When a business sells the same product both at retail and bundled into a service (like a science kit included in a camp sign-up fee), how does it figure Illinois sales tax on the bundled item?

Subject

Service Occupation Tax

Plain-English summary

This is a General Information Letter (GIL), not a Private Letter Ruling -- meaning it is not binding on the Department and only points the taxpayer to the relevant rules rather than deciding their specific case.

A retailer that sells kids' science kits in its storefront also runs summer camps for children. In the storefront, it buys kits wholesale and marks them up before charging sales tax on the marked-up retail price. In its camps, the same kit is bundled into the sign-up fee, with only the wholesale cost of the kit (not marked up) counted as the taxable portion, and the rest of the fee treated as non-taxable labor. The retailer asked the Department to confirm this was fine, or to suggest an alternative approach.

The Department explained the general framework rather than confirming the specific numbers used. It described a two-track system: (1) straight retail sales of tangible personal property (the storefront kit sales) are governed by the Retailers' Occupation Tax and Use Tax; (2) when tangible personal property is transferred incident to a service -- which is what happens when a kit is provided as part of running a camp -- that transfer instead falls under the Service Occupation Tax Act (or Use Tax), because hosting a camp is "analogous to a seminar provider." The Department did not say the retailer's specific $-amounts were correct or incorrect; it laid out the four methods the law allows a "serviceman" to use and left it to the retailer to apply the right one.

What this means for you

Businesses that both retail and provide services with the same goods

If you sell an item at retail and also provide that same type of item as part of a service (like a camp, class, seminar, or repair job), the item can be taxed differently in each context. Retail counter sales are taxed under the Retailers' Occupation Tax on the marked-up retail price. But when the item is transferred as part of delivering a service, you become a "serviceman" for that transaction and must use one of four Service Occupation Tax/Use Tax methods described below -- you cannot simply treat the bundled item's taxable value as whatever you choose.

The four ways servicemen can compute tax on transferred goods

The GIL lays out four methods for figuring tax on tangible personal property transferred incident to a service, and in no event may the tax base be less than the item's cost price:

1. Separately stated selling price -- state the selling price of the transferred item separately on the bill; tax applies to that stated price.
2. 50% of the entire bill -- if you don't separately state a price, you must use half of the total service charge as the tax base.
3. Cost price, if you are a registered "de minimis" serviceman -- available only if your annual aggregate cost price of transferred property is less than 35% of your annual gross receipts from service transactions (75% for pharmacists and graphic arts production), per 86 Ill. Adm. Code 140.101(f). Registered de minimis servicemen pay Service Occupation Tax on cost price, collect Service Use Tax from customers, and give suppliers Certificates of Resale.
4. Use Tax on cost price, if you are a de minimis serviceman not required to register -- these servicemen instead pay Use Tax to their suppliers (or self-assess and remit it if the supplier isn't registered) and are treated as the end-user, so they cannot collect any "tax" from their service customers.

What the Department told this specific retailer

The Department noted the retailer appeared to already be registered to collect and remit Retailers' Occupation Tax on its storefront sales. It suggested that if the retailer qualifies as a de minimis serviceman, it could pay Service Occupation Tax on the cost price of the camp kits and collect Service Use Tax from camp attendees, providing its suppliers Certificates of Resale for the kits transferred to attendees. Notably, the Department did not confirm the retailer's original method (charging tax only on the unmarked-up wholesale cost while calling the rest "labor") was itself one of the four approved methods -- it redirected the retailer toward the de minimis cost-price method as a compliant option, without evaluating the retailer's own numbers under any of the four methods.

Common questions

Q: Can I charge sales tax on a lower price for the same item when it's bundled into a service versus sold at retail?
A: The GIL confirms that goods transferred incident to a service (like a camp) are taxed under a different framework (Service Occupation Tax) than straight retail sales of the same goods (Retailers' Occupation Tax). But within that framework, you must use one of the four specific methods described above -- separately stated price, 50% of the bill, or (if you qualify as de minimis) cost price -- not an arbitrary allocation between "kit cost" and "labor."

Q: What is a "de minimis serviceman" and how do I know if I qualify?
A: You qualify as de minimis if your annual aggregate cost price of tangible personal property transferred incident to your services is less than 35% of your annual gross receipts from those service transactions (the threshold is 75% for pharmacists and graphic arts production), per 86 Ill. Adm. Code 140.101(f). Qualifying lets you pay tax based on the item's cost price rather than a marked-up price.

