What does Illinois General Information Letter ST 20-0004-GIL conclude about Exempt Organizations?

Plain-English summary

An Illinois not-for-profit college that trains optometrists asked the Department of Revenue whether it owed Service Occupation Tax on the prescription eyeglasses and contact lenses its clinic transfers to patients as part of the students' clinical training. The college already held a sales-and-use-tax exemption certificate and separately collected and remitted Retailers' Occupation Tax on the non-prescription sunglasses it sold to the public.

The Department concluded that the college does not owe either Retailers' Occupation Tax or Service Occupation Tax on the transfer of prescription eyeglasses and contact lenses that happens as part of providing optometry services, because training students to provide those services is part of the college's primary educational purpose. Under the Service Occupation Tax Act's exclusion for organizations organized and operated exclusively for educational purposes, the college can even buy the eyeglasses, contact lenses, or their components tax-free by giving its suppliers its exemption identification number.

That exemption is narrow, though. Anything the college sells that is not transferred as part of providing an optometry service — the letter specifically lists sunglasses, lens-cleaning solutions, and eyeglass cases — remains subject to Retailers' Occupation Tax. The college can still buy those particular items tax-free from its own suppliers by issuing a Certificate of Resale, since it turns around and collects tax from its own customers on them.

The Department also corrected a point the taxpayer's representative had made in the ruling request: the claim that "the serviceman is deemed the taxable user of the tangible personal property transferred" under the Service Occupation Tax is only true for certain servicemen, such as a de minimis serviceman who incurs Use Tax liability as the end user of the property transferred to customers.

What this means for you

Educational institutions with clinical or training programs

If your school or training program transfers tangible personal property (like eyewear, dental supplies, or other materials) to patients or clients as an integral part of training students in a licensed profession, that transfer may fall outside both Retailers' Occupation Tax and Service Occupation Tax under the educational-purpose exclusion in 35 ILCS 115/2 — provided your institution is organized and operated exclusively for educational purposes and holds an Illinois exemption certificate. You can generally use your exemption number to buy the underlying materials tax-free.

Nonprofits that also sell items outside their core service

Don't assume an educational exemption covers every sale you make. Here, only the eyewear tied directly to the clinical service was exempt; retail-type sales made apart from that service (sunglasses, cases, cleaning solutions) stayed taxable, and the college had to keep collecting Retailers' Occupation Tax on those and could use resale certificates to buy them tax-free from its own suppliers.

Accountants and tax professionals advising exempt organizations

This GIL illustrates how the Department separates a "de minimis serviceman" analysis (86 Ill. Adm. Code 140.106, 140.108, 140.109) from the more fundamental educational-purpose exclusion in the Service Occupation Tax Act itself (35 ILCS 115/2). The Department didn't need to reach the de minimis serviceman or non-competitive-sales arguments the taxpayer raised (86 Ill. Adm. Code 130.2005, 130.120(h)) because the educational-purpose exclusion resolved the core question directly. It's also a reminder that a GIL is non-binding — it only directs taxpayers to relevant authority.

Common questions

Q: Does the college owe Service Occupation Tax on the prescription eyewear it gives patients during training?
A: No. The Department found that transfer is not subject to Retailers' Occupation Tax or Service Occupation Tax because providing that service is part of the college's primary educational purpose in training optometrists.

Q: Can the college buy the eyeglasses and contact lenses tax-free?
A: Yes. The college may purchase the prescription eyeglasses and contact lenses, or their components, tax-free by giving its vendors its exemption identification number.

Q: What about the sunglasses and other items the college sells?
A: Those remain subject to Retailers' Occupation Tax because they aren't transferred as part of providing optometry services. The college may still buy those items tax-free from its own suppliers by issuing a Certificate of Resale, since it collects tax when it resells them.

Q: Is this ruling binding on the Department?
A: This document is captioned as a General Information Letter, which the Department issues to direct a taxpayer to relevant regulations; a GIL is not a statement of Department policy and is not binding on the Department. (The ruling's own summary line describes it as "a PLR," but the Department's response states the nature of the inquiry required a GIL response.)

Q: Did the Department agree with the taxpayer's "de minimis serviceman" argument?
A: The Department didn't rule on that theory specifically. It resolved the question on the more direct educational-purpose exclusion in 35 ILCS 115/2, and separately clarified that the "serviceman is the taxable user" statement in the taxpayer's letter is only true for certain servicemen, such as a de minimis serviceman incurring Use Tax as the end user.

