What does Illinois say about sales/use tax nexus, motor vehicle leasing and short-term rentals, the interim-use/demonstrator exemption, and sales to exempt organizations?

Plain-English summary

This letter isn't a typical letter ruling answering one taxpayer's question. It's the Illinois Department of Revenue's response to an annual multi-state survey — a private publisher asked Illinois to fill out a detailed questionnaire on sales-tax and income-tax policy topics (nexus rules, short-term rental taxation, non-profit sales, and more) for a reference publication. The Department declined to complete the survey in the format requested, but instead gave general information on several of the sales-tax topics the questionnaire raised.

Because a GIL "is not a statement of Department policy and is not binding on the Department" (2 Ill. Adm. Code 1200.120), everything below is background information the Department volunteered, not a ruling on anyone's specific facts. The topics it covered were:

• Nexus for out-of-state retailers — Illinois' click-through/referral nexus rule (35 ILCS 105/2(1.1)) and affiliate-nexus rule (35 ILCS 105/2(1.2)), both triggered only once cumulative gross receipts from referred or affiliate-driven sales exceed $10,000 in the preceding four quarters. The Department also noted that the Illinois Supreme Court struck down the original 2011 click-through nexus law in Performance Mktg. Ass'n, Inc. v. Hamer, and that a revised version took effect January 1, 2015.
• A proposed trade-show nexus safe harbor — at the time of the letter, the Department had proposed a rule (not yet adopted) that would shield an out-of-state retailer from nexus if it attends no more than 2 trade shows a year, is physically present at those shows no more than 8 days total, and has combined gross receipts from those shows of $10,000 or less.
• Short-term auto rentals and vehicle leases — the lease or rental of an automobile for a term of one year or less is subject to the Automobile Renting Occupation and Use Tax (35 ILCS 155/1 et seq.; 86 Ill. Adm. Code 180.101). For longer motor-vehicle leases, Public Act 98-628 (effective January 1, 2015) changed how the taxable "selling price" is measured for many qualifying leased vehicles, generally basing tax on the "Total of Payments" under the lease rather than the dealer's purchase price.
• The interim-use/demonstrator exemption — under 35 ILCS 105/2 and 86 Ill. Adm. Code 150.306, a retailer's demonstration or interim use of inventory held for resale (e.g., a dealership's loaner or demo vehicles) is not a taxable "use," provided the item stays in sales inventory and remains available for sale during that period.
• Sales to exempt organizations and governments — such sales remain taxable unless the organization holds an active Department-issued exemption identification number ("E number") under 86 Ill. Adm. Code 130.120(h)-(i). Even organizations with an E number are generally taxable on their own retail sales, subject to three narrow exceptions in 86 Ill. Adm. Code 130.2005: sales to members, noncompetitive sales, and occasional dinners/similar activities.
• Services vs. tangible personal property — the Service Occupation Tax applies only to tangible personal property transferred incident to a sale of service; a transaction involving only intangibles or pure services is not subject to Retailers' Occupation, Use, Service Occupation, or Service Use Tax (86 Ill. Adm. Code 140.101).

What this means for you

Out-of-state retailers selling into Illinois

If you have referral/affiliate marketing arrangements with Illinois-based websites or individuals, or you rely on sales reps or trade-show presence in Illinois, review the $10,000 cumulative-receipts thresholds in 35 ILCS 105/2(1.1) and (1.2) — crossing them can create Illinois nexus even without a physical office in the state.

Auto dealerships and vehicle-leasing companies

Short-term rentals (one year or less) are taxed under the separate Automobile Renting Occupation and Use Tax, not general sales tax. For longer leases, confirm whether your vehicles qualify under P.A. 98-628's "Total of Payments" selling-price method. And if you keep demo or loaner vehicles in resale inventory, look at whether they qualify for the interim-use exemption under 86 Ill. Adm. Code 150.306 rather than being treated as a taxable withdrawal from inventory.

Non-profits and organizations selling to or buying from exempt entities

An exemption identification number (E number) is required before a sale to a charitable, religious, educational, or similar organization can be treated as tax-exempt — and it's improper for an individual member to use the organization's E number for personal purchases. Even E-number holders are themselves subject to Retailers' Occupation Tax on their own sales except in narrow situations like sales to members or occasional fundraising dinners.