Q: Does hosting a camp really count as providing a "service" for tax purposes?
A: According to this GIL, yes -- the Department analogized hosting a camp to being a seminar provider, so materials (like science kits) transferred during the camp are treated the same way as materials transferred during a seminar: subject to Service Occupation Tax or Use Tax rather than ordinary retail sales tax.

Q: Is this letter a final answer that I can rely on?
A: No. This is a General Information Letter, which the Department itself describes as "not a statement of Department policy" and "not binding on the Department." It only directs the taxpayer to the relevant regulations (86 Ill. Adm. Code 140.101-140.109, 140.145) rather than resolving the taxpayer's specific facts the way a binding Private Letter Ruling would. If you want a binding answer for your own facts, you'd need to request a PLR under 2 Ill. Adm. Code 1200.110.

Q: What if I just make my own project kits from off-the-shelf supplies (tape, wire, motors) instead of reselling purchased kits?
A: The letter doesn't directly answer this follow-up question from the requester. It focuses its response on the general Service Occupation Tax framework for tangible personal property transferred incident to services, without specifically addressing whether supplies simply expensed as consumables change the analysis.

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-18-0036-gil.pdf

Original ruling text

ST 18-0036-GIL 12/05/2018

SERVICE OCCUPATION TAX

This letter describes a serviceman’s liability under the Service Occupation Tax Act. See 86 Ill.
Adm. 140.145. This is a GIL.

December 5, 2018

Dear Xxxx
This letter is in response to your letter received November 1, 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:
I had a question concerning the different product pricing in my retail storefront and the
summer camps that we host. Basically, we buy these kids’ science kits at wholesale for
say, $$. In the storefront, we mark them up to $$$, collect the XX% sales tax and sent it
to you at the end of the month.
With the summer camps, we charge say, $$$ for each child signed up in the camp.
This price includes the cost of the kit which we do not mark up. So, $$$ of the $$$ sign
up would be considered non-taxable labor and $$$ would go towards the kit cost. We
do collect the XX% tax on the kit as well, but at $$$, not the $$$ we would charge in the
retail store.
A person I spoke to at your office said that is was perfectly fine since the kits were being
used in different sales situations. Can you please confirm this to me in writing if
correct? If not, could you offer a suitable solution (i.e., using kits that we do not carry in
the store for the camps, or holding a camp sale price special during the camps?)
We often create our own project for the children using off the shelf supplies such as
tongue depressors, tape, wire and small motors. These we just put in the books as
supplies. Is it possible to use this method for the kits as well?
I really appreciate your time and help in this matter. Thank you so much.

ST 18-0036-GIL
Page 2

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. If the
purchases occur outside Illinois and the seller is not registered to collect Illinois Use Tax, purchasers
must self-assess their Use Tax liability and remit it directly to the Department.
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.
If a company only performs services and does not transfer any tangible personal property, no
tax liability will arise from performing the services.
Hosting camp is analogous to a seminar provider and should be treated in the same manner.
Generally, a seminar provider will incur either Service Occupation Tax or Use Tax on all seminar
materials transferred during the presentation of a seminar for which a fee or other charge is made for
attendance. A servicemen’s liability may calculate in one of four ways: (1) separately stated selling
price; (2) 50% of the entire bill; (3) Service Occupation Tax on cost price if they are registered de
minimis servicemen; or (4) Use Tax on 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. See 86 Ill.
Adm. Code 140.29(b)(1).
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible
personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
sales of service. They are required to collect the corresponding Service Use Tax from their
customers.
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. Servicemen may

ST 18-0036-GIL
Page 3

qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit tax to the Department
by filing returns and do not pay tax to their suppliers. They provide suppliers with Certificates of
Resale for the tangible personal property transferred to service customers.
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.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess, and remit Use Tax to the Department. The servicemen are
considered to be the end-users 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.
It appears you are registered to collect and remit Retailers’ Occupation Tax on your storefront
sales. If you qualify as a de minimis serviceman, you could pay Service Occupation Tax on your cost
price of the kits and collect the Service Use Tax from your camp attendees. If you qualify as a de
minimis serviceman, you would provide your suppliers with Certificates of Resale for the tangible
personal property transferred to your camp attendees. See 86 Ill. Adm. Code 140.129(b)(2)(B).
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,

Richard S. Wolters
Associate Counsel

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