Were paid or free-trial online memberships with shipping, streaming, e-books, music, storage, and discounts taxable in Illinois?

Plain-English summary

An online retailer asked IDOR to classify paid annual and free one-month memberships offering shipping benefits, streaming and downloadable video and music, borrowed and free e-books, product discounts, photo storage, and other benefits.

IDOR declined to issue the requested Private Letter Ruling and did not decide whether this particular membership or trial was taxable. It supplied general rules instead.

Membership fees generally were intangible receipts outside Retailers' Occupation Tax and Use Tax when the membership rights did not include a transfer of tangible personal property. Likewise, services without property transferred to the customer generally avoided Service Occupation and Service Use Tax.

If buying the membership itself entitled the customer to receive tangible property, or to receive a service with property transferred incident to it, the fee could create Retailers' Occupation, Service Occupation, or Use Tax depending on the provider's activities.

Downloaded books, music, newspapers, magazines, and similar electronic data were intangible rather than tangible personal property. Downloaded canned software remained taxable under the cited software regulation.

What this means for you

This GIL did not approve the described bundle as tax-free or separately resolve the free-trial questions. Its general rules required examining whether the membership itself delivered tangible property or a service involving property.

Common questions

Were membership fees generally taxable? No, when they represented only intangible membership rights.

Did IDOR decide the retailer's specific membership? No.

Were downloaded e-books and music tangible property? No; canned software was treated differently.

Citations and references

• 86 Ill. Adm. Code 130.401(d), 130.2105(a)(3), and 130.1935.
• 86 Ill. Adm. Code 140.101 and 160.101.

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-15-0027-gil.pdf

Original ruling text

ST 15-0027-GIL 04/30/2015 SERVICE OCCUPATION TAX

Membership fees are generally considered intangibles and are not subject to Retailers’ Occupation
Tax or Use Tax. If a membership charge entitles the customer to receive an item of tangible
personal property or to receive a service and tangible personal property is transferred incident to
the service, the charge may result in Retailers’ Occupation Tax liability, Service Occupation Tax
liability, or Use Tax liability. See 86 Ill. Adm. Code 130.401(d) and 86 Ill. Adm. Code 140.101. (This
is a GIL.)

April 30, 2015

Dear XXXX:

This letter is in response to your letter dated November 24 , 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:

COMPANY (the “Company’), an affiliate of COMPANY 2, respectfully submits
this request, pursuant to 86 Ill. Admin. Code 1200.110, for a Ruling from the Illinois
Department of Revenue (“Department”) regarding the applicability of Illinois Retailers’
Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax to sales of the
Membership, described in more detail below.

As required by 2 Ill. Adm. Code § 1200.110, Company provides the following
disclosures: (1) Company is not under audit by the Department; (2) Company is not
engaged in litigation with the Department; (3) to the best of the Company’s knowledge,
the Department has not previously ruled on the same or a similar issue for the Company
or a predecessor; (4) Company has not previously submitted the same or a similar issue
to the Department for a letter ruling and withdrawn the request before a letter ruling was
issued; (5) this request for a Ruling describes all authorities relevant to the request.
This Ruling is intended to address current and future tax periods to which the facts
described below apply. Company requests the opportunity to delete any identifying
information prior to public dissemination of the Ruling.

I. Facts

Company offers a membership program known as MEMBERSHIP.” The general
public may sign up for a free trial or paid MEMBERSHIP and receive certain
membership benefits associated with the COMPANY 2 (the “Website”) during the
membership period. The free trial period is one month and the paid membership period
is one year. Participants in the membership program are referred to as “MEMBERS.”
MEMBERS agree to the Terms & Conditions which are enclosed as Exhibit A. The
membership benefits provided to MEMBERS are described below.

SHIPPING — MEMBERS are entitled to receive free two-day shipping and other
discounted shipping benefits on select shipping options on eligible purchases made on
the Website.* Products eligible for these shipping benefits are designated as such on
the Website’s product pages. Also, certain products sold by third-party merchants
participating in SERVICE PROGRAM are eligible for SHIPPING benefits.

VIDEOS — MEMBERS may view movies and television shows designated as “VIDEOS”
an unlimited number of times at no additional cost during the course of their
MEMBERSHIP. The VIDEOS are viewed on the MEMBER’S television, computer,
GAMING system, DEVICE, or other compatible device. MEMBERS can stream the
VIDEOS and MEMBERS with tablets may download VIDEOS.° The downloaded videos
may be viewed without a wireless connection.

LIBRARY — The LIBRARY allows eligible MEMBERS who own DEVICES to choose
from thousands of electronic books (“e-books”) to borrow for free, as frequently as a
book a month, with no due dates. MEMBERS can only borrow one e-book at a time.
MEMBERS must own a DEVICE that is registered to the same ACCOUNT as the
eligible MEMBERSHIP account in order to access this benefit.®

FEATURE — The FEATURE allows eligible MEMBERS who own DEVICES to select
and receive one free e-book per month from four books selected by PUBLISHING
editors. The selected e-book becomes a permanent part of the eligible MEMBER’S
LIBRARY. MEMBERS must own a DEVICE that is registered to the same ACCOUNT
as the MEMBERSHIP account in order to access this benefit.’

PANTRY — The PANTRY benefit allows MEMBERS, in addition to the discounted
shipping benefits described in the Request, to have up to 45 pounds of heavy/bulky

1 Additional business descriptions can be found at http://www.XXXX/gp/.

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Shipping benefits also apply to certain products sold on third-party websites that offer

shipping benefits.

Additional information on the PROGRAM can be found at
http://;www.XXXX.com/content/KXX X.htm.

Additional information on the VIDEO can be found at
http://www.XXXX/gp/help/customer/display.html/ref=hp_left_cn?ie=UTF8&nodeld=200572880.
Additional information on the VIDEO for tablets can

be found at http://www. XXX X/dp/BOODOPNO4M/ref=sa_menu_kdpth#entertain.

