges. You may want to monitor the Department’s website for information regarding the
proposed rulemaking.
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