Were separately stated shipping and handling charges on an online computer purchase automatically exempt from Illinois sales tax?

Plain-English summary

An online computer buyer challenged sales tax on separately stated shipping and handling. IDOR explained that separate statement by itself did not make freight nontaxable.

Delivery was taxable when inseparably linked to the sale, including when the customer had no way to receive the computer without paying delivery. If the seller offered genuine free delivery or pickup and the customer voluntarily chose separately stated shipping, the charge could be nontaxable if the product price stayed the same.

If product price increased or decreased with delivery method, the delivery charge was taxable to the extent it exceeded actual outgoing transportation cost.

What this means for you

Online sellers should document buyer delivery choices and keep product price independent from fulfillment method. Buyers should not assume a separate freight line is tax-free.

Common questions

Was separately stated shipping automatically exempt? No.

What buyer option could make it nontaxable? Genuine pickup or qualifying free delivery, with a constant product price.

Citations and references

• 86 Ill. Adm. Code 130.415.
• 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-16-0053-gil.pdf

Original ruling text

ST 16-0053-GIL 10/03/2016

DELIVERY CHARGES

This letter discusses transportation and delivery charges in light of the decision in
Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009). See 86 Ill.
Adm. Code 130.415. (This is a GIL.)

October 3, 2016
Dear Xxxxx:
This letter is in response to your letter dated August 2, 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. 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 recently purchased a computer from COMPANY via the Internet.
COMPANY charged sales tax on the shipping and handling fees (please
see attached). The explanation I received from COMPANY as to why the
company charges sales tax on this line item for Illinois shipments is that
the amount does not necessarily equal the actual charge incurred by
COMPANY. The way I interpreted Illinois Department of Revenue
Regulations Title 86 Part 130 Section 415, since the shipping and
handling charges are listed separately and are not indicated as being in
excess on the actual cost to COMPANY, sales tax should not be charged.
Please provide the proper interpretation of the law and/or any rulings. If,
in fact, COMPANY is charging sales tax improperly on shipping and
handling, it is entirely possibly than their customers have been
overcharged by hundreds of thousands of dollars over the years.
Thank you for your attention to this matter. In addition to return mail, I
may be reached at email and at ###-###-#### (mobile phone).

ST 16-0053-GIL
DEPARTMENT’S RESPONSE:
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.
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 regulation 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
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ST 16-0053-GIL
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,

Cara Bishop
Associate Counsel

CB:bkl

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