Was a prepaid grocery-delivery membership covering three months of shipping and handling subject to Illinois sales or use tax?

Plain-English summary

An online grocery-delivery service let customers prepay for three months of shipping and handling. The membership then offset separately identified delivery charges on grocery orders.

IDOR ruled that the membership did not transfer tangible personal property. It was an intangible payment for future shipping and handling, not gross receipts from a retail sale, and therefore was not subject to Retailers' Occupation Tax or Use Tax.

The ruling supplemented Private Letter Ruling ST 16-0006, which had addressed the company's other delivery and pickup options.

What this means for you

The tax result attached to the membership itself, based on its transfer of no property. It did not necessarily determine the tax treatment of groceries or individual delivery charges on later orders.

This PLR states that it ceases to bind IDOR ten years after September 16, 2016—September 16, 2026—or earlier if relevant law, rules, case law, or facts change.

Common questions

Was the prepaid membership taxable? No.

Why? It was an intangible and transferred no tangible personal property.

Can another delivery service rely on this PLR? No.

Citations and references

• 86 Ill. Adm. Code 130.401(d).
• 2 Ill. Adm. Code 1200.110(e).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0010-plr.pdf

Original ruling text

ST 16-0010-PLR 09/16/2016

GROSS RECEIPTS

Membership fees are not gross receipts from the sale of tangible personal
property. Membership fees are gross receipts received in exchange for an
intangible. See 86 Ill. Adm. Code 130.401(d) and 86 Ill. Adm. Code 140.101.
(This is a PLR.)

September 16, 2016

RE: ST-16-0006-COMPANY PLR
Dear Xxxxx:
This letter is in response to your email dated August 18, 2016, in which you
requested 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. 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.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY, for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110, governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:

On July 29, 2016, the Department issued the above-cited ruling to our
client, COMPANY. Pursuant to our discussions, we are submitting this email for your consideration and for written clarification as to whether
charges for the PRODUCT, which is described below, are considered part
of the selling price of the groceries upon which it computes its Retailer’s
[sic] Occupation Tax (“ROT”) liability.

COMPANY is an online grocery delivery service. After completing a
shopping order and as part of the checking out process, customers are
given two options for obtaining/receiving the groceries: (1) have the
groceries delivered to a residential or commercial address for a charge,
which varies depending on the amount of the order, the type of customer,
the zip code of the delivery address and whether the customer has
separately purchased a PRODUCT, or (2) pick up the groceries at a bricks
and mortar location (PUP) for a lesser charge than option 1. Separately,
and not as part of the grocery ordering/checkout process, a customer can
sign up for PRODUCT, which is a prepaid “all inclusive” delivery charge
for 3 month, 6 month or 12 month periods. With PRODUCT, the customer
pays the delivery charge upfront which then gives the customer “free”
deliveries (part of option 1 above) to the customer’s residential or
commercial address for the time period of the PRODUCT.
We offer the following example which will hopefully make the situation
clearer. A customer places an order for $XXX in groceries and upon
checkout, the customer has the following options; (1) pay $XXX to have
the order delivered to the customer’s residential address/commercial
address, or (2) pay $XXX to pick-up the order at the local bricks and
mortar COMPANY location (PUP). However if the customer had instead
paid $XX up front for a 3 month PRODUCT, during checkout, charges for
delivery are separately identified but the customer is given a credit to
offset the delivery charges.
In the above-cited ruling, the Department provided responses to options
(1) and (2), but not to the charges for the PRODUCT. Therefore the
question that we are seeking clarification is whether the PRODUCT
charges are subject to tax.
Please don’t hesitate to contact me if you have any questions.

DEPARTMENT’S RESPONSE:
This Private Letter Ruling supplements Private Letter Ruling ST 16-0006.
Your letter states that a customer can purchase a PRODUCT for $$$. It is our
understanding that the PRODUCT entitles the customer to 3 months of shipping and
handling and is a method for the customer to prepay shipping and handling charges for
their upcoming grocery orders. Generally, the Department does not consider receipts
from the sale of such fees to be gross receipts from the sale of tangible personal
property. Based on the information you have provided, it is the Department’s position
that the PRODUCT is an intangible, which is not subject to the Retailers' Occupation
Tax Act or the Use Tax Act. 86 Ill. Adm. Code 130.401(d). This is the case because the
PRODUCT does not include the transfer of tangible personal property.

The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this
Private Letter Ruling, you may contact me at (217) 782-2844. If you have further
questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217)
782-3336.

Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
RSW:CB:bkl