Can a manufacturer's 'agency agreement' with the Illinois Department of Revenue cover a local distributor's sales of product samples, and what sales-tax rate applies to those samples?

Subject

Miscellaneous

Plain-English summary

A tax and accounting firm wrote to the Illinois Department of Revenue on behalf of independent distributors who operate "nutrition clubs" -- offices where a manufacturer's nutrition shake products are sold and potential customers can sample shakes before buying. The distributors already pay Retailers' Occupation Tax to the manufacturer (referred to as "COMPANY 1 International") on the full retail price when they purchase product, because the manufacturer has a blanket agreement with the State to collect and remit that tax on their behalf. The firm asked whether the distributors owed additional sales tax when they broke a shake canister down into individual samples, sold for a few dollars each along with an aloe shot and herbal tea, given that tax had already been paid once at the manufacturer level.

The Department explained that Illinois's Retailers' Occupation Tax and Use Tax generally apply at a 6.25% state rate (plus local rates that vary by jurisdiction), but that food for off-premises consumption (excluding alcohol, soft drinks, candy, and food prepared for immediate consumption) is taxed at a lower 1% rate plus local taxes under 86 Ill. Adm. Code 130.310. The Department said that "[b]ased on the limited information concerning the products sold by your clients, we cannot determine which rate of tax applies," and directed the requester to review the regulation's definitions of food and soft drinks. It did note, however, that selling prepared samples for a fee "actually appears to be a retail sale subject to the Retailers' Occupation Tax."

On the core question, the Department explained how a manufacturer's "agency agreement" under 86 Ill. Adm. Code 130.550 works: the manufacturer registers, files returns, and remits Retailers' Occupation Tax on behalf of its local distributors, but the tax owed is based on the distributor's selling price to the ultimate consumer -- not on the manufacturer's sale price to the distributor. That means the manufacturer (or the distributor, if the agreement doesn't cover it) must collect and remit tax on the entire downstream sale, including sample sales and any other nutritional products sold, not just the original wholesale transaction. Distributors relying on the agreement don't need to separately register, file, or remit tax, but must keep a copy of the agreement to show the Department on request; if they can't produce it, they must register and remit tax themselves. Distributors may also opt out of the agency agreement and handle their own registration and remittance.

This is a General Information Letter (GIL), not a Private Letter Ruling. As the Department's own boilerplate states, a GIL "is not a statement of Department policy and is not binding on the Department." See 2 Ill. Adm. Code 1200.120.

What this means for you

Manufacturers/wholesalers with distributor networks

If you have an "agency agreement" with the Department under 86 Ill. Adm. Code 130.550 to collect and remit tax on behalf of your distributors, this letter is a reminder that your tax obligation is measured by what your distributors charge their end customers -- not by what you charge the distributor. That includes lower-dollar transactions like product samples, not just the primary product sale.

Independent distributors (e.g., nutrition club operators)

If your supplier has an agency agreement covering you, you generally don't need to separately register, file returns, or remit Retailers' Occupation Tax yourself -- but you should keep a copy of that agreement on hand. If you can't produce it when the Department asks, you'll be required to register and remit tax directly. You (or your supplier) also need to determine the correct tax rate for what's actually being sold; the Department would not commit to a rate here because it did not have enough detail about the specific products.

Accountants and tax professionals advising these businesses

The letter does not resolve the food-tax-rate question (1% versus 6.25%) for shake samples, aloe shots, or herbal tea -- the Department expressly said it could not determine the applicable rate from the facts given and pointed to the definitions in 86 Ill. Adm. Code 130.310 for food, soft drinks, and candy. Advisors should walk through that regulation's definitions product-by-product rather than assuming a single rate applies to the whole nutrition-club business model.

Common questions

Q: Does selling a manufacturer's product samples for a fee count as a taxable retail sale?
A: The Department said this "actually appears to be a retail sale subject to the Retailers' Occupation Tax," based on the facts described (samples prepared and sold to potential clients for a few dollars each).