Citations and references

• 35 ILCS 115/2 (Service Occupation Tax Act exclusion for organizations operated exclusively for educational purposes)
• 86 Ill. Adm. Code 130.120(h) (Retailers' Occupation Tax exemption for sales to exclusively educational or charitable organizations)
• 86 Ill. Adm. Code 130.1405 (Certificates of Resale)
• 86 Ill. Adm. Code 130.1980 (opticians and optometrists treated as servicemen for prescription eyewear)
• 86 Ill. Adm. Code 130.2005 (non-competitive sales exemption for exempt organizations)
• 86 Ill. Adm. Code 140.106 (definition of "de minimis" serviceman)
• 86 Ill. Adm. Code 140.108 (de minimis servicemen not required to register for Retailers' Occupation Tax)
• 86 Ill. Adm. Code 140.109 (de minimis servicemen registered for Retailers' Occupation Tax)
• 86 Ill. Adm. Code 140.126(c)(3) (Service Occupation Tax rate on food, medicines, and medical appliances)
• 2 Ill. Adm. Code 1200.110 (procedures for Private Letter Rulings)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Subject

Exempt Organizations

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0004-gil.pdf

Original ruling text

ST 20-0004-GIL 01/29/2020 EXEMPT ORGANIZATIONS
This letter determines that an educational institution that provides optometry services as part of
its curriculum does not incur tax on the transfer of tangible personal property incident to the
providing of that service. See generally 86 Ill. Adm. Code 130.2005. (This is a PLR.)

January 29, 2020

Dear Xxxx:
This letter is in response to your letter dated April 2, 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:
We are requesting a Private Letter Ruling on behalf of our client pursuant to 86 Ill.
Admin Code 1200.110. Pursuant to the regulation, we attest on behalf of our client the
following:

1. The taxpayer is not under audit for any tax, nor is the taxpayer the subject of any
   pending litigation related to the request.
2. The requested ruling relates to Service Occupation Tax for periods open under
   the statute of limitation and going forward.
3. To the best of our knowledge, the Taxpayer and Representative are not aware of
   any contradictory authorities nor are we aware of any rulings covering the
   specific facts and questions addressed below.
4. Neither the taxpayer nor its Representative have previously requested a ruling
   from the Department of Revenue on this issue.
   Statement of Facts
   The taxpayer is a not-for-profit educational institution located in CITY and organized for
   the purpose of training Optometrists. As part of its educational function, doctors and
   students provide eye examinations, prescription glasses and contact lenses as well as
   non-prescription sunglasses to low income patients in the community. The Taxpayer
   has been issued and holds an exemption for sales and property tax by the Illinois
   Department of Revenue, and thus has demonstrated that it qualifies for the sales and

ST 20-0004-GIL
Page 2

use tax exemption. The Taxpayer is also registered for sales and use tax and collects
and remits sales tax on its sales of non-prescription sunglasses.
The College is located on the South Side of CITY and operates a clinic that provides
eye examinations, glasses fittings and contact lens to patients. Most patients are from
the local area and use a combination of Medicare, Medicaid, other state programs,
grants and insurance programs. The tangible personal property transferred incident to
the service (lens, frames, and contacts) therefore largely benefit low income patients as
well as being used to train optometrists.
The Taxpayer performed an analysis of its costs and revenues for the last three years
and determined that the cost price of tangible personal property transferred incident to it
[sic] services was approximately PERCENT each year. The Taxpayer considers itself a
de minimis service man who is also registered for Retailers [sic] Occupation Tax. We
would be happy to provide additional information on this analysis if needed.
Ruling Requested
The Taxpayer requests a ruling that its sales tax exemption applies to the Service
Occupation Tax obligation for de minimis servicemen who are registered for Retailers
[sic] Occupation Tax and that the Taxpayer does not owe Service Occupation Tax on
the cost price of its materials transferred.
Discussion and Relevant Authorities
The Taxpayer is not aware of any relevant authorities addressing the Use Tax or
Service Occupation Tax liability of a de minimis serviceman that holds an Illinois
Exemption Number. The Taxpayer acknowledges that the provision of prescription
glasses and contact lenses would be considered an Illinois regulation [sic] 86 Ill. Admin.
Code 130.1980 states that opticians and optometrists who provide prescription
eyeglasses and contacts are not engaged in the sale of tangible personal property but
should be considered servicemen under the service occupation tax rules. 86 Ill. Admin.
Code 130.1980
Section 140 of the Service Occupation Tax regulations divides servicemen into three
categories- de minimis servicemen who are not required to be registered for Retailers
[sic] Occupation Tax (140.108), de minimis servicemen who are registered for Retailer’s
[sic] Occupation Tax, (140.109) and non-de minimis servicemen. “De minimis” in this
context is defined as a serviceman whose cost ratio of tangible personal property
transferred incident to sales of services is less than 35% of its gross annual receipts
from all sales of service. 86 Ill. Admin Code 140.106. Generally, optometrist [sic] who
are de minimis servicemen registered as retailers collect the retailer’s [sic] occupation
tax on non-prescription eyewear and issue a resale certificate and pay service
occupation tax on the sale of prescription eyewear (generally 1% plus and [any] local
taxes that apply to food, medicines and medical appliances). 86 Ill. Admin. Code
140.126(c)(3).