Accountants and tax professionals

This letter is useful mainly as a snapshot of Illinois' sales-tax nexus and exemption framework as of mid-2017 — including law changes still pending at that time (the trade-show safe harbor was only proposed, and SB 1434 on rental-purchase agreements had passed the legislature but not yet been signed). Verify current status of any provision described as "proposed" or "pending" here before relying on it.

Common questions

Q: Did the Department actually answer the survey questionnaire?
A: No. The letter states plainly: "We are unable to respond to your survey in the format provided." It then volunteers general information on some of the topics raised instead of completing the questionnaire.

Q: Does this letter create binding Illinois tax policy?
A: No. As a General Information Letter, it is explicitly "not a statement of Department policy and is not binding on the Department" under 2 Ill. Adm. Code 1200.120. It only points to existing regulations and statutes.

Q: What triggers Illinois click-through or affiliate nexus for an out-of-state seller?
A: A contract with an Illinois-based person who refers customers (using a promotional code, tracking link, or similar mechanism) or who sells under a similar name/trademark for a commission, once cumulative gross receipts from those referred/affiliate sales exceed $10,000 in the preceding four quarters. See 35 ILCS 105/2(1.1) and (1.2).

Q: Is a dealership's demo or loaner vehicle taxable?
A: It can qualify for the interim-use exemption in 86 Ill. Adm. Code 150.306 if the vehicle was purchased for resale, stays in sales inventory, and remains available for sale during the interim-use period — among other requirements.

Q: Do all sales to a tax-exempt non-profit automatically avoid sales tax?
A: No. The organization must hold an active E number from the Department, and only sales to the organization itself (not to individual members using its E number) qualify. See 86 Ill. Adm. Code 130.120(h)-(i) and 130.2005(k).

Citations and references

• 35 ILCS 105/2(1.1) (click-through/referral nexus for retailers)
• 35 ILCS 105/2(1.2) (affiliate-nexus retailer maintaining a place of business)
• 35 ILCS 105/2 (definition of "use"; demonstration/interim use exclusion)
• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act)
• 86 Ill. Adm. Code 180.101 (Automobile Renting Occupation and Use Tax regulation)
• 86 Ill. Adm. Code 150.306 (interim use and demonstration exemption)
• 86 Ill. Adm. Code 130.120(h)-(i) (exemption identification number requirement for exempt organizations)
• 86 Ill. Adm. Code 130.2005 (limited exceptions for not-for-profit retail selling activity)
• 86 Ill. Adm. Code 130.2007 (exempt organizations, sales to)
• 86 Ill. Adm. Code 130.2080 (governmental bodies, sales to)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on tangible personal property incident to sales of service)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0029-gil.pdf

Original ruling text

ST 17-0029-GIL 07/31/2017

MISCELLANEOUS

This letter responds to an annual survey. (This is a GIL.)

July 31, 2017

Dear Xxxxx:
This letter is in response to your letter dated June 16, 2017, 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:
The COMPANY 1, in conjunction with COMPANY 2, annually undertakes a major
information collection effort with respect to the application of the tax laws of the
states. COMPANY 1's goal in gathering this information is to assemble and publish the
PUBLICATION. As the market has shown, such a publication is a useful reference source
for departments of revenue, attorneys, corporate tax departments, and public accounting
firms.
COMPANY 1 is in the process of updating the PUBLICATION for its 2018 annual edition.
Accordingly, we ask for your state's assistance in preparing this important publication. I
have attached two Microsoft Word files—one for income tax and one for sales tax—to
serve as this year's questionnaire. The questionnaire follows the same format as in past
years. (If you do not have a copy of your 2016 response, and it would be helpful to you in
completing the 2017 questionnaire, please let me know and I will email you a copy.)
This year, the numbering scheme and the sequence of the questions remains essentially
the same. Also, please note that the new questions are highlighted in bold, red
font. Therefore, you should be able to easily follow the changes from last year to this
year. Because of anticipated time constraints for respondents, again this year we are
asking that you only respond to the questions for which your answers require a change
and the new questions. All unanswered questions will be considered the same as last
year's answer unless otherwise noted.
Please complete the 2017 questionnaire and return it by July 21, 2017.
The
enclosed questionnaire should be answered in accordance with laws in effect as of July

