Which restaurant-franchise charges for hosting, software, hardware, faxing, online ordering, and shipping were taxable in Illinois?

Plain-English summary

A restaurant franchisor listed eleven charges passed to franchisees, including online fax and ordering, loyalty and IT hosting, setup, hardware, network devices, shipping, franchise fees, marketing fees, and royalties.

IDOR did not classify each charge. It said services without property transfer generally were outside retail tax; transferred property followed Service Occupation or Use Tax methods; electronic information was not tangible property, but canned software was taxable; and delivery was excluded only when separately agreed from the property's selling price. A separate invoice line alone was not enough.

Common questions

Did IDOR approve hosting fees as nontaxable? No.

Was separately listed shipping automatically excluded? No.

Citations and references

• 86 Ill. Adm. Code 140.101 through 140.109
• 86 Ill. Adm. Code 130.2105(a)(3) and 130.1935
• 86 Ill. Adm. Code 130.415(d)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0034.pdf

Original ruling text

ST 13-0034-GIL 07/31/2013 SALE OF SERVICE
Under the Service Occupation Tax Act, servicemen are taxed on tangible personal
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101.
(This is a GIL.)
July 31, 2013
Dear:
This letter is in response to your letter dated May 23, 2013, 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 from COMPANY1 to inquire about the following scenario:
We are a company who franchises RESTAURANTS. We charge the franchisees for the
following items:
1) COMPANY2 charges of X cents per page. This varies per period depending on how
much or if the store uses the on-line fax program for catering orders. Some stores
don’t have any charges and some stores have lots of charges, so it will always vary.
The restaurants are receiving the faxes from the customers, mainly for catering
orders. The corporate office charges the franchise groups for their faxes.
2) On-Line order charges of $X per store per period. Our vendor, COMPANY3
invoices us and we pass the cost through to the franchisee. These are overhead
charges for the on-line customer ordering program.
3) Shipping – varies per period and come from COMPANY4 if we ship something to a
franchisee or store.
4) Loyalty Hosting - $X per period and this never changes. This is for the support of
the Loyalty program. Customers have loyalty cards and the monthly maintenance
fee is to track their purchases for future discounting.
5) Full Hosting - $X per period and this never changes. This is for Full IT support of the
store:
Menulink, POS (terminals) and back office computer/printers/faxes.
COMPANY1 provides maintenance of the restaurants computer software and

ST 13-0034-GIL
July 31, 2013
Page 2
hardware, including fax machines, printers, terminals, back office computers and
related software.
6) One-time charges of Loyalty Hosting and Full Hosting set up for new store opens:
$X and $X respectively. These are one-time fees when a new store opens charged
by COMPANY1 to the franchise groups to set up required hardware and software in
the restaurants.
7) Miscellaneous hardware charges – these are few and far between and only if the
store has an issue with a hard drive that needs replacing or memory that goes bad
or something of that nature. We charge the franchisee for the item, tax and shipping
when we order from our vendor.
8) COMPANY5 – hardware devices that allow the store to receive and hold internet
connections. Each new store gets one and sometimes they need replacing. The
cost to the store is $X per unit.
9) Franchise fees.
10) Marketing fees.
11) Royalty fees.
Please advise which of these items should have sales tax when sold to the franchisee.
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. 35 ILCS 120/2;
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. 35 ILCS 105/3;
86 Ill. Adm. Code 150.101.
Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve the
transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. Some of the transactions you describe
appear to be service transactions.
Service Occupation Tax
Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve the
transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information see of 86
Ill. Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are taxed on
tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm. Code

ST 13-0034-GIL
July 31, 2013
Page 3
140.101. The purchase of tangible personal property that is transferred to the service customer may
result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending upon
his activities. The serviceman’s liability may be calculated in one of four ways: (1) separately stated
selling price of tangible personal property transferred incident to service; (2) 50% of the serviceman's
entire bill; (3) Service Occupation Tax on the serviceman's cost price if the serviceman is a registered
de minimis serviceman; or (4) Use Tax on the serviceman's cost price if the serviceman is a de
minimis serviceman and is not otherwise required to be registered under Section 2a of the Retailers'
Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item transferred as
a result of the sale of service. The tax is then calculated on the separately-stated selling price of the
tangible personal property transferred. If the servicemen do not separately state the selling price of
the tangible personal property transferred, they must use 50% of the entire bill to the service
customer as the tax base. Both of the above methods provide that in no event may the tax base be
less than the servicemen's cost price of the tangible personal property transferred. See 86 Ill. Adm.
Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis servicemen
who have either chosen to be registered or are required to be registered because they incur Retailers'
Occupation Tax liability with respect to a portion of their business. See 86 Ill. Adm. Code 140.109.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of the sale of service is less than 35% of the
total annual gross receipts from service transactions (75% in the case of pharmacists and persons
engaged in graphics arts production). Servicemen no longer have the option of determining whether
they are de minimis using a transaction by transaction basis. Registered de minimis servicemen are
authorized to pay Service Occupation Tax (which includes local taxes) based upon their cost price of
tangible personal property transferred incident to the sale of service. Such servicemen should give
suppliers resale certificates and remit Service Occupation Tax using the Service Occupation Tax
rates for their locations. Such servicemen also collect a corresponding amount of Service Use Tax
from their customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen that are not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act. Such de
minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their suppliers are
not registered to collect and remit tax, the servicemen must register, self-assess and remit Use Tax to
the Department. The servicemen are considered to be the end-users of the tangible personal property
transferred incident to service. Consequently, they are not authorized to collect a "tax" from the
service customers. See 86 Ill. Adm. Code 140.108.
Electronically delivered Information
Information or data that is electronically transferred or downloaded is not considered the transfer of
tangible personal property in this State. See 86 Ill. Adm. Code 130.2105(a)(3). However, canned
computer software is considered taxable tangible personal property, regardless of the form in which it
is transferred or transmitted, including tape, disc, card, electronic means or other media. See 86 Ill.
Adm. Code 130.1935.
Transportation Charges

ST 13-0034-GIL
July 31, 2013
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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).
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