Additional information on the LIBRARY program may be found at

http://www.X XX X/gp/help/customer/display.html/ref=hp_land XXXX nodeIld=2
00757120.

Additional information on the FEATURE may be found at

http://www. XXXX/gp/digital/X XX X/botm/

items delivered for a flat shipping fee of $5.99. The heavy/bulky items in PANTRY are
only available for purchase by MEMBERS.

PRICING — PRICING provides discounts to MEMBERS on sales of certain tangible
personal property. For example, MEMBERS can purchase certain televisions and
software at a discount. The products offered to MEMBERS at a discount continue to
expand.

MUSIC — MEMBERS may listen to music designated as “MUSIC” an unlimited number
of times at no additional cost during the course of their MEMBERSHIP. MUSIC may be
played on the MEMBER’S computer, DEVICE, or other compatible device. MUSIC
may be streamed, or may be downloaded for listening without a wireless connection.

Photo Storage — MEMBERS have unlimited storage for photos in the DRIVE (“DRIVE”).
MEMBERS must have a DRIVE account registered to the same ACCOUNT as their
MEMBERSHIP. As long as the MEMBERSHIP is active, photos uploaded to the
MEMBER’S DRIVE will not count against the MEMBER'S fixed storage capacity in the
DRIVE.

While Company does not directly provide the membership benefits to MEMBERS, it is
contractually obligated to ensure the benefits are provided. To meet its contractual
obligations, Company pays its affiliates to provide the underlying service related to each
benefit. For example, an affiliate of Company provides the shipping service and another
affiliate provides e-books.

Additional information on the MUSIC program can be found at

http://www.X XX X/gp/feature.html/ref=dmm_prm_st_bb_learn?ie=UTF8&docld=1002557791 &pf_rd_m=ATVPDKI
KXODER&pf_rd_s=merchandised-search-left-
2&pf_rd_r=ODBBX2MRSYBVDQFW134R&pf_rd_t=101&pf_rd_p=1827366182&pf_rd_i=8335758011.

Issues

A. ls Company’s sale of the MEMBERSHIP to Illinois customers subject to the
Retailers’ Occupation Tax or Use Tax?

B. ls Company's provision of the free, one-month trial period of the MEMBERSHIP to
Illinois customers subject to the Retailers’ Occupation Tax or Use Tax?

C. Is Company's sale of the MEMBERSHIP to Illinois customers subject to the Service
Occupation Tax or Service Use Tax?

D. Is Company's provision of the free, one-month trial period of the MEMBERSHIP to
Illinois customers subject to the Service Occupation Tax or Service Use Tax?

Law

Illinois imposes the Retailers’ Occupation Tax on retail sales of tangible personal
property? and it imposes the Use Tax on the use of tangible personal property
purchased at retail from a retailer.° In addition, Illinois imposes the Service Occupation
Tax on the transfer of tangible personal property incident to the sale of services,” and it
also imposes the Service Use Tax on the use of real or tangible personal property
acquired incidentally to the purchase of a service from a serviceman.* The following
summary of Illinois law sets forth the relevant parts of these taxes.

A. Retailers’ Occupation Tax & Use Tax

1. Retailers’ Occupation Tax

Illinois imposes the Retailers’ Occupation Tax “upon persons engaged in the
business of selling at retail tangible personal property...”’° A “sale at retail” means any
“transfer of the ownership of or title to tangible personal property to a purchaser, for the
purpose of use or consumption, and not for the purpose of resale . . . for a valuable
consideration.”** Illinois does not define what constitutes “tangible personal property”
for Retailers’ Occupation Tax purposes.

Illinois imposes its Retailers’ Occupation Tax on gross receipts from sales of
tangible personal property made in the taxpayer’s course of business.*° The application

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35 ILCS 120/2.

35 ILCS § 105/3.
35 ILCS § 115/3.
35 ILCS § 110/3.

35 ILCS § 120/2.

35 ILCS 120/1.

35 ILCS § 120/2-10.

of Retailers’ Occupation Tax to receipts from sales of tangible personal property,
transportation and delivery charges, and digital products is set forth below.

a. Tangible Personal Property

As noted above, Illinois law does not define “tangible personal property” for
Retailers’ Occupation Tax purposes. Illinois law does provide, however, that “tangible
personal property” includes canned computer software.° Custom computer programs,
or software programs prepared to the special order of the customer, are not tangible
personal property.’ Information or data that is downloaded electronically, such as
downloaded books, musical recordings, newspapers or magazines, is also not
characterized as tangible personal property, but rather is classified as an intangible.®

b. Transportation and Delivery Charges

Illinois imposes the Retailers’ Occupation Tax on transportation or delivery
charges that are included in the selling price of the tangible personal property being
sold."? The Department has provided specifically that shipping and handling charges for
online sales are taxed under the Retailers’ Occupation Tax Act, not the Service
Occupation Tax Act.”°

The Retailers’ Occupation Tax applies to transportation and delivery charges
when they are included in the taxable gross receipts or sales price of a transaction. An
Illinois regulation provides that when computing the Retailers' Occupation Tax liability, a
taxpayer may not deduct from its taxable gross receipts or selling prices “the cost of
property sold, the cost of materials used, labor or service costs, idle time charges,
incoming freight or transportation costs, overhead costs, processing charges, clerk hire
or salesmen's commissions, interest paid by the seller, or any other expenses
whatsoever.”~" Illinois further defines “transportation and delivery charges” as “freight,
express, mail, truck or other carrier, conveyance or delivery expenses.””*
Transportation and delivery charges are synonymous with shipping and handling
charges.”°

The taxability of transportation and delivery charges does not depend on whether
such charges are separately stated.** Instead, taxability depends on whether “the
transportation or delivery charges are included in the selling price of the property which

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35 ILCS § 120/2; Illinois Dept. of Rev. General Information Letter ST 13-0051-GIL, 09/13/2013 (“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.”).

