Were service, installation, and freight charges on two Illinois invoices taxable?

Plain-English summary

A seller asked IDOR to verify tax charged on service, startup or installation, and freight lines from two invoices. The submitted copies had no highlighted lines, and IDOR could not determine what was being provided, so it gave no invoice-specific answer.

The letter outlined three possible classifications. A construction contractor permanently incorporating property into real estate was the end user and owed Use Tax on material cost; its customer owed no Use Tax, and the contractor had no authority to collect that tax from the customer. A serviceman instead applied one of the Service Occupation Tax or Use Tax methods to property transferred with service.

For freight, an inseparable link made outgoing delivery taxable. That link existed when delivery was not separately identified or the buyer had no way to obtain the goods without paying delivery. Separately identified delivery chosen instead of pickup or qualifying free delivery could be nontaxable if the merchandise price did not change.

What this means for you

Invoice labels do not determine tax. Sellers should document whether work is construction or service, identify property transferred, and preserve evidence of pickup or free-delivery options before deciding how to tax installation and freight.

Common questions

Did IDOR approve or reject the tax on these invoices? Neither; the records were insufficient.

Could a contractor pass its Use Tax to the customer as tax? No.

Did separately stating freight automatically make it nontaxable? No.

Citations and references

• 35 ILCS 120/2 and 105/3.
• 86 Ill. Adm. Code 130.415, 130.1940, 130.2075, and 140.101.
• 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/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0021-gil.pdf

Original ruling text

ST 16-0021-GIL 05/31/2016 DELIVERY CHARGES
This letter discusses transportation and delivery charges in light of the decision in Kean v. WalMart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009). See 86 Ill. Adm. Code 130.415.
(This is a GIL.)

May 31, 2016

Dear Xxxxxx:
This letter is in response to your letter dated January 26, 2016, 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:
I am writing to see if you can verify on the two attached invoices if the service,
startup/installation or freight charges should have included sales tax. We invoiced our
customer and included sales tax. Our customer hired a company to review the sales
tax they paid and they are now saying that according to ILAC130.415(d), ILAC140.141
and ILAC130.450(b) we should not have charged sales tax on the highlighted lines of
the attached invoices. Can you please confirm if we should or should not have charged
sales tax on the highlighted lines of invoices XXXXXXX-IN and XXXXXXX-IN.

DEPARTMENT’S RESPONSE:
It is unclear as to what specific items on the invoices you attached to your letter you are
referencing because the invoices attached did not contain any highlighted lines. In addition, we are

unable to determine from the information contained on the invoices what is actually being provided.
Notwithstanding, we hope that you find the following helpful, and you may also visit the Department’s
website to search for letters the Department has issued on the subject matter about which you are
concerned.
Sales Tax:
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.
Construction Contractors:
If a person or business enters into a contract to permanently incorporate tangible personal
property into real estate, then that person or business would be acting as a construction contractor.
In Illinois, construction contractors are deemed end users of tangible personal property purchased for
incorporation into real property. As end users of such tangible personal property, contractors incur
Use Tax liability for such purchases based upon their cost price of the tangible personal property
personal property and generally pay tax to their suppliers. See 86 Ill. Adm. Code 130.1940 and 86 Ill.
Adm. Code 130.2075. It is important to note that since construction contractors are the end users of
the materials that they permanently affix to real estate, their customers incur no Use Tax liability and
the construction contractors have no legal authority to collect the Use Tax from their customers.
Service Transactions:
Retailers' Occupation and Use Taxes do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on tangible personal
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. The purchase
of tangible personal property that is transferred to the service customer may result in either Service
Occupation Tax liability or Use Tax liability for the servicemen depending upon his activities. The
serviceman’s liability may be calculated in one of four ways:
(1)
(2)
(3)
(4)

separately stated selling price of tangible personal property transferred incident to service;
50% of the serviceman's entire bill;
Service Occupation Tax on the serviceman's cost price if the serviceman is a registered de
minimis serviceman; or
Use Tax on the serviceman's cost price if the serviceman is de minimis and is not otherwise
required to be registered under Section 2a of the Retailers' Occupation Tax Act.

Transportation and Delivery Charges:
The Department’s regulation regarding transportation and delivery charges, 86 Ill. Adm. Code
130.415, was recently amended to incorporate the provisions of Kean v. Wal-Mart Stores, Inc., 235 Ill.
2d 351, 919 N.E.2d 926 (2009). At issue in Kean was whether shipping charges for certain Internet
purchases of tangible personal property were subject to Illinois sales tax. The court found that an
“inseparable link” existed between the sale and delivery of the merchandise plaintiffs purchased from
Wal-Mart’s Internet store. Thus, the court in Kean concluded that the outgoing transportation and
delivery charges were part of the gross receipts subject to the Retailers’ Occupation Tax.

As Kean notes, outgoing transportation and delivery charges are part of the gross receipts
subject to Retailers’ Occupation Tax when there is an inseparable link between the sale of tangible
personal property and the outgoing transportation and delivery of the property. The regulation
clarifies that an inseparable link exists when the transportation and delivery charges are (1) not
separately identified to the purchaser on the contract or invoice or (2) when the transportation and
delivery charges are separately identified to the purchaser on the contract or invoice, but the seller
does not offer the purchaser the option to receive the tangible personal property in any manner
except by the payment of transportation and delivery charges added to the selling price of the item
(e.g., the seller does not offer the purchaser the option to pick up the tangible personal property or the
seller does not offer, or the purchaser does not qualify for, a free transportation and delivery option).
See 86 Ill. Adm. Code 130.415(b)(1)(B)(ii).
Except for cases in which an inseparable link exists, outgoing transportation and delivery is
otherwise considered a service separate and distinct from the sale of tangible personal property and
is excluded from the gross receipts subject to the Retailers’ Occupation Tax.
The amended regulation provides that retailers who have computed their tax liability for
transportation and delivery charges according to the provisions of either the old rule or the amended
rule for periods between the Kean decision (November 19, 2009) and April 1, 2016 (the effective date
of the new rules) shall be considered to have properly collected and remitted tax on those charges.
See the Department’s regulation at 86 Ill. Adm. Code 130.415(b)(1)(A)(i). The regulation further
provides that if a seller of tangible personal property offers the purchaser free transportation and
delivery of the property or free transportation and delivery of property for which the purchaser
qualifies (e.g., purchases of $50 or more receive free delivery), or the option to pick up the property,
any separately identified transportation and delivery charges chosen by the purchaser (e.g., amounts
paid for expedited transportation and delivery) will be nontaxable, as long as the selling price of the
tangible personal property neither increases nor decreases depending on the method chosen by the
purchaser to obtain the merchandise. When the selling price of the tangible personal property
increases or decreases, the transportation and delivery charges will be subject to Retailers’
Occupation Tax to the extent those charges exceed the actual cost of the outgoing transportation and
delivery.
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,

Debra M. Boggess
Associate Counsel
DMB:bkl