Did out-of-state liquor sellers have to collect Illinois tax on alcohol and shipping, and how could they recover tax paid in error?

Plain-English summary

Owners of two out-of-state liquor stores with no stated Illinois presence had shipped alcoholic beverages to Illinois, later registered, and paid tax on shipping and invoice subtotals. They asked whether Illinois tax had actually been due and how to address prior payments.

IDOR supplied general 2015 nexus rules but did not determine whether the sellers themselves had nexus. Under that framework, an out-of-state retailer without sufficient Illinois nexus did not owe Retailers' Occupation Tax or have to collect Use Tax, although its Illinois customers still owed and self-assessed Use Tax.

The letter separately said an out-of-state winery selling wine directly to Illinois residents had to obtain an Illinois Winery Shipper's License. A licensee not otherwise registered under the Retailers' Occupation Tax Act had to register under the Use Tax Act and collect and remit tax on wine shipped to Illinois customers.

Shipping charges were outside selling price only when buyer and seller separately agreed to delivery apart from the property sale. A separate invoice line alone was insufficient; a separate contract or documented pickup option could establish separateness. Any delivery charge above actual delivery cost was taxable.

Only the taxpayer that filed the original return could claim credit for tax paid by mistake of fact or error of law. The claimant had to show it bore the tax or unconditionally repaid customers, use the Department's claim procedure rather than adjusting a later return, and file within the limitation period described in the letter.

What this means for you

This is historical 2015 nexus and filing guidance. Seller type, Illinois contacts, licensing status, delivery agreement, and who originally filed the return all affected different parts of the analysis.

Common questions

Did IDOR conclusively say the two liquor stores had to collect? No.

Was separately listing shipping enough to exclude it? No.

Who could file a claim for tax paid in error? The taxpayer that filed the original return, subject to the stated burden and deadline rules.

Citations and references

• 235 ILCS 5/5-1.
• 86 Ill. Adm. Code 150.201(i) and 150.801.
• 86 Ill. Adm. Code 130.415(d) and 130.1501.
• Nancy Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).

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-15-0030-gil.pdf

Original ruling text

ST 15-0030 GIL 06/05/2015 LIQUOR TAX

Under the Liquor Control Act of 1934, out-of-state wineries who are going to sell wine directly
to Illinois residents must complete an Application For State Of Illinois Winery Shipper’s License
(“Direct Shipping Permit”) and collect and remit tax to the Department of Revenue. See 235
ILCS 5/5-1.

June 5, 2015

Dear Mr. and Mrs. XXXX:

This letter is in response to your letter dated March 13, 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:

| am the owner of COMPANY 1 and my wife NAME is the owner of COMPANY 2.
Both are OUT-OF-STATE liquor stores with no presence in Illinois. Both stores have
websites with terms and conditions that follow the rules of the Uniform Commercial
Code and state the following: “The buyer assumes title of purchased goods once they
leave our premises. The buyer is solely responsible for the shipment of purchased
alcoholic beverages and for determining the legality and the tax/duty consequences of
having the alcoholic beverages shipped to any state.” We paid OUT-OF-STATE sales
tax on all the shipping charges on both in-state and out-of-state orders. We also paid
OUT-OF-STATE sales tax on the invoice subtotals on our out-of-state orders up until
DATE. At that time, our accountant confirmed with the OUT-OF-STATE Department
of Taxation and Finance that we do not need to collect OUT-OF-STATE sales tax on
out-of-state shipments.

In DATE we read industry news on a law firm sending summonses to out-of-state
wine stores that shipped to Illinois and didn’t collect and send to Illinois the sales
taxes. We found more news on this law firm and have included the articles. Most of
the news focused on the sales tax not being collected on the shipping charges and
we found it to be very confusing and complex. We quickly excluded Illinois as an
eligible state for shipping and then called the IDOR several times. All the agents we
spoke to thought no tax was due and did not think we needed to file. However, in
order to protect ourselves from the actions of this law firm we decided to register both
businesses with the IDOR and pay sales tax on the shipping charges. We then

thought sales taxes would also be due on the rest of the invoice amount (why only
the shipping charges) so we amended the sales tax returns to pay the tax on the
invoice subtotal amounts as well.