86 Il. Admin. Code 130.1935(c)(1) (“[c]ustom computer programs prepared to the special order of the customer are not subject to

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tax under the Retailers' Occupation Tax, Use Tax, Service Occupation Tax or Service Use Tax.”).

See 86 Ill. Admin. Code 130.2105(a)(3).

86 Ill. Admin. Code 130.415(c).

Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 365 (Ill. 2009); see also Dep’t of Rev. v. ABC Corp., Inc., No. ST 11-03,

(03/02/2011) (ruling that delivery charges made in connection with a food and meal delivery service was subject to tax under the

Retailers’ Occupation Tax Act, not the Service Occupation Tax Act).
86 Ill. Admin. Code 130.410.
86 Ill. Admin. Code 130.415(a).

Id

86 Ill. Admin. Code 130.415(b).

is sold” or whether “the seller and the buyer contract separately for such transportation
or delivery charges by not including such charges in such selling price.”” If “the
transportation or delivery charges are included in the selling price of the tangible
personal property which is sold,” the transportation or delivery expense may not be
deducted and is subject to the Retailers’ Occupation Tax.”°

If the seller and buyer contract for the transportation or delivery charges
separately from the selling price of the transaction, then the transportation or delivery
service is not a part of the “selling price” but rather a separate service charge that is not
subject to the Retailers’ Occupation Tax.’ Delivery charges are contracted for
separately when 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.”° If, however, such
charges exceed the costs of shipping, transportation or delivery, then 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 demonstrating 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, is also sufficient.**

c. Services

Illinois does not impose the Retailers’ Occupation Tax on services.** The
Retailers’ Occupation Tax is generally only imposed “upon persons engaged in the
business of selling at retail tangible personal property. ..”°°

i. Membership Fees

As a general matter, Illinois does not impose the Retailers’ Occupation Tax on
the sale of memberships. An Illinois regulatory provision states that “[m]embership fees
are not gross receipts from the sale of tangible personal property.”** Membership fees
are gross receipts received in exchange for an intangible.2° For example, when a
membership “buys” purchasers the right to purchase products at wholesale, but are not
applied to the purchase price of tangible personal property, they are not subject to the
Retailers’ Occupation Tax.°°

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Id.

86 Ill. Admin. Code 130.415(c).
86 Ill. Admin. Code 130.415(d).

Id.
Id.
Id.
Id.

35 ILCS 120/2.
35 ILCS § 120/2 (effective Jan. 1, 2014).
86 Ill. Admin. Code 130.401(d).

Id.
Id.

Illinois does impose the Retailers’ Occupation Tax on membership fees,
however, if the membership represents the sale of tangible personal property.” An
Illinois regulation provides an example of a country club that charges a member $100
each month as a “minimum charge” for food services at the club.° If the member
consumes $75 worth of food in a particular month, then the $75 is subject to the
Retailers’ Occupation Tax.°° Further, if a membership charge entitles a customer to
receive an item of tangible personal property or to receive a service and tangible
personal property is transferred incident to that service, then that charge can result in
Retailers' Occupation Tax liability, Service Occupation Tax liability or Use Tax liability.“°
The taxability determination depends on the nature of the serviceman’s activities.**

d. Digital Goods

Illinois does not impose the Retailers’ Occupation Tax on digital goods because
they are not tangible personal property. Under Illinois law “[i]Jnformation or data that is
downloaded electronically, such as downloaded books, musical recordings, newspapers
or magazines, does not constitute the transfer of tangible personal property.”** The
Department has also taken the position that the electronic downloading of a book is not
subject to the Retailers’ Occupation Tax because it involves only the transfer of data or
information, not the electronic transfer of canned computer software.”

e. Bundled Transactions

Illinois law addresses bundled transactions in the context of a nontaxable service
bundled with tangible personal property. The Department has applied the “true object”
test in the context of examining bundled exempt services with tangible personal
property or taxable telecommunications services.“ The Department has indicated that
the true object test is an all-or-nothing test, and it looks at the reason or purpose the

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Id.
Id.
Id.

Illinois Dept. of Rev. General Info. Ltr. ST 09-0034-GIL, (03/17/2009); see also Illinois Dept. of Rev. General Info. Ltr. ST 02-0230-GIL,
(10/24/2002) (ruling that a $500 penalty fee imposed for not purchasing the requisite amount of food and beverage of a minimum spending
program was not subject to the Retailers’ Occupation Tax, as “[a]ny penalty that is imposed that is not part of the selling price of tangible
personal property would not be subject to sales tax.”).

Illinois Dept. of Rev. General Info. Ltr. ST 09-0034-GIL, (03/17/2009).

86 Ill. Admin. Code 130.2105(a)(3); Illinois Dept. of Rev. General Information Letter ST 11-0015-GIL, (03/29/2011); Illinois Dept. of Rev.
General Information Letter ST 09-0098-GIL, (07/30/2009).

Illinois Dept. of Rev. General Information Letter ST 07-0068-GIL, (06/19/2007); Illinois Dept. of Rev. General Information Letter ST 14-0028-
GIL, (04/04/2014); Illinois Dept. of Rev. General Information Letter ST 14-0031-GIL (05/12/2014).