ST 20-0004-GIL
Page 3

Under 86 Ill. Admin 130.120(h), sales to organizations which are organized exclusively
for educational or charitable purposes are exempt from Retailers [sic] Occupation Tax.
The Taxpayer holds and [sic] exemption certificate issued by the State of Illinois and
qualifies for this provision.
Generally, when an exempt entity makes sales to the public, Illinois regulations provide
that the seller must collect sales tax from its customers unless an exemption is
provided. 86 Ill. Admin. Code 130.2005. One of these exceptions is non-competitive
sales. While at first blush, this appears to be a competitive sale as the Taxpayer is
selling the same items as for-profit businesses, the regulation allows the Department to
consider further guidelines for the sales, including the nature of the item sold and the
character of the particular sale, and the real, practical effect of punitive competition. 86
Ill. Admin. Code 13.2005(a)(3)(C).
We believe that the Taxpayer’s transactions should not be considered competitive sales
and that the Taxpayer should not be required to remit Service Occupation Tax on the
transactions for the following reasons:

1. The Non-Competitive Sales provisions are located within the Retailer [sic]
   Occupation Tax rules and contemplate the sales of tangible personal property.
   Illinois rules clearly categorize this transaction as a Service Occupation Tax
   transaction.
2. Under the Service Occupation Tax, the serviceman is deemed the taxable user
   of the tangible personal property transferred. The Taxpayer is entitled to
   purchase these items exempt from tax through an exemption certificate granted
   by the state.
3. The items being transferred are being used for both an educational and
   charitable purposes. [sic] The prescriptions and fitting of glasses serve an
   educational purpose. The recipients of the glasses, the patients of the Taxpayer,
   are largely indigent members of the community relying on state and federal aid
   to receive the glasses or contact lenses.
4. Even under the non-competitive sales rules, the Department may consider the
   nature of the transaction. As stated above, while the glasses transferred are the
   same type of product that for-profit businesses provide, the nature of the
   customers suggests that they may be priced out of the retail market for these
   services and that the Taxpayer is providing a service that alleviates some of the
   demand for services on the local, state and federal government as contemplated
   in the Hospira decision.
5. The Taxpayer is registered and files ST-1 returns and collects and remits
   Retailers [sic] Occupation Tax on its sales of non-prescription eyewear. The
   requirement to remit Service Occupation Tax would not result in a great deal of
   additional revenue to the state (less than $X,XXX) but would detract from the
   educational and charitable function of the Taxpayer.
   We respectfully submit that the Illinois Department of Revenue issue the requested
   ruling with the taxpayer information redacted. We further request that if the Department
   concludes contrary to the request that the Taxpayer be allowed to withdraw the ruling
   request. We are happy to provide any additional information or answer any questions

ST 20-0004-GIL
Page 4

the Department has. Please contact me if there are any questions. A Power of Attorney
has been submitted to the POA unit.
DEPARTMENT’S RESPONSE:
Section 2 of the Service Occupation Tax Act excludes the sale or transfer of tangible personal
property as an incident to the rendering of service for or by certain organizations such as those that
are organized and operated exclusively for educational purposes. 35 ILCS 115/2. We believe that the
provision of ophthalmic examinations and the provision of prescription eyeglasses as part of the
College’s educational curriculum falls within the performance of its educational function. The transfer
of tangible personal property incident to the providing of optometry services by the STATE College is
not subject to tax because the training of students to provide such services is part of the College’s
primary educational purpose. The College would not incur either Retailers' Occupation Tax or
Service Occupation Tax liability on the transfer of prescription eyeglasses and contact lenses incident
to the provision of optometry services. The College may purchase the prescription eyeglasses and
contact lenses, or the components for prescription eyeglasses, tax-free by providing vendors with its
exemption identification number.
However, the sale by the College of items that are not transferred incident to the provision of
optometry services would be subject to Retailers' Occupation Tax liability. The items subject to tax
would include such items as sunglasses, cleaning solutions for lenses, eyeglass cases, or any other
tangible personal property that is sold apart from the rendering of optometry services. These items
may be purchased by the College without incurring tax by providing its suppliers with a Certificate of
Resale. See 86 Ill. Adm. Code 130.1405.
Note, in your letter you state, in part, that “[u]nder the Service Occupation Tax, the serviceman
is deemed the taxable user of the tangible personal property transferred.” Generally, that statement
is only true for certain servicemen (e.g., the de minimis serviceman incurring Use Tax liability is
considered to be the end user of the tangible personal property transferred to service customers).
See, 86 Ill. Adm. Code 140.108.
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
Chairman, Private Letter Ruling Committee
RSW/DMB:rkn