We are now writing to seek a Letter Ruling on whether any sales tax is due to Illinois
on these orders. We were not aware of any sales taxes due to Illinois before reading
the news on this topic. We still consider all our orders to be OUT-OF-STATE
transactions but remain confused as to whether any sales tax is due to Illinois.

DEPARTMENT’S RESPONSE:

Nexus

An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. The Illinois
Retailer is then liable for Retailers’ Occupation Tax on gross receipts from sales and must collect the
corresponding Use Tax incurred by the purchasers. Our regulations were recently amended in
response to the Illinois Supreme Court’s decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.
The regulations specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois.

Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.

The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical
building. Under Illinois law, it also includes the presence of any agent or representative of the seller.
The representative need not be a sales representative. Any type of physical presence in the State of
Illinois, including the vendor’s delivery and installation of his product on a repetitive basis, will trigger
Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410,
(1996).

The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.

Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:

A. The retailer sells the same or substantially similar line of products as the person located in
this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and

B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).

These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.
2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), a
“click-thru nexus provision” enacted in 2011. However, new provisions became effective January 1,
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v.
Hamer, 998 N.E. 2d 54 (2013).

Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or
other consideration based upon the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing to the potential customers a
promotional code or other mechanism that allows the retailer to track purchases referred by such
persons.

Examples of mechanisms that allow the retailer to track purchases referred by such persons
include but are not limited to the use of a link on the person's Internet website, promotional codes
distributed through the person's hand-delivered or mailed material, and promotional codes distributed
by the person through radio or other broadcast media. These provisions apply only if the cumulative
gross receipts from sales of tangible personal property by the retailer to customers who are referred
to the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4
quarterly periods ending on the last day of March, June, September, and December. A retailer
meeting these requirements shall be presumed to be maintaining a place of business in Illinois but
may rebut this presumption by submitting proof that the referrals or other activities pursued within this
State by such persons were not sufficient to meet the nexus standards of the United States
Constitution during the preceding 4 quarterly periods. See ILCS 105/2(1.1).

Liquor Tax

Under the Liquor Control Act of 1934, out-of-state wineries who are going to sell wine directly
to Illinois residents must complete an Application For State Of Illinois Winery Shipper’s License
(“Direct Shipping Permit”). Further, a licensee who is not otherwise required to register under the
Retailers’ Occupation Tax Act must register under the Use Tax Act to collect and remit use tax to the
Department of Revenue for all gallons of wine that are sold by the licensee and shipped to persons in
this State. 235 ILCS 5/5-1.

Shipping (delivery) and Handling Charges

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.

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 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).

As you can see from the information provided, out-of-state retailers that do not have sufficient
nexus with Illinois do not incur Retailers’ Occupation Tax on sales into Illinois and are not required to
collect Use Tax on behalf of its Illinois customer. The customers of those retailers, however, still incur
Use Tax liability on the purchase of any goods from the out-of-State retailers and have a duty to self-
assess and remit their Use Tax liability directly to the Illinois Department of Revenue.

Claim For Credit

Only the taxpayer who filed the original return on which the tax was paid may file a claim for
credit. In addition, the claim for credit must be filed within the statute of limitations for filing claims.
The general rules regarding claims for credit are discussed in the following paragraphs.

If taxpayers pay amounts of taxes under the Retailers' Occupation Tax Act that are not due,
either as a result of a mistake of fact or an error of law, the taxpayers may file claims for credit with
the Department. No credit shall be given the taxpayers unless they show that they have borne the
burden of the tax or have unconditionally repaid the amount of the tax to their customers from whom it
was collected. See 86 Ill. Adm. Code 130.1501. The claims for credit must be prepared and filed upon
forms provided by the Department containing the information listed in Section 130.1501(b).
Taxpayers should not make adjustments on their next return or amend the return for the period in
which the overpayment occurred.

Under Illinois sales tax laws, retailers are not required to file claims for credit. The Department
has no authority to compel sellers to file a claim for credit. Whether or not sellers refund the taxes
paid to them by their customers and file claims for credit with the Department is a private matter
between sellers and purchasers. The statute of limitations for filing claims for credit is described in
Section 130.1501(a)(4). The language is somewhat confusing but, boiled down, it means that the
statute of limitations is 3 to 3 % years and expires in 6 month blocks. For example, on July 1, 2013,
the statute of limitations expired for claims to recover taxes that were erroneously paid in the first 6
months of 2010.

| 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