Illinois Dept. of Rev. General Information Letter ST 13-0048-GIL (09/11/2013) (applying the true object test to determine
whether a bundled service with an optional communications feature was subject to telecommunications excise tax, stating that
“[i]t is clear customers subscribe to the SERVICES because of the interactive Internet platforms provided to host various
meetings and presentations, the true object of the services. Any use of the optional Communication Features, which is restricted to
SERVICES sessions, is secondary to the true object of the value added SERVICES.”); Illinois Dept. of Rev. General Information
Letter ST 10-0069-GIL, (08/10/2010) (applying the true object test to determine whether a bundled service with an optional
communications feature is subject to tax, stating that “[i]t is clear customers subscribe to the SERVICES because of the
interactive Internet platforms provided to host various meetings and presentations, the true object of the services. Any use of the
optional Communication Features, which is restricted to SERVICES sessions, is secondary to the true object of the value added
SERVICES.”); Illinois Dept. of Rev. General Information Letter ST 09-0047-GIL, (03/24/2009) (applying the true object test to
determine whether a bundled service is subject to tax, stating that “Company A is not providing a telecommunications service as
they are charging a subscription fee and the true object of the transaction is the call tracking service and the electronic download,
which are specifically not subject to the Illinois ROT or SOT.”).

buyer entered into the transaction and what the buyer wanted to purchase.*° If the
purpose is to obtain a taxable item, e.g., tangible personal property, the entire
transaction is taxable unless the taxable and nontaxable items are separately stated.“°

2. Use Tax

Illinois imposes its complementary Use Tax on the privilege of “using” in Illinois
“tangible personal property purchased at retail from a retailer, including computer
software..."“” “Use” means “the exercise by any person of any right or power over
tangible personal property incident to the ownership of that property...”“° Illinois
imposes its use tax upon either the selling price or the fair market value, if any, of the
tangible personal property.“2 The Retailers’ Occupation Tax and Use Tax are
complementary so that if a transaction is not subject to Retailers’ Occupation Tax, it is
subject to the Use Tax.°? The Use Tax rate equals the tax due under the Retailers’
Occupation Tax.**

B. Service Occupation Tax & Service Use Tax

1. Service Occupation Tax

Illinois imposes the Service Occupation Tax on “all persons engaged in the
business of making sales of a service (referred to as “servicemen”)* on all tangible
personal property transferred as an incident of a sale of service, including computer
software...”°° A “sale of service” means any transaction other than (a) a retail sale of
tangible personal property subject to the Retailers’ Occupation Tax or Use Tax; and (b)
an exempt sale for resale.° For purposes of this definition, Illinois adopts the Retailers’
Occupation Tax definition for a “retail sale.”°°> The tax is computed as a percentage of
the cost price to the serviceman of the tangible personal property.°° Charges for
services apart from the cost price of tangible personal property are not subject to this
tax.

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See Illinois Dept. of Rev. General Information Letter ST 07-0066-GIL (06/18/2007) (citing to Illinois Dept. of Rev. General

Information Letter ST 04-0091-GIL (06/21/2004).

See Illinois Dept. of Rev. General Information Letter ST 07-0066-GIL (06/18/2007) (citing to Illinois Dept. of Rev. General

Information Letter ST 04-0091-GIL (06/21/2004).
35 ILCS § 105/3.

35 ILCS § 105/2.

35 ILCS § 105/3-10.

See Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 365 (Ill. 2009) (“ROTA and the Use Tax Act are complementary, interlocking

statutes that comprise the taxation scheme commonly referred to as the Illinois “sales tax.” (internal citations omitted)); Illinois
Dept. of Rev. General Information Letter ST 13-0028-GIL, (05/28/2013) (“The Retailers’ Occupation Tax is imposed on the
retailer and the Use Tax is imposed on the purchaser. Since the Use Tax is imposed on the purchaser, there is a tax to which an
exempt purchaser's exempt status can attach and, because these taxes are complementary, if the purchaser is exempt from paying

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Use Tax, then the retailer is generally exempt from the Retailers’ Occupation Tax.”).
35 ILCS § 105/3-10; 35 ILCS § 120/2-10.

See also 35 ILCS § 115/2 (defining “Serviceman” as “any person who is engaged in the occupation of making sales of service.”).

35 ILCS § 115/3.

35 ILCS § 115/2(a)-(b).
35 ILCS § 115/2.

35 ILCS 115/3-10.

Id.

The Service Occupation Tax applies to the “selling price” of the tangible personal
property.°® For the purpose of computing this tax, the “selling price” cannot be less than
the cost price to the serviceman of the tangible personal property transferred.°? The
selling price of each item of tangible personal property transferred as an incident of a
sale of service may either be separately stated or included in the entire charge
presented on the serviceman's bill to its customer.©° If the selling price of the tangible
personal property transferred as incident of a sale of service is not separately stated,
the “selling price” of the tangible personal property is deemed to be 50% of the
serviceman's entire billing to the service customer.*

The application of Service Occupation Tax to receipts from sales of tangible
personal property, transportation services, and digital products is set forth below.

a. Tangible Personal Property

Illinois law does not define “tangible personal property” for Service Occupation
Tax purposes. Illinois law does provide, however, that “tangible personal property”
includes prewritten or canned computer software.

b. Transportation and Delivery Charges (i.e., Shipping and
Handling Charges)

Illinois Service Occupation Tax does not apply to transportation and delivery
charges if such charges are made in connection with a retail sale.“ The Service
Occupation Tax does not apply, inter alia, to a retail sale of tangible personal property
that is subject to the Retailers’ Occupation Tax or Use Tax.™ The Retailers’ Occupation
Tax applies to all retail sales unless the taxpayer can produce evidence in the form of
books and records to show that the sale is not subject to the Retailers’ Occupation
Tax.

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Id.
Id.

Id.
Id.

°° See 35 ILCS § 115/3-25 (for Service Occupation Tax purposes, “computer software” means a set of

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statements, data, or instructions to be used directly or indirectly in a computer in order to bring about a
certain result in any form in which those statements, data, or instructions may be embodied, transmitted,
or fixed, by any method now known or hereafter developed, regardless of whether the statements, data,
or instructions are capable of being perceived by or communicated to humans, and includes prewritten
or canned software that is held for repeated sale or lease, and all associated documentation and
materials, if any, whether contained on magnetic tapes, discs, cards, or other devices or media, but does
not include software that is adapted to specific individualized requirements of a purchaser, custom-made
and modified software designed for a particular or limited use by a purchaser, or software used to
operate exempt machinery and equipment used in the process of manufacturing or assembling tangible
personal property for wholesale or retail sale or lease.”).

35 ILCS § 115/2(a)-(b).

Id.

H.D., Ltd. v. Dep’t of Rev., 297 Ill. App. 3rd 26, 34 (2d Dist. 1998).

