Our MLM company reformulated its '24K' mental-clarity dietary supplement from a ready-to-drink liquid into a powder that customers mix with water before drinking -- does it still qualify as tax-favored food under Illinois sales tax law?

Plain-English summary

A multi-level marketing (MLM) company -- the letter compares it to Amway -- sells nutritional, dietary, and skin-care products through a network of independent distributors. In 2011 it launched a "mental clarity" dietary supplement called NEW (referred to in the request as "24K") that was originally sold as a ready-to-drink liquid. The company reformulated the product so it is now sold only as a powder that the user must mix with water or another liquid before drinking -- it is no longer "ready for immediate consumption." The company asked the Department for a formal ruling on whether this reformulated powder is taxable or tax-exempt, and if taxable, at what rate.

The Department could not classify the specific product. The taxpayer's letter said a copy of the product label was enclosed, but the Department noted that no label was actually included with the letter it received. Because of that, the Department did not rule on the 24K product specifically and instead explained the general rules that determine how food-type products are taxed in Illinois.

The general framework. The Illinois Retailers' Occupation Tax Act taxes businesses that sell tangible personal property at retail in Illinois (86 Ill. Adm. Code 130.101), and the complementary Use Tax applies to the privilege of using property purchased at retail (86 Ill. Adm. Code 150.101). Together these are commonly called the "sales tax," with a base rate of 6.25% plus any applicable local taxes.

The reduced food rate. Illinois' regulation on Foods, Soft Drinks and Candy (86 Ill. Adm. Code 130.310) draws a line between two tax rates:

• Alcoholic beverages, soft drinks, candy, and food prepared for immediate consumption are taxed at the full 6.25% rate, plus any applicable local taxes.
• Food for human consumption that is to be consumed off the premises where it is sold is generally taxed at a reduced 1% rate, plus any applicable local taxes.

What counts as "food." Under 86 Ill. Adm. Code 130.310(c)(1), "food" is defined as "any solid, liquid, powder or item intended by the seller primarily for human consumption, whether simple, compound or mixed, including foods such as condiments, spices, seasonings, vitamins, bottled water and ice." Because this definition expressly includes powders and vitamins, a product's physical form (liquid versus powder) is not, by itself, the deciding factor -- what matters is whether the product is intended primarily for human consumption and whether it is sold for consumption off the premises versus prepared for immediate consumption.

What this means for you

MLM and direct-sales companies selling nutritional or dietary supplement products

Reformulating a product from a ready-to-drink liquid into a powder that must be mixed with water does not, on its own, change its sales-tax classification. The determining questions are whether the product is intended primarily for human consumption and whether it is being sold for consumption off the premises (reduced 1% rate) versus prepared for immediate consumption, or whether it falls into the alcoholic beverage/soft drink/candy categories (full 6.25% rate). If you want the Department to weigh in on your own product, be sure to actually include the product label and packaging with your request -- the Department could not evaluate this taxpayer's product because no label was received.

Businesses seeking a binding answer rather than general guidance

This letter is a General Information Letter (GIL), not a Private Letter Ruling (PLR). A GIL only points a taxpayer to the relevant regulations; it does not bind the Department to any particular classification of your product. If you need a determination that is binding as to your specific product and facts, you must request a PLR and follow the procedures in 2 Ill. Adm. Code 1200.110, which requires providing complete and accurate facts (including, for a product like this, the actual label).

Accountants and tax professionals advising supplement or MLM clients

When classifying a client's powdered or liquid nutritional product, apply the 86 Ill. Adm. Code 130.310(c)(1) definition of "food" first (primarily intended for human consumption, regardless of solid/liquid/powder form), then determine whether it is sold for off-premises consumption (1% rate) or falls into the immediate-consumption/soft-drink/candy/alcohol categories taxed at the full 6.25% rate.

Common questions

Q: Did the Department rule that the reformulated 24K powder is taxed at the reduced 1% food rate?
A: No. The Department did not classify the specific product because the product label referenced in the taxpayer's letter was not actually included. The Department instead described the general rules for how food-type products are taxed in Illinois.

Q: Does turning a ready-to-drink liquid supplement into a powder that must be mixed with water change its tax treatment?
A: Not automatically. The regulatory definition of "food" in 86 Ill. Adm. Code 130.310(c)(1) covers "any solid, liquid, powder or item intended by the seller primarily for human consumption," so a powder form does not by itself remove a product from the food category or from eligibility for the reduced rate.