ST 17-0029-GIL
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1, 2017. If there is legislation pending or recently enacted that would alter your answers,
please explain any such changes that you are aware of at the time the questionnaire is
completed.
If you have any questions about the questionnaire or a specific question, please contact
me and I will promptly return your call. Thank you for your continued cooperation and
support. Your contributions are extremely valuable in maintaining the quality of this
outstanding reference work.
A complimentary copy of the 2018 PUBLICATION will be sent to you when it is published
next year. Also beginning next year we are offering the option to receive the guide as an
ebook. If you select this option, an access code will be emailed to you so that you can
download the ebook version for your use. Please let me know if you would like to receive
the ebook in lieu of the two volume hardcopy book.
Note: It would be very helpful to me if you could email me back, confirming your
receipt of the questionnaire and that you will be the respondent for your state.
Please see quick response questions below.
A. COMPLIANCE AND ADMINISTRATION

[16] NEXUS
SAFE HARBOR NEXUS ZONES
▪ Does your state provide safe-harbor areas within which certain business activities may be conducted
without creating nexus for the taxpayer conducting the business?
 Yes  No
▪ IF YES, what types of business activities may be conducted without creating nexus for the taxpayer
conducting the business?
 Call center  Fulfillment center  Distribution center  Trade show  Other, explain:

BRIGHT-LINE SALES AND USE TAX NEXUS TESTS
▪ Has your state adopted a bright-line test to determine whether a taxpayer has nexus for
sales and use tax purposes?
 Yes 
No
▪ If YES, what standards are applied (check all that apply)?
 Sales in excess of some dollar amount. Specify dollar amount:
 Retail transactions in excess of some amount. Specify number of transactions:
 Other standard. Explain:
▪ Does your state currently have proposed legislation in process that would adopt a
bright-line test to determine if a taxpayer has nexus for sales and use tax purposes?
 Yes 
No
▪ If YES, what is the bill number for this legislation?
[28] SHORT-TERM RENTALS
▪ Does your state impose sales/use tax upon short-term rentals of tangible personal property?

 Yes  No

ST 17-0029-GIL
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▪ If YES, how is “short-term” defined (e.g., number of days)?
▪ Are short-term rentals subject to taxes in lieu of your state’s sales/use tax?
 Yes  No
▪ If YES, describe the alternative tax (e.g., Rental Tax at 1%):
▪ Are short-term rentals subject to miscellaneous taxes in addition to or in lieu of your state’s sales/use tax?
 Yes  No
▪ If YES, describe the miscellaneous tax (e.g., Tourism Tax at 2%):
▪ Are special taxes imposed on certain items of tangible personal property subject to short-term rentals?  Yes
 No
▪ If YES, describe the special tax (e.g., Car Rental Tax at 1%):
▪ Is an election to pay sales/use tax on acquisition cost or rental proceeds available?
 Yes  No
▪ If election is made to collect tax on rental proceeds, is tax due in the event the renter is tax-exempt?
 Yes
 No

B. SALES AND USE TAX BASE
[69] AUTOMOTIVE DEALERS
▪ In addition to selling vehicles, automobile dealerships provide demonstrators for
customer use, loaners for service customers, and mixed-use vehicles for their
employees. For purposes of this question, assume:
▪ A demonstrator is a vehicle in dealer inventory for resale but used as demonstrator
for prospective customers.
▪ A loaner is a vehicle used by customers while their vehicle is being serviced.
▪ A mixed-use vehicle is a vehicle held in dealer inventory but used occasionally for
business or pleasure by the
dealer or one of its owners or employees.
Please indicate the taxable or nontaxable status of each of the
Nontaxabl
Taxable
following purchases:
e