Case law also provides that transportation and delivery charges for an online
retail sale, if applicable, are taxed under the Retailers’ Occupation Tax Act, not the
Service Occupation Tax Act.°°

c. Services

Illinois does not impose the Service Occupation Tax on pure services. Instead,
Illinois imposes the Service Occupation Tax on all tangible personal property transferred
as an incident of a sale of service.®” A “sale of service” means any transaction other
than (a) a retail sale of tangible personal property subject to the Retailers’ Occupation
Tax or Use Tax; and (b) an exempt sale for resale.°® For purposes of this definition,
Illinois adopts the Retailers’ Occupation Tax definition for a “retail sale.”® If a “sale of
service” does not involve the transfer of tangible personal property, Service Occupation
Tax does not apply.

i. Membership Fees

Illinois does not impose the Service Occupation Tax on membership fees. As a
general matter, Illinois does not impose the Service Occupation Tax on membership
fees because they are considered to be intangibles, not tangible personal property. The
Department has indicated that receipts from the sale of membership fees are not
subject to the Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service
Use Tax because a membership fee is considered an intangible, not tangible personal

property. ©

If, however, a membership charge entitles a customer to receive an item of
tangible personal property or to receive a service and tangible personal property is
transferred incident to that service, then that charge may result in Retailers' Occupation
Tax liability, Service Occupation Tax liability or Use Tax Liability. In this case where
the membership may be taxable, the tangible personal property must be provided to the
member by virtue of his or her purchase of the membership; there is no subsequent

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Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 365 (Ill. 2009); see also Dep’t of Rev. v. ABC Corp.,
Inc., No. ST 11-03, (03/02/2011) (ruling that delivery charges made in connection with a food and
meal delivery service was subject to tax under the Retailers’ Occupation Tax Act, not the Service
Occupation Tax Act).

35 ILCS § 115/3 [Eff. 1-1-2014.].

35 ILCS § 115/2(a)-(b).

35 ILCS § 115/2.

Illinois Dept. of Rev. General Information Letter ST 09-0034-GIL, (03/17/2009) (“The Department
does not consider receipts from the sale of membership fees to be gross receipts from the sale of tangible
personal property. Rather, a membership fee is considered an intangible, which is not subject to the
Retailers' Occupation Tax or Use Tax liability. 86 Ill. Adm. Code 130.401(d). This is the case when the
sale of membership rights does not include the transfer of tangible personal property. However, if the
membership charge entitles the customer to receive an item of tangible personal property or to receive a
service and tangible personal property is transferred incident to that service, then that charge may result
in either the Retailers' Occupation Tax liability, Service Occupation Tax liability or Use Tax liability,
depending upon the serviceman's activities. See 86 Ill. Adm. Code 140.101.”).

See 86 Ill. Adm. Code 140.101.

purchase or consideration required by the member to receive the tangible personal
property.

d. Digital Goods

As a general matter, Illinois does not impose the Service Occupation Tax on
digital goods because they are considered to be intangibles, not tangible personal
property.’° The Department has taken the position that digital products transferred
electronically are not subject to the Service Occupation Tax or the Service Use Tax.”

e. Bundled Transactions

Illinois Service Occupation Tax applies to “all persons engaged in the business of
making sales of service (referred to as “servicemen”)” on all tangible personal property
transferred as an incident of a sale of service, including computer software...”’° The tax
is computed as a percentage of the cost price to the serviceman of the tangible
personal property.’’ Charges for services apart from the cost price of tangible personal
property are not subject to this tax.”

For Service Occupation Tax purposes, Illinois law provides several valuation
methods for the tangible personal property transferred incident to the sale of a service,
which do not involve the application of the true object test. The Service Occupation Tax
applies to the “selling price” of the tangible personal property.“ For the purpose of
computing this tax, the “selling price” cannot be less than the cost price to the
serviceman of the tangible personal property transferred.®° The selling price of each
item of tangible personal property transferred as an incident of a sale of service may
either be separately stated or included in the entire charge presented on the
serviceman's bill to its customer.® If the selling price of the tangible personal property
transferred as incident of a sale of service is not separately stated, the “selling price” of
the tangible personal property is deemed to be 50% of the serviceman's entire billing to
the service customer.°* When, however, a serviceman contracts to design, develop,
and produce special order machinery or equipment, the Service Occupation Tax is
based on the serviceman's cost price of the tangible personal property transferred
incident to the completion of the contract.®°

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73

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75

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77
78
79
80
81
82
83

Id.

86 Ill. Admin. Code 130.2105(a)(3); Illinois Dept. of Rev. General Information Letter ST 11-0015-GIL,
(03/29/2011); Illinois Dept. of Rev. General Information Letter ST 09-0098-GIL, (07/30/2009).

Illinois Dept. of Rev. General Information Letter No. ST 11-0015-GIL, (03/29/2011).

See also 35 ILCS § 115/2 (defining “Serviceman” as “any person who is engaged in the occupation of
making sales of service.”).

35 ILCS § 115/3.

Id.
Id.
Id.
Id.
Id.
Id.
Id.

2. Use Tax

Illinois imposes its Service Use Tax on the use of “real or tangible personal
property acquired as an incident to the purchase of a service from a serviceman,
including computer software, and including photographs...”° “Use” means the “the
exercise by any person of any right or power over tangible personal property incident to
the ownership of that property, but does not include the sale or use for demonstration by
him of that property in any form as tangible personal property in the regular course of
business.” “Use” does not mean the interim use of tangible personal property nor the
physical incorporation of tangible personal property, as an ingredient or constituent, into
other tangible personal property, which is either sold in the regular course of business
or transported in interstate commerce to destinations outside the State of Illinois.°°
Illinois regulatory provisions further provide that if a serviceman is not taxable under the
Service Occupation Tax Act, then the use of such property is likewise not subject to the
Service Use Tax.®” Illinois imposes its Service Use Tax on “the selling price of tangible
personal property transferred as an incident to the sale of service.”® The selling price
cannot be less than the cost price of the property to the serviceman.®”

IV. Analysis

A. Company’s Sale of the MEMBERSHIP to Illinois Customers is Not Subject
to the Retailers’ Occupation Tax and Use Tax

The sale of the MEMBERSHIP to Illinois customers is not subject to Illinois
Retailers’ Occupation Tax and Use Tax because the MEMBERSHIP is not any of the
following: (1) taxable tangible personal property; (2) a taxable service under Illinois law,
including a taxable membership; or (3) a bundled transaction because the membership
does not involve the transfer of tangible personal property or a taxable service.