Q: What is the general sales tax rate in Illinois, and what is the reduced food rate?
A: The general Retailers' Occupation Tax/Use Tax ("sales tax") rate is 6.25%, plus any applicable local taxes. Food for human consumption to be consumed off the premises where it is sold is generally taxed at a reduced 1% rate, plus any applicable local taxes.

Q: Which products are taxed at the full 6.25% rate even though they might seem like "food"?
A: Alcoholic beverages, soft drinks, candy, and food prepared for immediate consumption are all taxed at the full 6.25% rate, plus any applicable local taxes, rather than the reduced food rate.

Q: How can a company get a binding ruling on a specific product like this, rather than general guidance?
A: By requesting a Private Letter Ruling (PLR) under 2 Ill. Adm. Code 1200.110, providing complete and correct facts about the product (including its label and composition). A PLR is binding on the Department as to that taxpayer, to the extent the facts provided are correct and complete; a GIL like this one is not binding.

Citations and references

Statutes and regulations cited:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on sellers of tangible personal property at retail)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail for use in Illinois)
• 86 Ill. Adm. Code 130.310 (Foods, Soft Drinks and Candy regulation setting the reduced-rate/full-rate line)
• 86 Ill. Adm. Code 130.310(c)(1) (defines "food" as any solid, liquid, powder or item intended by the seller primarily for human consumption)
• 2 Ill. Adm. Code 1200.110 (procedures for requesting a binding Private Letter Ruling)
• 2 Ill. Adm. Code 1200.120 (General Information Letters are non-binding and not a statement of Department policy)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0024-gil.pdf

Original ruling text

ST 19-0024-GIL 12/04/2019 FOOD
Alcoholic beverages, soft drinks, candy, and food that is prepared for immediate consumption
are taxed at the regular sales tax rate of 6.25%, plus any applicable local taxes. Generally, a
1% sales tax rate, plus any applicable local taxes, is applied to food for human consumption
that is to be consumed off the premises where it is sold. (This is a GIL.)
December 4, 2019
RE: Request Taxability of 24K product
Dear XXX:
This letter is in response to your letter dated May 30, 2019, 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 sells nutritional, dietary, and skin care products through a multi-level
network of independent distributors. COMPANY is considered an “MLM” or multi-level
marketer such as Amway. Our physical location is in CITY, STATE. COMPANY
charges sales tax based upon the address to which we ship and based upon suggested
retail price. COMPANY files one consolidated state sales/excise tax return in lieu of
each independent distributor filing a separate return with your state.
While we have obtained previous rulings from your state on the taxability of our
products and charges, we would like to ensure that our sales tax collection procedures
are in compliance with all current law. At this time, please provide us with a letter ruling
or binding opinion on the taxability of our NEW product, given recent changes.
In February 2011 we launched a product called NEW which is a “mental clarity” dietary
supplement in liquid form. However, the product has recently been reformulated and is
now only sold as a powder. The new version is the same product, but is no longer
“ready for immediate consumption”: the user must first mix it with water or some other
liquid. I am requesting a formal ruling on the taxability of this new product. I have
included a copy of the product label to assist in the ruling.

ST 19-0024-GIL
December 4, 2019
Page 2

We are seeking assurance if this product in its newest state is taxable or tax exempt per
state regulations, and what category if applicable it falls. Please provide applicable
guidance.
Thank you for your assistance.
DEPARTMENT’S RESPONSE:
In your letter, you indicated that you included a copy of the product label. There was no such
label included with your letter. Notwithstanding, I hope you find the following helpful.
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. Illinois imposes a Use Tax 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 two taxes are complementary in nature and together are commonly referred to as the
“sales tax”. The sales tax rate is 6.25%, plus any applicable local taxes.
For your information and reference, the Department’s regulations on the reduced tax rate
under the Retailers’ Occupation Tax Act applicable to food, drugs, medicines, medical appliances and
grooming and hygiene products can be found on the Department’s website at www.tax.illinois.gov.
The regulation on Foods, Soft Drinks and Candy can be found at 86 Ill. Adm. Code 130.310.
Alcoholic beverages, soft drinks, candy, and food that is prepared for immediate consumption
are taxed at the regular sales tax rate of 6.25%, plus any applicable local taxes. Generally, a 1%
sales tax rate, plus any applicable local taxes, is applied to food for human consumption that is to be
consumed off the premises where it is sold.
Food is defined as “any solid, liquid, powder or item intended by the seller primarily for human
consumption, whether simple, compound or mixed, including foods such as condiments, spices,
seasonings, vitamins, bottled water and ice.” See Section 130.310(c)(1).
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