Q: If tax was already paid when the distributor bought inventory from the manufacturer, does the distributor have to collect tax again when reselling samples?
A: Under an agency agreement (86 Ill. Adm. Code 130.550), the tax due is based on the distributor's selling price to the ultimate consumer, not the manufacturer's sale price to the distributor. So the manufacturer/distributor arrangement must still capture tax on the full downstream sale, including samples -- it isn't a case of double taxation, but rather tax computed at the correct (retail) transaction level.

Q: What sales tax rate applies to the nutrition shake samples, aloe juice shots, and herbal tea?
A: The Department did not decide. It said, "Based on the limited information concerning the products sold by your clients, we cannot determine which rate of tax applies," and pointed the requester to the food/soft-drink/candy definitions in 86 Ill. Adm. Code 130.310 and the general 6.25% state rate (plus local tax) that applies to items not qualifying for the lower 1% food rate.

Q: Do distributors under an agency agreement need to register with the Department themselves?
A: No, not if the manufacturer's agency agreement covers them -- the manufacturer handles registration, filing, and remittance. But distributors should retain a copy of the agreement; without it, the Department can require them to register, file, and remit tax directly. Distributors may also choose to opt out of the agency agreement and handle their own tax compliance.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter, which "is not a statement of Department policy and is not binding on the Department." See 2 Ill. Adm. Code 1200.120. A taxpayer wanting a binding answer on their specific facts would need a Private Letter Ruling instead.

Q: Why didn't the Department just answer the tax-rate question directly?
A: It said the information provided about the specific products (shake canisters, samples, aloe juice, tea) was too limited to determine which rate applied, and instead directed the requester to review the applicable regulation's definitions themselves.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0023-gil.pdf

Original ruling text

ST 18-0023-GIL 09/13/2018 MISCELLANEOUS
Manufacturers, importers or wholesalers can enter into an “agency agreement” with the
Department, whereby they register, file returns and remit Retailers’ Occupation Tax on behalf
of their local distributors. See 86 Ill. Adm. Code 130.550. (This is a GIL.)

September 13, 2018
Dear Xxxxx:
This letter is in response to your letter dated February 06, 2018, 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:
My name is NAME, CEO of COMPANY. We are a tax and accounting firm that deal
primarily with COMPANY 1 Distributors. The reason for my letter is to request a formal
response regarding the applicability of sales tax to my client’s business model.
My clients are Independent COMPANY 1 Distributors that operate nutrition clubs. A
nutrition club is an office where they sell COMPANY 1 products and nutrition samples.
The nutrition club allows potential clients to sample the nutrition shake before they
purchase the entire nutrition program. We recently contacted a customer sales tax
representative in your sales tax department to inquire as to the taxability of the sales
made in the State of Illinois. However, they were unable to give us an answer and
asked that we send a written request to get clarification on the issue.
Facts:

1. COMPANY 1 International charges the independent distributor the sales tax
   at the product’s full retail price on all nutritional products they purchase.
   Therefore, the independent distributor pays $$$ for the nutrition shake
   canaster (at %% discount) but sales tax is applied @ (2.25%) to the retail
   price of $$$$ (see attached purchase order) and shipping and handling: The
   shake consumption is good for ## individual meals.
2. To promote the nutrition products, the COMPANY 1 Distributor gives samples
   to potential clients @ $$ per consumption. Therefore, they open the canaster
   and prepares a shake at their office (nutrition club) and allows the client to

ST 18-0023-GIL
Page 2
sample the different flavors for a $$ fee. The preparation of the sample shake
includes opening the canaster and taking a scoop of the meal powder and
adding water to create the flavor sample. Normally a client samples one
flavor per visit.