1. The MEMBERSHIP is Not Taxable Tangible Personal Property

Sales of the MEMBERSHIP are not subject to Illinois Retailers’ Occupation Tax
and Use Tax because the MEMBERSHIP is not tangible personal property. While
tangible personal property is not defined under Illinois law for Illinois Retailers’
Occupation Tax and Use Tax purposes, the MEMBERSHIP does not provide customers
with a tangible item. Instead, the MEMBERSHIP is properly characterized as an
intangible right to receive certain benefits. Accordingly, the sale of a MEMBERSHIP is
not subject to Illinois Retailers’ Occupation Tax and Use Tax as tangible personal

property.

2. The MEMBERSHIP is Not a Taxable Service

35 ILCS § 110/3.
35 ILCS § 110/2.

Id.

86 Ill. Admin. Code 160.101.
35 ILCS § 110/3-10.

Id.

The MEMBERSHIP is not subject to Illinois Retailers’ Occupation Tax and Use
Tax because the MEMBERSHIP is not a taxable service under Illinois law.

a. The MEMBERSHIP is Not a Taxable Membership

The MEMBERSHIP is not subject to Illinois Retailers’ Occupation Tax and Use
Tax because it is not a taxable membership under Illinois law. As a general matter,
Illinois does not impose Retailers’ Occupation Tax on sales of memberships. An Illinois
regulatory provision states that “[m]embership fees are not gross receipts from the sale
of tangible personal property.””’ Illinois law does provide that if the member receives
tangible personal property as part of their purchase of the membership, the sale of the
membership may be taxable.”

In this case, the MEMBERSHIP is not subject to Illinois Retailers’ Occupation
Tax and Use Tax because the purchase of a MEMBERSHIP does not result in the
transfer of tangible personal property. MEMBERS do not receive any tangible
personal property as part of their purchase of a MEMBERSHIP. Rather a
MEMBERSHIP is merely an intangible right to receive certain benefits. Specifically, a
MEMBERSHIP allows a MEMBER to gain access to: free or discounted shipping on
select products; the VIDEO collection; the LIBRARY; the FEATURE; PANTRY;
PRICING; MUSIC; and unlimited photo storage. MEMBERS do not receive any tangible
personal property with their purchase of a MEMBERSHIP. Instead, a MEMBER must
choose to purchase tangible personal property separate and apart from the
MEMBERSHIP (on which purchases he or she may receive a discount or discounted
shipping and handling). Accordingly, because the MEMBERSHIP does not result in the
transfer of tangible personal property, the MEMBERSHIP is not a taxable membership
subject to Illinois Retailers’ Occupation Tax and Use Tax.

3. The MEMBERSHIP is Not a Taxable Bundled Transaction

The MEMBERSHIP does not constitute a bundled transaction that would be
subject to Illinois’ Retailers’ Occupation Tax and Use Tax. Although the term “bundled
transaction” is not explicitly defined by Illinois law, Illinois has addressed bundled
transactions in the context of exempt services with tangible personal property or taxable
telecommunications services.” In this case, the benefits provided by the

%° 86 Ill. Admin. Code 130.401(d).

*! Td.

°° Tllinois Dept. of Rev. General Information Letter ST 13-0048-GIL (09/11/2013) (applying the true
object test to determine whether a bundled service with an optional communications feature was subject
to telecommunications excise tax, stating that “[i]t is clear customers subscribe to the SERVICES
because of the interactive Internet platforms provided to host various meetings and presentations, the
true object of the services. Any use of the optional Communication Features, which is restricted to
SERVICES sessions, is secondary to the true object of the value added SERVICES.”); Illinois Dept. of
Rev. General Information Letter ST 10-0069-GIL, (08/10/2010) (applying the true object test to
determine whether a bundled service with an optional communications feature is subject to tax, stating
that “[i]t is clear customers subscribe to the SERVICES because of the interactive Internet platforms
provided to host various meetings and presentations, the true object of the services. Any use of the
optional Communication Features, which is restricted to SERVICES sessions, is secondary to the true
object of the value added SERVICES.”); Illinois Dept. of Rev. General Information Letter ST 09-0047-
GIL, (03/24/2009) (applying the true object test to determine whether a bundled service is subject to tax,
stating that “Company A is not providing a telecommunications service as they are charging a
subscription fee and the true object of the transaction is the call tracking service and the electronic

MEMBERSHIP do not involve the transfer of tangible personal property. Rather, a
MEMBERSHIP allows a MEMBER to gain access to the benefits described above. Any
tangible personal property must be purchased by MEMBERS separately; MEMBERS do
not receive tangible personal property by virtue of purchasing a MEMBERSHIP.
Accordingly, the MEMBERSHIP is not a bundled transaction upon which the Illinois
Retailers’ Occupation Tax and Use Tax would be imposed.

Based on the above analysis, the sale of the MEMBERSHIP to Illinois customers
is not subject to the Illinois Retailers’ Occupation Tax and Use Tax because the
MEMBERSHIP is not any of the following: (1) taxable tangible personal property; (2) a
taxable service, including a taxable membership; or (3) a bundled transaction because
the MEMBERSHIP does not involve the transfer of tangible personal property.

