How did Illinois service taxes apply when a business printed and distributed advertising door hangers?

Plain-English summary

An out-of-state business planned to print advertising door hangers and use an Illinois distribution team to deliver them door to door. It asked whether the door hangers, distribution fee, and a combined or separately stated invoice were taxable.

IDOR did not give a definitive transaction-specific answer because it had not reviewed the contracts with the printer and customers and did not know the servicemen's registration status. It nevertheless characterized the described arrangement as a service transaction that could require the business either to collect Service Use Tax from customers or to pay Use Tax itself.

The letter explained four possible methods. A serviceman could tax the separately stated selling price of tangible property transferred with the service; use 50% of the entire customer bill when the property price was not separately stated; pay Service Occupation Tax on cost as a registered de minimis serviceman; or pay Use Tax on cost as an unregistered de minimis serviceman not otherwise required to register. Under the first two methods, the tax base could not be lower than the serviceman's cost of the property.

De minimis status was determined annually, not transaction by transaction. For most servicemen, transferred property had to cost less than 35% of annual service receipts. An unregistered de minimis serviceman using the final method was the end user of the door hangers and could not collect a customer "tax."

What this means for you

Separately stating printing and distribution charges could affect the tax base, but it did not by itself settle the tax result. The governing contracts, Illinois presence, registration status, annual property-cost percentage, and method used to account for transferred door hangers all mattered.

Common questions

Did IDOR say the distribution service was categorically tax-free? No. It lacked enough contractual and registration facts for a specific answer.

What happened if the door-hanger price was separately stated? The separately stated selling price could be the tax base, subject to a floor equal to the serviceman's cost.

What happened if it was not separately stated? The letter said 50% of the entire bill could be used as the tax base, again not below cost.

Citations and references

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101.
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101.
• 86 Ill. Adm. Code 140.101 through 140.109.
• 86 Ill. Adm. Code 140.106, 140.108, 140.109, 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-15-0048-gil.pdf

Original ruling text

ST 15-0048 GIL 07/27/2015 SALE OF SERVICE
This letter explains the Service Occupation Tax and the Service Use Tax. See 86 Ill. Adm. Code
140.101 through 140.109 and 160.101 regarding sales of service. (This is a GIL.)

July 27, 2015

Dear Ms. XXXX:
This letter is in response to your letter dated July 2, 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 seeking a letter ruling on whether or not our client’s fees for the distribution of
door hangers (which are distributing for advertising and marketing purposes) and the
door hangers themselves are subject to tax.
Facts
Our client, whose business is based in CITY, STATE sells door hangers and distributes
them to door to door to residential neighborhoods on behalf of their customers, for
advertising and marketing purposes.
The customer submits finished artwork, digitally to our client. Our client then submits
the artwork, digitally, to their printer. The printer prints the door hangers and ships them
to our client’s distribution team, which will be located in your state. Our client then has
their distribution team distribute door hangers door to door to residential neighborhoods
for advertising and marketing purposes. Our client bills their customer for the printing
and the distribution. (See sample door hanger attached)
We respectfully request a written determination of the following: (Please assume that
we have nexus in your state when making your determination.)

1. Are these door hangers subject to tax? In other words, would we be responsible
   for charging our customer tax on the door hangers?
2. Are the distribution fees for distributing the door hangers subject to tax?
3. We bill our customers for one lump sum fee for both the printing of the door
   hangers and the distribution fees for distributing the door hangers. Would the

taxability be any different if we separately stated the distribution fees from the
printing fees (or door hangers) on our invoices to our customers?
Our client does not currently have nexus in your state. However, they anticipate
entering your state in the near future. As such, if you could expedite your response it
would be greatly appreciated.
If you have any questions prior to the issuance of the letter ruling please email me at
[email protected] or call me at the above listed number. Thank you for your
consideration to these matters.
DEPARTMENT’S RESPONSE:
We cannot provide you with a specific answer to your questions without reviewing your client’s
specific contractual obligations with the printer and the customer. In addition, 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 are 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.
The scenario you have described is considered a service transaction that may result in your
client’s obligation to either collect Service Use Tax or remit Use Tax. For general information, see 86
Ill. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Although there is no Service Occupation Tax liability when sales do not occur in Illinois, a
serviceman with nexus such as the presence of employees or representatives in Illinois, may either
incur the obligation to collect Service Use Tax from his customers or may incur Use Tax liability
himself. The amount of tax that must be collected or paid is equivalent to the amount calculated as
explained below. 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 corresponding 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
corresponding 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 may handle their tax liability by paying Use Tax to their suppliers on the cost
price of the tangible personal property they transfer in Illinois incident to sales of service. 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.
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:mdb