Was a manufacturer's separately stated consolidated freight charge for moving goods between its own plants taxable?

Plain-English summary

A manufacturer planned to charge customers a percentage-based consolidated freight fee when products moved from one company plant to another so a customer's order could ship from one location.

IDOR treated that interfacility movement as incoming freight and a retailer cost of doing business. Illinois selling price could not be reduced by property cost, materials, labor, services, or other expenses.

Costs of doing business remained part of taxable gross receipts even when separately stated on the customer's bill. For the described consolidation deliveries, Retailers' Occupation Tax was measured on the cost of moving the goods from one company facility to the other before customer delivery.

What this means for you

Labeling an internal logistics cost as freight on the customer invoice did not turn it into a deductible delivery charge. Its function as an interplant consolidation cost controlled.

Common questions

Was the consolidated freight charge taxable? Yes.

Did separately stating it change the result? No.

Why was it taxable? It was incoming freight and a cost of doing business.

Citations and references

• 35 ILCS 120/1.
• 86 Ill. Adm. Code 130.410.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0039.pdf

Original ruling text

ST 14-0039-GIL 08/07/14 GROSS RECEIPTS
Costs of doing business are an element of the retailer's gross receipts subject to tax even if
separately stated on the bill to the customer. See 86 Ill. Adm. Code 130.410. (This is a GIL.)

August 7, 2014
Dear Xxxx:
This letter is in response to your letter received June 27, 2014, 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 NAME and I am the Senior Tax Analyst for COMPANY. We are a manufacturing
company with facilities in CITY, STATE1, CITY, STATE1, and CITY, STATE2. Our
corporate headquarters is in STATE2 at the plant facility.
We are in the process of incorporating a new charge for our customers. This new
charge will be called a "Consolidated Freight Charge". Our definition of this charge is:
"Freight assessed on product transported from one COMPANY facility to the
other for the purpose of consolidating a customer's order to ship from a single
shipping point. The charge will be calculated as a % of the invoice price for the
product (line Items) that are produced in one plant and transferred to another for
shipment consolidation. This charge will be shown as a single line item on the
bottom of the customers invoice."
This letter is to determine the taxability of this charge in your state and request the
statutes that will cover this transaction. Thank you in advance for your help!!
DEPARTMENT’S RESPONSE:
The Retailers’ Occupation Tax is imposed upon persons engaged in this State in the business
of selling tangible personal property for use or consumption. Retailers’ Occupation Tax is based upon
the “selling price” of the tangible personal property sold. Section 1 of the Retailers’ Occupation Tax
Act defines the term, “selling price,” as the “consideration for a sale valued in money … and shall be
determined without any deduction on account of the cost of the property sold, the cost of materials
used, labor or service cost or any other expense whatsoever….” See 35 ILCS 120/1. As indicated by
this definition, a retailer’s cost of doing business is not deductible from his or her gross receipts. This

principle is articulated in Section 130.410 of the Department’s rules. 86 Ill. Adm. Code 130.410. This
rule states that in calculating Retailers’ Occupation Tax liability, “labor or service costs” . . . “overhead
costs” . . . “or any other expenses whatsoever” are not deductible from gross receipts. The rule
provides that these costs of doing business are an element of the retailers’ gross receipts subject to
tax even if separately stated on the bill to the customer. Note, incoming freight is always a cost of
doing business subject to Retailers’ Occupation Tax. Thus, for deliveries made from one company’s
facilities to another of its facilities for the purpose of consolidating a customer’s order and
subsequently redelivered to the customer, tax liability will be measured on the cost of the delivery
from the one facility to the other facility. This delivery is a transportation cost that is treated
exclusively as a retailer’s cost of doing business.
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

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