B. Company’s Provision of a One-Month Trial Period MEMBERSHIP to Illinois
Customers is Not Subject to the Retailers’ Occupation Tax and Use Tax

The provision of a one-month trial period of the MEMBERSHIP to Illinois
customers is not subject to the Retailers’ Occupation Tax and Use Tax because:
(1) there is no charge to customers for the MEMBERSHIP, and (2) the sale of the
MEMBERSHIP is not subject to the Retailers’ Occupation Tax and Use Tax. Both the
Retailers’ Occupation Tax and Use Tax are calculated based on a percentage of the
sales price or the fair market value of the tangible personal property being sold.°°? The
purchase price of the trial membership is $0; it is provided free of charge. Furthermore,
as set forth above, the MEMBERSHIP is not a taxable membership under Illinois
Retailers’ Occupation Tax and Use Tax law and guidance. As a result, the one-month
trial period of the MEMBERSHIP provided to Illinois customers for no charge is not
subject to the Retailers’ Occupation Tax and Use Tax.

C. Company’s Sale of the MEMBERSHIP to Illinois Customers is Not Subject
to the Service Occupation Tax and the Service Use Tax

Sales of MEMBERSHIPS to Illinois customers are not subject to Illinois Service
Occupation Tax and Service Use Tax because the MEMBERSHIP is not any of the
following: (1) taxable tangible personal property; (2) a taxable service under Illinois law,
including a taxable membership; or (3) a bundled transaction because the
MEMBERSHIP does not involve the transfer of tangible personal property.

1. The MEMBERSHIP is Not Taxable Tangible Personal Property

Sales of the MEMBERSHIP are not subject to Illinois Service Occupation Tax
and Service Use Tax because the MEMBERSHIP is not tangible personal property.
Illinois imposes the Service Occupation Tax on all tangible personal property transferred
as an incident of a sale of service.’ While tangible personal property is not defined
under Illinois law for Illinois Service Occupation Tax and Service Use Tax purposes, the
MEMBERSHIP does not provide customers with any tangible personal property.
Instead, the MEMBERSHIP is properly characterized as an intangible right to receive

download, which are specifically not subject to the Illinois ROT or SOT.”).
% 35 ILCS § 105/3-10; 35 ILCS § 120/2-10.
% 35 ILCS § 115/3 [Eff. 1-1-2014.].

certain benefits. Accordingly, the sale of a MEMBERSHIP is not subject to Illinois
Service Occupation Tax and Service Use Tax as tangible personal property.

2. The MEMBERSHIP is Not a Taxable Service

The MEMBERSHIP is not subject to Illinois Service Occupation Tax and Service
Use Tax because the MEMBERSHIP is not a taxable service under Illinois law.

a. The MEMBERSHIP is Not a Taxable Membership

The MEMBERSHIP is not subject to Illinois Service Occupation Tax and Service
Use Tax because it is not a taxable membership under Illinois law. The Department has
indicated that receipts from the sale of memberships are not subject to the Service
Occupation Tax or the Service Use Tax because a membership is considered an
intangible, not tangible personal property.” Illinois law does provide instances where
memberships are subject to the Service Occupation Tax and the Service Use Tax if
such fees are in essence a fee paid for the transfer of tangible personal property.°° For
the same reasons set forth in section IV. A. 2. a, the MEMBERSHIP is not subject to the
Illinois Service Occupation Tax and Service Use Tax because a purchase of the
MEMBERSHIP does not result in the transfer of tangible personal property.

3. The MEMBERSHIP is Not a Taxable Bundled Transaction

The MEMBERSHIP does not constitute a bundled transaction that would be
subject to Illinois Service Occupation Tax and Service Use Tax. Although the term
“pundled transaction” is not explicitly defined by Illinois law, Illinois has addressed
bundled transactions in the context of exempt services with tangible personal property
and taxable telecommunications services.2’ Both types of bundled transactions require

°° Tilinois Dept. of Rev. General Information Letter ST 09-0034-GIL, (03/17/2009) (“The Department

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does not consider receipts from the sale of membership fees to be gross receipts from the sale of tangible
personal property. Rather, a membership fee is considered an intangible, which is not subject to the
Retailers' Occupation Tax or Use Tax liability. 86 Ill. Adm. Code 130.401(d). This is the case when the
sale of membership rights does not include the transfer of tangible personal property. However, if the
membership charge entitles the customer to receive an item of tangible personal property or to receive a
service and tangible personal property is transferred incident to that service, then that charge may result
in either Retailers' Occupation Tax liability, Service Occupation Tax liability or Use Tax liability,
depending upon the serviceman's activities. See 86 Ill. Adm. Code 140.101.”).

86 Ill. Admin. Code 130.401(d).

Illinois Dept. of Rev. General Information Letter ST 13-0048-GIL (09/11/2013) (applying the true
object test to determine whether a bundled service with an optional communications feature was subject
to telecommunications excise tax, stating that “[i]t is clear customers subscribe to the SERVICES
because of the interactive Internet platforms provided to host various meetings and presentations, the
true object of the services. Any use of the optional Communication Features, which is restricted to
SERVICES sessions, is secondary to the true object of the value added SERVICES.”); Illinois Dept. of
Rev. General Information Letter ST 10-0069-GIL, (08/10/2010) (applying the true object test to
determine whether a bundled service with an optional communications feature is subject to tax, stating
that “[i]t is clear customers subscribe to the SERVICES because of the interactive Internet platforms
provided to host various meetings and presentations, the true object of the services. Any use of the
optional Communication Features, which is restricted to SERVICES sessions, is secondary to the true
object of the value added SERVICES.”); Illinois Dept. of Rev. General Information Letter ST 09-0047-
GIL, (03/24/2009) (applying the true object test to determine whether a bundled service is subject to tax,
stating that “Company A is not providing a telecommunications service as they are charging a
subscription fee and the true object of the transaction is the call tracking service and the electronic

tangible personal property as a component of the transaction. For the same reasons
set forth above in section IV. A. 3, MEMBERS do not receive any tangible personal
property with their purchase of a MEMBERSHIP, and therefore, sales of the
MEMBERSHIP cannot be bundled transactions subject to the Illinois Service
Occupation Tax and Service Use Tax.