3. The independent distributor collects $$, which is the cost of a sample of the
   shake, shot of aloe juice and flavored tea. The distributor does not charge
   sales tax to end user (client) since the taxes were already paid by the
   independent distributor to COMPANY 1 International. (see bullet 1. above)
4. Then the potential client decides on a flavor, purchases the canaster (shake)
   with other nutritional product they want. Since sales taxes are always paid
   when the nutritional products are purchased from COMPANY 1 International,
   we believe no tax liability is due at the time of sale.
   The part that we are not in agreement or understanding is the fact that the Distributor
   purchases their products from COMPANY 1 International directly and are taxed sales
   tax on the retail price. This happens because COMPANY 1 International has a blanket
   agreement with the State of Illinois which indicates COMPANY 1 International should
   collect sales tax and remit payments to the State on behalf of all its Distributors. The
   question arises when the taxpayer is operating their nutrition club and they break down
   the sale of the shake canaster into ## portions, the aloe shots and herbal hot tea. Does
   this require the collection of sales taxes and payment of sales taxes to the state of
   Illinois? Since sales taxes are paid at the retail price of the product we believe that the
   State of Illinois would be double taxing the sale of product. However, I don’t know if a
   different tax rate other than 2.25% applies to the sale of the three items in the sample
   for $$ (see Step 2. above.)
   We have concerned Distributors in the State of Illinois that want to comply with the
   necessary procedures to operate and pay all necessary sales taxes. Therefore, we
   would really appreciate a reply to our question in writing, so we can advise the
   Distributors on the correct way to operate their business. If you have any further
   questions or concerns or need further explanation on this, please feel free to contact
   me.
   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 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 86 Ill. Adm. Code
   150.101. These taxes comprise what is commonly known as “sales” tax in Illinois. Generally, the
   Retailers’ Occupation Tax rate and Use Tax rate imposed by the State of Illinois is 6.25%. See 86 Ill.
   Adm. Code 130.310. Unlike the State tax rate noted above, local tax rates vary depending on the tax
   rate imposed by the local government in a particular jurisdiction. For local tax rates, see the
   Department’s Tax Rate Database and the Tax Rate Finder on the Department’s website at
   www.tax.illinois.gov.
   Please review the Department’s regulation at 86 Ill. Adm. Code 130.310, regarding the
   appropriate tax rates for food, soft drinks and candy. As you can see from the regulation, food that is

ST 18-0023-GIL
Page 3
to be consumed off the premises where it is sold (other than alcoholic beverages, soft drinks, candy,
and food that has been prepared for immediate consumption) is taxed at the rate of 1% plus
applicable local taxes. Food is defined as any solid, liquid, powder or item intended by the seller
primarily for human internal consumption, whether simple, compound or mixed, including foods such
as condiments, spices, seasonings, vitamins, bottled water and ice.
Products that do not meet the appropriate definition of food or that are food prepared by the vendor
for immediate consumption, are taxable at the higher State sales tax rate of 6.25% plus applicable local
taxes. Based on the limited information concerning the products sold by your clients, we cannot
determine which rate of tax applies. Reviewing the Department’s regulation at 86 Ill. Adm. Code 130.310
may be helpful. Further, you indicate that your clients “give [prepared] samples to potential clients @ $6
per consumption.” That type of transaction actually appears to be a retail sale subject to the Retailers’
Occupation Tax. We urge you to review the definition of soft drinks at 86 Ill. Adm. Code 130.310 to
determine if the prepared sample product is taxable at the higher rate or the lower rate.

Please see the Department’s regulation concerning the “Filing of Returns for Retailers by
Suppliers Under Certain Circumstances” found at 86 Ill. Adm. Code 130.550. This regulation explains
that manufacturers, importers or wholesalers can enter into an “agency agreement” with the
Department, whereby they register, file returns and remit Retailers’ Occupation Tax on behalf of their
local distributors. You indicate in your letter that COMPANY 1 International has such an agreement
with the Department. Under this type of agreement, the manufacturers, importers or wholesalers sell
products to local distributors and collect tax from the distributors based upon the selling price to the
ultimate consumers. The applicable tax is not based upon the sale to the local distributors. The
appropriate tax must be collected for the entire sales to the distributors’ ultimate customers (e.g.,
including the “samples” to potential clients @ $$ per consumption, as well as the sale of the canaster
and any other nutritional products), which includes State and any applicable local tax.
When manufacturers, importers, or wholesalers operate under this type of agency agreement,
the local distributor need not register, file returns or remit taxes since the manufacturers, importers or
wholesalers have agreed to this responsibility. The local distributors should, however, retain a copy
of the agreement. If they fail to provide such documentation upon demand by the Department, they
will be required to register, file returns, and remit the appropriate amount of tax directly to the
Department. Distributors who prefer to register and remit their own taxes may opt out of the agency
agreement.
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