How did Illinois tax optional medical-equipment service agreements, later repairs and parts, restocking fees, and shipping?

Plain-English summary

A medical-imaging equipment company asked about optional service agreements, billable repairs, parts, shipping, restocking fees, and resale certificates.

An optional maintenance agreement sold separately from equipment was not taxable at sale. When parts were later supplied under it, the provider owed tax under the applicable serviceman method; a deductible under the separate agreement was not taxable. A maintenance charge included in equipment selling price would instead be taxable up front.

For returned merchandise, a restocking fee was not taxable gross receipts, but the retailer had to refund all tax from the original purchase. Any retained overcollection had to be remitted to Illinois or returned to the customer.

Noncontract repairs followed the four serviceman methods when parts transferred; labor-only services with no property transfer were outside Retailers' Occupation and Use Tax. Delivery used the inseparable-link rule, and a claimed resale required a valid certificate.

What this means for you

Separate optional agreements from equipment sales, track parts cost and serviceman method, refund tax fully on returns, and validate resale and shipping documentation.

Common questions

Was a separately sold optional service agreement taxable? No.

Was a restocking fee taxable? No, but the original tax still had to be fully refunded.

Are labor-only repairs taxable? Not under the property taxes described when no tangible property transfers.

Citations and references

• 86 Ill. Adm. Code 140.301(b)(3), 140.101 through 140.109, 130.401(b), 130.1405, and 130.415.
• 35 ILCS 120/2-40.

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-16-0056-gil.pdf

Original ruling text

ST 16-0056-GIL 11/01/2016

REPAIRS

The taxability of maintenance agreements depends upon whether charges for the
agreements are included in the selling price of the tangible personal property. See 86
Ill. Adm. Code 140.141 and 140.301. (This is a GIL.)

November 1, 2016

Dear Xxxxx:
This letter is in response to your dated letter July 6, 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:
COMPANY. is a corporation whose primary business is the sales and
service of medical imaging equipment and parts. A facet of COMPANY’s
business is providing service to CT, MRI, NM and PET Scanners under service
agreements. Such service agreements can be either executed at the time of the
purchase of the equipment from COMPANY, or simply executed by the customer
to cover a scanner that they already have installed. These service agreements
can cover both labor and parts, or labor only. All of COMPANY’s service
agreements are optional.
Issue 1) Is revenue received from service agreements taxable or
non-taxable? COMPANY’s service agreements are not included as
part of the sale of equipment, and are always invoiced separately.
In the case of a service agreement covering both parts and labor,
however, the fee is not separated between the two.
Issue 2) Is shipping taxable on the sale of a part which we are
shipping into your state?
Issue 3) If merchandise is returned, but there is a restock fee, is
the full amount of tax due back to the customer? Additionally,
would the restock charge be taxable?