▪ Demonstrator vehicle


▪ Loaner vehicle


▪ Mixed-use vehicle
[70] NON-PROFIT SALES AND PURCHASES
▪ Which of the following non-profit sales and purchases would be subject to sales tax
even though the entity is tax-exempt for income tax purposes (check all that apply)?
 Sales of food, meals, beverages, and similar items
 Sales of tickets that buyers will exchange for food, beverages, or other physical
products
 Sales of booklets, books, pamphlets, and so forth
 Sales of tickets for fundraising events when the ticket price includes amounts for
food or beverages
 Sales of items at rummage sales, bazaars, carnival booths, community events, and
other fundraisers
 Sales of merchandise in Internet, live, and silent auctions

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 Sales of tickets for game booths where prizes are guaranteed to each ticket
purchaser, even when the
prizes have little value
 The gifting of merchandise for a true donation to the non-profit
 Sales of tickets for concerts, movies, plays, shows, and similar events when food
and meals are not
included in the ticket price
 Sales of tickets for game booths and raffles when prizes are not guaranteed to every
ticket purchaser
 The sale of travel, home rentals, guide services, personal services, tutoring, and
other things of value
that are not physical products
 Sales of gift cards, gift certificates, and coupon books
 Membership drives and other fundraising activities that do not involve the exchange
of merchandise
 Sales of advertising that does not involve exchanges of merchandise or goods

Thank you for your cooperation on this project! Please return this questionnaire BY JULY 21, 2017 to:

Please list the state revenue agency employee(s) to contact for further information on these matters.
Name

Name

Address

Address

Phone

Phone

Fax

Fax

e-mail

e-mail

DEPARTMENT’S RESPONSE:
We are unable to respond to your survey in the format provided. However, we hope you find
the following information helpful.
Nexus
Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was amended
to include additional types of retailers. A retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which:
A. The retailer sells the same or substantially similar line of products as the person located
in this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and

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B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS 105/2(1.2).
These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.
2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), a
“click-thru nexus provision” enacted in 2011. However, new provisions became effective January 1,
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v. Hamer,
998 N.E. 2d 54 (2013).
Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or other
consideration based upon the sale of tangible personal property by the retailer, directly or indirectly
refers potential customers to the retailer by providing to the potential customers a promotional code or
other mechanism that allows the retailer to track purchases referred by such persons.
Examples of mechanisms that allow the retailer to track purchases referred by such persons
include but are not limited to the use of a link on the person's Internet website, promotional codes
distributed through the person's hand-delivered or mailed material, and promotional codes distributed
by the person through radio or other broadcast media. These provisions apply only if the cumulative
gross receipts from sales of tangible personal property by the retailer to customers who are referred to
the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4
quarterly periods ending on the last day of March, June, September, and December. A retailer meeting
these requirements shall be presumed to be maintaining a place of business in Illinois but may rebut
this presumption by submitting proof that the referrals or other activities pursued within this State by
such persons were not sufficient to meet the nexus standards of the United States Constitution during
the preceding 4 quarterly periods. See ILCS 105/2(1.1).
Nexus Safe-Harbor Zone
The Department’s previous response remains accurate. Note, however, the Department has
proposed rulemaking that adds a new section to the Use Tax regulations to assist out-of-state retailers
selling at trade shows in determining whether their presence or the presence of their representatives in
Illinois for the purpose of engaging in trade show activities triggers nexus for the retailer and requires
collection of Use Tax on all sales into Illinois. The proposed rule creates a “safe harbor” for retailers at
trade shows if three conditions are met: 1) the retailer attends no more than 2 trade shows per calendar
year; 2) the retailer is physically present at those 2 trade shows for an aggregate total of no more than
8 days in any calendar year; and 3) combined gross receipts from sales made at the 2 trade shows
during any single calendar year do not exceed $10,000. If this rulemaking is adopted, the Department’s
response on this issue will change.
Short Term Rentals
The lease or rental of an automobile for a term of one year or less is subject to the Automobile
Renting Occupation and Use Tax. See 35 ILCS 155/1 et seq. and 86 Ill. Adm. Code 180.101).

