How did Illinois tax a direct-mail postcard campaign bought from an out-of-state advertising agency and rebilled to dealers?

Plain-English summary

An Illinois company hired an out-of-state advertising agency to print and mail dealer-specific postcards. The agency billed one amount for printing and mailing, and the company rebilled each dealer for half the campaign cost.

IDOR could not give a specific answer without the invoices, contracts, and Illinois registration status of the service providers. It said the arrangement could be a service transaction involving tangible postcards and might also be a multi-service situation.

The service provider's liability could be calculated using the separately stated property price, 50% of the bill, Service Occupation Tax on cost for a registered de minimis serviceman, or Use Tax on cost for an otherwise unregistered de minimis serviceman. De minimis status used annual figures rather than individual campaigns.

In a multi-service arrangement, the primary serviceman contracted with a secondary serviceman to obtain part of the product and services delivered to the customer. Registration and de minimis status determined which party incurred which tax and whether resale documentation could be used.

Property transferred with a service could qualify for interstate-commerce exemption when the agreement required physical delivery from Illinois to a point outside Illinois, the delivery actually occurred, and the property was not returned to Illinois.

What this means for you

Splitting the cost with dealers did not itself answer the tax question. The agency contract, postcard ownership and transfer, invoices, registration, annual ratios, and mailing destinations all mattered.

Common questions

Did IDOR decide who owed tax? No.

Could the campaign be a multi-service transaction? Yes, based on the described structure.

Could out-of-state delivery be exempt? Yes, when the cited physical-delivery requirements were met.

Citations and references

• 86 Ill. Adm. Code 140.101 through 140.109.
• 86 Ill. Adm. Code 140.145.
• 86 Ill. Adm. Code 140.501(b) and 140.108(a)(2)(B).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0011.pdf

Original ruling text

ST 15-0011-GIL 01/30/2015 SALE OF SERVICE
Retailers' Occupation and Use Taxes do not apply to sales of service. The Service
Occupation Tax Act and Service Use Tax are imposed on the transfer of tangible
personal property incident to sales of service. See 86 Ill. Adm. Code 140.101 and
160.101. (This is a GIL.)

January 30, 2015

Dear Xxxx:
This letter is in response to your letter dated January 22, 2015, 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 are a [STATE 1] Limited Liability Company with our headquarters located in Illinois.
We are registered for sales tax with the state of Illinois as well as many other states and
seek guidance on how to treat the taxability of a direct mail marketing campaign that
was recently offered to our dealers in Illinois.
We partnered with an advertising agency located in [STATE 2] to offer a limited-time
direct mail campaign for our dealers located throughout the United States. Our dealers
will provide the zip codes in which to send the mailings to and how many addresses to
include within those zip codes. This information will be given to the advertising agency
in order for them to mail postcards to residential addresses within the provided zip
codes. The postcards will be printed by a representative of the advertising agency. The
postcards feature a common marketing message created by our company COMPANY,
plus unique information about each dealer that may include the dealer’s contact
information.
The advertising agency billed COMPANY a lump sum for printing and mailing services.
This charge did not include state sales tax. We will subsequently bill each dealer an
appropriate amount based on the number of postcards they requested, however we will
split 50% of the cost with the dealer. As an example, a dealer with a direct mail
campaign cost of $1,000 will be billed $500 by COMPANY.
Our company does not have sufficient information to determine whether the advertising
agency located in [STATE 2] is registered for, or subject to, Illinois tax, or how they

handle such sales for Illinois tax purposes if they are subject. With the information
provided does Illinois Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or
Service Use Tax apply to the direct mail campaign for our company or for our Illinois
dealers? If tax does apply to either party, how should the amount subject to tax be
determined and to whom should pay the tax?
DEPARTMENT’S RESPONSE:
We cannot provide you with a specific answer to your questions without
reviewing invoices for the products/services that you buy and sell. In addition, without
reviewing your specific contractual obligations with the third-party advertising service,
and without knowing the registration status of the servicemen involved, the Department
is without sufficient information to provide you with a specific response. However, I hope
the following information regarding Retailers’ Occupation Tax, Use Tax, Service
Occupation Tax and Service Use Tax is helpful.
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. See 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. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self assess their
Use Tax liability and remit it directly to the Department.
Retailers' Occupation and Use Taxes do not apply to sales of service. The
Service Occupation Tax Act and Service Use Tax are imposed on the transfer of
tangible personal property incident to sales of service. See 86 Ill. Adm. Code 140.101
and 160.101. If the transactions you are inquiring about do not involve the transfer of
any tangible personal property to your company, then they generally would not be
subject to Service Occupation Tax or Service Use Tax.
It is possible that the scenario you have described could be considered a service
transaction that may result in either Service Occupation Tax or Use Tax liability for the
servicemen, depending upon which tax base the servicemen choose to calculate their
liability. For general information, see 86 Ill. Code 140.101 through 140.109 regarding
sales of service and Service Occupation Tax.
A 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 he is a registered de minimis serviceman; or, 4. Use Tax on the serviceman’s cost
price if he is a de minimis serviceman 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 price 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
serviceman’s cost price of the tangible personal property transferred. See 86 Ill. Adm.
Code 140.106. These methods result in the customer incurring a Service Use Tax
liability. See 86 Ill. Adm. Code 160.101.
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 incident to 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 do not 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. This
method also results in the customer incurring a Service Use Tax liability.
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. Under this method the
customer incurs no Service Tax liability.
You appear to be describing a multi-service situation. However, without
additional information regarding these transactions, we are unable to verify this. We
hope the following information is helpful. When a serviceman contracts out all or a
portion of the service that he will provide, he is acting as a primary serviceman in a
multi-service situation. As a primary serviceman, he engages the services of a
secondary serviceman in order to obtain all or part of the product and services desired
by the service customer. Whether the primary and secondary servicemen are
registered or de minimis will determine what type of tax will be incurred as well as who
will incur the tax. See 86 Ill. Adm. Code 140.145 for the ways in which servicemen incur
tax in multi-service scenarios. Depending on whether each of the servicemen are
registered servicemen in Illinois, 86 Ill. Adm. Code 140.145(c) may apply, and
certificates of resale may be given for purchases of services involving the transfer of
tangible personal property which will be transferred incident to a subsequent sale of
service.

We also cannot determine, based on the limited information contained in your
letter, whether any sales are made into interstate commerce. An exemption is available
for servicemen on property resold as an incident to a sale of service under an
agreement by which the serviceman is obligated to make physical delivery of the goods
from a point in this State to a point outside this State, not to be returned to this State,
provided such delivery is actually made. See 86 Ill. Adm. Code 140.501(b). Please note
unregistered de minimis servicemen may also claim the interstate commerce
exemption. See 86 Ill. Adm. Code 140.108(a)(2)(B).
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:kad