ST 16-0056-GIL

Issue 4) Is non-contract billable service, (IE: labor and travel time)
taxable? The service performed by COMPANY is repairs to
medical imaging equipment, such as MRI and CT Scanners. These
repairs are not always associated with a machine that we have sold
in the past.
Issue 5) Is service taxable if parts are listed separately on the
same invoice?
Issue 6) What resale certificate is COMPANY required to receive
from the customer? Do you accept a customer’s home state resale
certificate or is the customer required to be registered in your state?
If customer’s home state certificate is acceptable are there any
stipulations?
DEPARTMENT’S RESPONSE:
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 86 Ill. Adm. Code 130.101. The tax is measured by the seller's gross
receipts from retail sales made in the course of such business. "Gross receipts" means the
total selling price or the amount of such sales. The retailer must pay Retailers' Occupation Tax
to the Department based upon its gross receipts from the sale of the tangible personal
property. 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.
Maintenance Agreements
The taxability of a maintenance or service agreement depends upon whether the charge
for the agreement is included in the selling price of tangible personal property. If the charge for
the agreement is included in the selling price of tangible personal property, the charge is part
of the gross receipts of the retail transaction and is subject to tax. No tax is incurred on the
maintenance services or parts when the repair or servicing is performed.
If a maintenance agreement is sold separately from tangible personal property, the sale
of the agreement is not a taxable transaction. However, when maintenance services or parts
are provided under the terms of the maintenance agreement, the seller of the maintenance
agreement will be acting as a service provider under provisions of the Service Occupation Tax
Act. The Service Occupation Tax provides that when a service provider enters into an
agreement to provide maintenance services for particular pieces of equipment for a stated
period of time at predetermined fees, the service provider incurs Use Tax based on its cost
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ST 16-0056-GIL
price of tangible personal property transferred to the customer incident to the completion of the
maintenance service. See 86 Ill. Adm. Code 140.301(b)(3). Further, the purchaser of the
separate agreement is not charged tax on the labor or tangible personal property that is
transferred incident to the completion of the maintenance agreement. If a deductible is
charged to the purchaser under the terms of the separate agreement, the deductible is also not
subject to tax.
Service Occupation Tax
Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not
involve the transfer of tangible personal property to customers. However, if tangible personal
property is transferred incident to sales of service, this will result in either Service Occupation
Tax liability or Use Tax liability for the businesses providing services (e.g., servicemen)
depending upon their activities. For your general information, see of 86 Ill. Adm. Code
140.101 through 140.109 regarding sales of service and Service Occupation Tax.
The servicemen’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
servicemen's entire bill; (3) Service Occupation Tax on the servicemen's cost price if the
servicemen are registered de minimis servicemen; or (4) Use Tax on the servicemen's cost
price if the servicemen are de minimis and are 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 of service. The tax is then calculated on the separatelystated 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 servicemen's cost price of the
tangible personal property transferred. See 86 Ill. Adm. Code 140.106.
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 sales 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-bytransaction 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. Such servicemen also collect a corresponding amount of Service Use Tax
from their customers, absent an exemption.
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 handle their tax liability by paying Use Tax to their suppliers.
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ST 16-0056-GIL
If their suppliers are not registered to collect and remit tax, the servicemen must register, selfassess and remit Use Tax to the Department. The servicemen are considered to be the endusers 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.
Restocking Fee
When a retailer makes a charge for restocking or reshelving returned merchandise, the
receipts retained by the retailer to cover the restocking or reshelving fee are not considered
taxable gross receipts for purposes of his Retailers' Occupation Tax liability. When a customer
returns merchandise to the retailer, the retailer should refund all of the sales tax to the
customer even though he will not be refunding the entire purchase price because of a
restocking or reshelving policy. 86 Ill. Adm. Code 130.401(b). This same concept applies in
all cases when merchandise is returned to the retailer and a full or partial refund is provided by
that retailer.
If a retailer can document that it returned all of the tax to the customer that was paid on
the initial purchase, it may deduct all the gross receipts from the original sale on its return for
the period in which the refund was provided. See 86 Ill. Adm. Code 130.401(b). If it fails to
return all of the tax to the customer that was paid on the initial purchase, it may only deduct the
amount of gross receipts that correspond to the amount of tax that was refunded. The
remainder of the tax that was not returned to the customer represents an over collection of tax.
Illinois law requires that all over collections of tax must either be turned over to the Department
or refunded to the customer. See 35 ILCS 120/2-40.
Resale Certificate
A retailer, as a seller required to collect Illinois tax, must either charge and collect tax or
document appropriate exemptions when making deliveries in Illinois. In order to document the
fact that its sale is a sale for resale, a retailer is obligated by Illinois to obtain a valid Certificate
of Resale from the purchaser. See 86 Ill. Adm. Code 130.1405. A Certificate of Resale is a
statement signed by the purchaser that the property purchased by him or her is purchased for
purposes of resale. In addition to the statement that the property is being purchased for
resale, a Certificate of Resale must contain:
1)
2)
3)
4)
5)

The seller's name and address;
The purchaser's name and address;
A description of the items being purchased for resale;
Purchaser's signature, or the signature of an authorized employee or agent of the
purchaser, and date of signing; and
Registration Number, Resale Number, or a statement that the purchaser is an
out-of-State purchaser who will sell only to purchasers located outside the State
of Illinois.

The Department provides a standard form for documenting sales for resale (Form CRT-61
Certificate of Resale). This form can be obtained from the Department’s website.
The obligations of a seller with respect to accepting a Certificate of Resale were
addressed in Rock Island Tobacco and Specialty Company v. Illinois Department of Revenue,
87 Ill.App.3d 476, 409 N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980). The Rock Island court
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ST 16-0056-GIL
held that when a retailer obtains a proper Certificate of Resale that contains a registration or
resale number that is valid on the date it is given, the retailer’s liability is at an end. If the
purchaser uses that item himself or herself (e.g., it was not purchased for resale), the
Department will proceed against the purchaser, not the retailer, provided the above stated
conditions are met. The purchaser’s registration or reseller number can be verified at the
Department’s website by clicking on the “Tax registration inquiry” box.
Failure to present an active registration number or resale number and a certification to
the seller that a sale is for resale creates a presumption that a sale is not for resale. This
presumption may be rebutted by other evidence that all of the seller’s sales are sales for resale
or that a particular sale is a sale for resale. For example, other evidence that might be used to
document a sale for resale, when a registration number or resale number and certification to
the seller are not provided, could include an invoice from the purchaser to his customer
showing that the item was actually resold, along with a statement from the purchaser
explaining why it had not obtained a resale number and certifying that the purchase was a
purchase for resale in Illinois. The risk run by a retailer in accepting such other documentation
and the risk run by purchasers in providing such other documentation is that an Illinois auditor
is more likely to require that more information be provided as evidence that the particular sale
was, in fact, a sale for resale.
Transportation and Delivery Charges
The Department’s regulation regarding transportation and delivery charges, 86 Ill. Adm.
Code 130.415, was 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.
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ST 16-0056-GIL
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 the 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

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