ST 17-0029-GIL
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When determining the Use Tax owed by the lessor of a motor vehicle, which the lessee may
have a contractual obligation to reimburse, effective January 1, 2015, Public Act 98-628 changed the
definition of “selling price” on which tax is measured for many situations in which a motor vehicle is sold
to a lessor to be leased. For qualifying motor vehicles sold for the purpose of being leased for a defined
period that exceeds one year, the taxable selling price is now the amount paid under the lease contract
rather than the amount that the leasing company pays to the motor vehicle dealer to purchase the car.
The “selling price” on which tax is measured for these qualifying leases is typically the amount found in
a box on the lease contract captioned “Total of Payments.” In most cases, the tax amount is less than
the amount charged in these transactions prior to January 1, 2015. Motor vehicles that qualify under
P.A. 98-628 are all first division motor vehicles and certain second division motor vehicles. For more
information, see Informational Bulletin FY 2015-03 “Leased Motor Vehicle Changes and New Reporting
Requirements.”
Note, Illinois’ treatment of leases or rentals of tangible personal property not required to be titled
and registered may change. Legislation has been proposed entitled “Rental Purchase Agreement
Occupation and Use Tax Act” (SB1434) that passed both houses of the legislature and, on June 29,
2017, was sent to the Governor to sign. If signed into law, the Department’s response on this issue will
change.
Interim Use
Section 2 of the Use Tax Act states in part that “'Use' does not mean the demonstration use or
interim use of tangible personal property by a retailer before he sells that tangible personal property.”
See 35 ILCS 105/2. The Department's regulation at 86 Ill. Adm. Code 150.306 describes the Interim
Use and Demonstration Exemption. Specifically, subpart (a)(1) provides guidance regarding when
tangible personal property qualifies for the interim use exemption. In particular, please note that the
property must be available for sale during the interim use period. Whether the property will qualify for
the interim use exemption depends, among other things, on how the property is carried on the retailer’s
books and whether the property is deducted or depreciated under certain provisions of the Internal
Revenue Code. The interim use exemption is only available if the retailer has purchased the item for
resale and the item is in the retailer’s sales inventory.
Vehicles that are purchased for resale by an automobile dealership but are used in the interim
as loaner cars may, if the requirements of the rule are met, qualify for the interim use exemption under
86 Ill. Adm. Code 150.306.
Exempt Organizations
Sales to exempt organizations (e.g., organizations that qualify as exclusively religious,
charitable, or educational, or a not-for-profit corporation, society, association, foundation, institution or
organization which has no compensated officers or employees and which is organized and operated
primarily for the recreation of persons 55 years of age or older) or governmental entities are subject to
tax unless the exempt organization or governmental entity has obtained an active exemption
identification number (E number) from the Department. See 86 Ill. Adm. Code 130.120(h)-(i). See also
86 Ill. Adm. Code 130.2007 and 130.2080. Persons or businesses selling tangible personal property to
these organizations or governmental entities must be provided with an E number for the sales to be tax
exempt. It is important to note that only sales to the organization or governmental entity holding the E
number are exempt, not sales to individual members of the organization. It is highly improper for an

ST 17-0029-GIL
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individual to use the E number of an organization or governmental entity for his or her own benefit. See
86 Ill. Adm. Code 130.2005(k).
While organizations that are organized and operated exclusively for charitable, religious or
educational purposes and have received an E number are, as a general matter, subject to Retailers’
Occupation Tax upon their own sales of tangible personal property, there are three limited exceptions
where such organizations are authorized to engage in a restricted amount of retail selling activity
without incurring Retailers' Occupation Tax liability. The limited exceptions available to not-for-profit
organizations described in 86 Ill. Adm. Code 130.2005 include: (1) Sales to Members (see 86 Ill. Adm.
Code 130.2005(a)(2)); (2) Noncompetitive Sales (see 86 Ill. Adm. Code 130.2005(a)(3)); and (3)
Occasional Dinners and Similar Activities (see 86 Ill. Adm. Code 130.2005(a)(4)).
Retailers' Occupation and Use Taxes do not apply to sales of service. Under the Service Occupation
Tax Act, businesses providing services are taxed on tangible personal property transferred as an incident
to sales of service. See 86 Ill. Adm. Code 140.101. Transactions that do not involve the transfer of any
tangible personal property to a customer and only involve the transfer of an intangible or services, would
not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

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