Based on the above analysis, the sale of the MEMBERSHIP to Illinois customers
is not subject to Illinois Service Occupation Tax and Service Use Tax because the
MEMBERSHIP is not any of the following: (1) taxable tangible personal property; (2) a
taxable service, including a taxable membership; or (3) a bundled transaction because
the MEMBERSHIP does not involve the transfer of tangible personal property.

. Company’s Provision of a One-Month Trial Period MEMBERSHIP to Illinois

Customers is Not Subject to Illinois Service Occupation Tax or Service Use Tax

The provision of a one-month trial period of the MEMBERSHIP to Illinois
customers is not subject to Illinois Service Occupation Tax or Service Use Tax because:
(1) there is no charge to customers for the MEMBERSHIP, and (2) the sale of the
MEMBERSHIP is not subject to Illinois Service Occupation Tax or Service Use Tax.
The Service Occupation Tax and the Service Use Tax are imposed on nearly identical
bases. The Service Occupation Tax is calculated based on a percentage of the cost
price to the serviceman of the tangible personal property being sold.°° The Service Use
Tax is calculated based on a percentage of the selling price of tangible personal
property transferred as an incident to the sale of service, which cannot be less than the
cost price of the property to the serviceman.%? The purchase price of the trial
membership is $0; it is provided free of charge. Furthermore, as set forth above, the
MEMBERSHIP is not a taxable membership under Illinois Service Occupation Tax or
Service Use Tax law and guidance. As a result, the one-month trial period of the
MEMBERSHIP provided to Illinois customers for no charge is not subject to Illinois
Service Occupation Tax or Service Use Tax.

Conclusions

Company respectfully requests the Department’s confirmation of the following:

A. Sales of the MEMBERSHIP to Illinois customers are not subject to the Retailers’
Occupation Tax or Use Tax.

B. The free, one-month trial period of a MEMBERSHIP provided to Illinois
customers is not subject to the Retailers’ Occupation Tax or Use Tax.

C. Sales of the MEMBERSHIP to Illinois customers are not subject to the Service
Occupation Tax or Service Use Tax.

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99

download, which are specifically not subject to the Illinois ROT or SOT.”).
35 ILCS 115/3-10.
35 ILCS § 110/3-10.

D. The free, one-month trial period of a MEMBERSHIP provided to Illinois
customers is not subject to the Service Occupation Tax or Service Use Tax.

Prior to the issuance of the Ruling, Company respectfully requests that the
Department contact us to discuss any facts or questions that may potentially result in a
taxable Ruling. Company reserves the right to withdraw the request. Should any of the
facts or the analysis noted in this request require clarification, please do not hesitate to
contact me.

In a follow-up email dated April 13, 2015, you inquired about three new benefits
that have been added, as described below:

e Exclusive Access to ELEMENTS — ELEMENTS is a line of premium
everyday essential products such as baby wipes. ELEMENTS products
are only available for purchase by MEMBERS.

e Access - MEMBERS receive 30 minutes early access to select Lightening
Deals on the Website and sales events on WEBSITE.

e BUTTON — Currently, MEMBERS can request an invitation to receive up
to 3 BUTTONS. BUTTONS allow customers to simply press the button
when the customer needs to reorder a product. Upon pressing the button,
an order is placed through the customers ACCOUNT for the product.
Each button works for a single product. For example, a customer could
obtain a button for BRAND laundry detergent and, upon running out of
laundry detergent, the customer can press the button and an order will
automatically be placed for the product and shipped to the customer.
While BUTTONS are currently only available to select MEMBERS that
receive an invitation, they may be available to all CUSTOMERS in the
future.

DEPARTMENT’S RESPONSE:

The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject to the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
The Department recently met and determined that it would decline to issue a Private Letter Ruling in
response to your request. We hope however, the following General Information Letter will be helpful
in addressing your questions.

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. 86 III. Adm.
Code 130.101. The Use Tax Act imposes a tax upon the privilege of using in this State tangible
personal property purchased at retail from a retailer. 86 Ill. Adm. Code 150.101. If no tangible
personal property is being transferred to the customers, then neither Illinois Retailers’ Occupation Tax
nor Use Tax would apply. Likewise, the Service Occupation Tax Act and Service Use Tax are

imposed on the transfer of tangible personal property incident to sales of service. 86 Ill. Adm. Code
140.101 and 160.101. If no tangible personal property is being transferred to customers incident to
the services being provided, then neither Illinois Service Occupation Tax nor Service Use Tax would

apply.

Please note that the Department's regulation, entitled “Sellers of Newspapers, Magazines,
Books, Sheet Music and Musical Recordings, and Their Suppliers; Transfers of Data Downloaded
Electronically”, provides, in relevant part, that information or data that is downloaded electronically,
such as downloaded books, musical recordings, newspapers or magazines, does not constitute the
transfer of tangible personal property. These types of transactions represent the transfer of
intangibles and are thus not subject to Retailers’ Occupation and Use Tax. 86 Ill. Adm. Code
130.2105(a)(3). However, downloads of canned software, as defined more fully in Section 130.1935
of this Part, are subject to Retailers' Occupation and Use Tax.

Generally, the Department does not consider receipts from the sale of membership fees to be
gross receipts from the sale of tangible personal property. Rather, a membership fee is considered an
intangible, which is not subject to Retailers' Occupation Tax or Use Tax liability. 86 Ill. Adm. Code
130.401(d). This is the case when the sale of membership rights does not include the transfer of
tangible personal property. However, if the membership charge entitles the customer to receive an
item of tangible personal property or to receive a service and tangible personal property is transferred
incident to that service, then that charge may result in either Retailers’ Occupation Tax liability,
Service Occupation Tax liability or Use Tax liability, depending upon the serviceman’s activities. See
86 III. Adm. Code 140.101.

| 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

DMB:mdb