In an Illinois drop shipment, may the supplier omit tax when the out-of-state reseller lacks an Illinois number but the end customer promises to self-assess?

Plain-English summary

An Illinois-registered company drop-shipped merchandise for an unregistered out-of-state purchaser to that purchaser's Illinois customer. The supplier had charged tax, but the purchaser instead offered a letter saying the Illinois customer would self-assess Use Tax.

IDOR treated this as two transactions: the supplier's sale to the out-of-state purchaser and the purchaser's resale to the Illinois customer. The supplier must collect tax on its Illinois delivery unless it documents the first transaction as a sale for resale.

The preferred documentation is a signed certificate of resale containing the required transaction details and an Illinois registration or resale number. An out-of-state purchaser with no Illinois nexus may obtain a resale number without becoming a return filer. Alternatively, a certificate explaining the drop shipment, the purchaser's lack of Illinois contacts, and its decision not to obtain a number can serve as other evidence of resale—but IDOR warned that an auditor is more likely to demand additional proof.

If the purchaser is not required to collect Illinois Use Tax and does not collect it, the Illinois customer remains responsible for paying Use Tax directly.

Common questions

Is the end customer's promise to self-assess enough by itself? The GIL directs the supplier to document its own sale to the purchaser as a resale transaction.

Must a no-nexus purchaser register as an Illinois tax collector? Not necessarily; it may qualify for a resale number that does not require tax-return filing.

Citations and references

• 86 Ill. Adm. Code 130.225, 130.1405, and 130.1415
• 35 ILCS 120/2c

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-13-0062.pdf

Original ruling text

ST-13-0062 – GIL 10/22/13 CERTIFICATES OF RESALE
This letter discusses the standard drop-shipment scenario and certificates of resale. See 86 Ill.
Adm. Code 130.225 and 86 Ill. Adm. Code 130.1405. (This is a GIL.)

October 22, 2013

Dear Xxxxx:
This letter is in response to your letter dated July 16, 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:
We had a sale where the out of state purchaser had us drop ship the merchandise
to the customer in Illinois. We charged sales tax on the order as the purchaser is
not registered to collect Illinois tax.
The purchaser, instead of paying the sales tax, has sent us a copy of a letter from
the Illinois customer stating they will self-assess Illinois use tax. Based on this
letter, is it permissible not to collect sales tax from the purchaser?
Under normal circumstances, if the out of state purchaser is charged sales tax, can
they pass the tax on to the customer? If not, does the customer have to pay use
tax as well?

DEPARTMENT’S RESPONSE:
The Department’s regulations regarding Drop Shipments can be found at 86 Ill. Adm.
Code 130.225 and Seller’s Responsibility to Obtain Certificates of Resale and Requirements for
Certificates of Resale at 86 Ill. Adm. Code 130.1405. A drop-shipment situation is normally one
in which out-of State purchaser (Purchaser) makes a purchase for resale from a company
(Company) which is registered with Illinois and has that Company drop-ship the property to
Purchaser’s customer (Customer) located in Illinois.

Your letter posits two separate transactions. The first transaction occurs when Company
sells to Purchaser. An additional transaction occurs when Purchaser sells to Customer.
Company, as a seller required to collect Illinois tax, must either charge and collect tax or
document appropriate exemptions when making deliveries in Illinois. In order to document the
fact that its sale to Purchaser is a sale for resale, Company is obligated by Illinois to obtain a
valid Certificate of Resale from Purchaser. See 86 Ill. Adm. Code 130.1405. A Certificate of
Resale is a statement signed by the purchaser that the property purchased by him is purchased for
purposes of resale. In addition to the statement that the property is being purchased for resale, a
Certificate of Resale must contain:
1) the seller's name and address;
2) the purchaser's name and address;
3) a description of the items being purchased for resale;
4) the purchaser's signature, or the signature of an authorized employee or agent
of the purchaser, and date of signing; and
5) Registration Number, Resale Number, or a statement that the purchaser is an
out-of-State purchaser who will sell only to purchasers located outside the State
of Illinois.
If Purchaser has no nexus with Illinois, it is unlikely that Purchaser would be registered
with Illinois. If that is the case, and if Purchaser has no contact with Illinois which would require
it to be registered as out-of-State Use Tax collector for Illinois, then Purchaser could obtain a
resale number which would provide it the ability to supply the required number to Company in
conjunction with a Certificate of Resale.
Resale numbers are issued to persons who make no taxable sales in Illinois but who need
the ability to provide suppliers with Certificates of Resale when purchasing items that will be
resold. So long as Purchaser does not act as an Illinois retailer (see 86 Ill. Adm. Code
130.605(a)), and so long as it does not fall under the definition of a “retailer maintaining a place
of business in this State” (see 86 Ill. Adm. Code 150.801), its sales to Illinois customers are not
subject to Illinois Retailers’ Occupation Tax liability, and it cannot be required to act as a Use
Tax collector. So long as this is true, Purchaser qualifies for a resale number that does not require
the filing of tax returns with the Illinois Department of Revenue. See 86 Ill. Adm. Code
130.1415. The fact that Purchaser may not be required to act as a Use Tax collector for Illinois
does not relieve Customer of Use Tax liability. Therefore, if Purchaser does not collect Illinois
Use Tax from Customer, Customer would have to pay its tax liability directly to the Illinois
Department of Revenue.
Active registration or placing resale numbers on Certificates of Resale are still the
preferred methods. However, the Illinois Retailers’ Occupation Tax Act leaves open the
possibility of other options to document the resale nature of the sale:

Failure to present an active registration number or resale number and a certification to the
seller that a sale is for resale creates a presumption that a sale is not for resale. This
presumption may be rebutted by other evidence that all of the seller’s sales are sales for
resale or that a particular sale is a sale for resale. See 35 ILCS 120/2c.
Again, including a registration or a resale number from Purchaser on a Certificate of
Resale is the preferred method for documenting that the purchase from Company is a purchase
for resale. Unless Purchaser is able to document a resale exemption for the Seller on its
purchases, Use tax will be incurred on both of these transactions. However, in light of this
statutory language, a certification from Purchaser on a Certificate of Resale in lieu of resale
number which described the drop-shipment situation and the fact that Purchaser has no contact
with Illinois which would require it to be registered and that it chooses not to obtain an Illinois
resale number would constitute evidence that this particular sale is a sale for resale, despite the
fact that no registration number or resale number is provided. The risk run by Company in
accepting such a certification, and the risk run by Purchaser in providing such a certification, is
that an Illinois auditor may be more likely to go behind a Certificate of Resale which does not
contain a valid resale number and require that more information be provided by Company as
evidence that the particular sale was, in fact, a sale for resale.
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,

Cara Bishop
Associate Counsel
CB:msk