How is Illinois sales tax calculated on food and dietary products made from industrial hemp extract, like balms and tincture drops?

Plain-English summary

An Illinois company that sells nutritional, dietary, and skin-care products through a multi-level marketing network asked the Department how sales tax would apply to two new hemp-extract products: a topical balm (applied to the skin) and a food-grade tincture oil (taken by placing drops under the tongue). Both products were made from industrial hemp containing less than 0.3% THC, as defined by the federal Agricultural Improvement Act of 2018. The company wanted confirmation that both products were taxable and asked the Department to identify any exemption that might apply.

The Department explained that Illinois taxes "food" — defined broadly as any solid, liquid, powder, or item intended by the seller primarily for human internal consumption — at the low 1% rate (plus local taxes) under 86 Ill. Adm. Code 130.310, as long as it isn't an alcoholic beverage, cannabis-infused product, soft drink, candy, or food prepared for immediate consumption. Because industrial hemp is specifically excluded from the definition of "cannabis" under the Industrial Hemp Act and related regulations, hemp-based food products don't get pulled into the higher 6.25% cannabis tax rate. Products that don't meet the definition of food are taxed at the general 6.25% rate instead.

Applying that framework, the Department stated that if the hemp-based products are "sold primarily for internal human consumption," they would be considered food and taxed at the 1% rate plus local taxes. Since the tincture drops are administered under the tongue for internal consumption, that describes them directly; the topical balm, applied to the skin rather than consumed internally, would not fit that description and so would not qualify for the 1% food rate, leaving it subject to the general 6.25% rate for products that don't meet the definition of food. The Department also noted a separate, lower rate exists for "medicine or drug" products under 86 Ill. Adm. Code 130.311, but that rate only applies if the product's label actually makes a medicinal claim — the Department expressly declined to say whether these specific labels made such a claim, since it does not review specific labels in a GIL.

What this means for you

Sellers of hemp, CBD, and dietary supplement products

If you sell industrial hemp extract or similar supplements, the tax rate turns on how the product is meant to be used, not on how it's marketed generally. Products taken internally (drops, tinctures, capsules, gummies) are generally taxed as food at 1% plus local taxes, while topical products (balms, salves, lotions) are taxed at the general 6.25% rate because they aren't "food" at all. Keep this distinction in mind when setting up point-of-sale tax rates across a product line that mixes ingestible and topical items.

Businesses considering the "medicine or drug" low rate

Don't assume a supplement qualifies for the low medicine/drug rate just because it's a health product. Under 86 Ill. Adm. Code 130.311, that rate is reserved for items whose label actually makes a medicinal claim. Most vitamins, dietary supplements, and meal-replacement drinks don't make such claims, so they default to being taxed as food (1%) rather than as a drug — the tax outcome is similar, but the legal basis and label requirements differ.

Accountants and tax professionals advising MLM or supplement companies

This GIL is a useful illustration of how the Department applies 86 Ill. Adm. Code 130.310 and 130.311 together, and how the Industrial Hemp Act (505 ILCS 5) and 86 Ill. Adm. Code 423.105 keep compliant low-THC hemp products out of the higher cannabis tax bracket. Remember that a GIL is not binding and does not review specific product labels — if a client needs certainty on whether a specific label supports the drug/medicine rate, a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110 would be the appropriate next step.

Common questions

Q: Are hemp extract products taxed the same as marijuana or cannabis products in Illinois?
A: No. Industrial hemp (under 0.3% THC, as defined by the 2018 Agricultural Improvement Act) is specifically excluded from the definition of "cannabis" under the Cannabis Cultivation Privilege Tax Law, the Cannabis Purchaser Excise Tax Law, and 86 Ill. Adm. Code 423.105. So compliant hemp products are not swept into the 6.25% rate that applies to adult-use cannabis products.

Q: Why would the tincture drops be taxed differently than the balm?
A: The tincture drops are taken internally (administered under the tongue), which fits the definition of "food" under 86 Ill. Adm. Code 130.310 — items intended primarily for human internal consumption. The balm is applied topically to the skin, so it isn't consumed internally and doesn't meet that definition, leaving it subject to the general 6.25% state rate.

Q: Could either product instead qualify for the lower "medicine or drug" tax rate?
A: Only if the product's label actually makes a medicinal claim, per 86 Ill. Adm. Code 130.311. The Department noted it could not determine whether these specific labels made such claims, and that most vitamins, supplements, and meal-replacement products don't make medicinal claims — meaning they are usually taxed as food rather than as a drug.

Q: Is this letter binding on the Department?
A: No. This is a General Information Letter (GIL), issued under 2 Ill. Adm. Code 1200.120. A GIL simply points a taxpayer to the relevant regulations; it is not a statement of Department policy and is not binding, unlike a Private Letter Ruling (PLR), which is binding on the Department for the specific taxpayer and facts involved.

Q: What rate applies to food products that don't qualify for the 1% rate?
A: Products that don't meet the definition of "food," or that are food prepared by the vendor for immediate consumption, are taxed at the general Illinois sales tax rate of 6.25%, plus applicable local taxes.

Citations and references

Regulations and statutes:

• 86 Ill. Adm. Code 130.310 (tax rate for food, soft drinks, and candy)
• 86 Ill. Adm. Code 130.310(c)(4) (adult use cannabis definition excludes industrial hemp)
• 86 Ill. Adm. Code 130.310(d)(8) (6.25% rate for adult use cannabis and non-qualifying food)
• 86 Ill. Adm. Code 423.105 (Cannabis Cultivation Privilege Tax Law/Cannabis Purchaser Excise Tax Law exclude industrial hemp)
• 86 Ill. Adm. Code 130.311 (definition of medicine or drug)
• 505 ILCS 5 (Industrial Hemp Act)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Subject

Food, Drugs, & Medical Appliances

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/st20-0015-gil.pdf

Original ruling text

ST 20-0015-GIL 09/30/2020 FOOD, DRUGS, & MEDICAL APPLIANCES
This letter discusses food products made from industrial hemp. 86 Ill. Adm. Code 130.310.
(This is a GIL.)

September 30, 2020

RE: Request Taxability of Hemp PRODUCTS

Dear Xxxx:
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, with one minor exception. Orders which have been certified for personal
usage by our distributors and are less than $$$ retail value are taxed based upon
wholesale pricing. COMPANY files one consolidated state sales/excise tax return in
lieu of each independent distributor filing a separate return with your state.
Within the next months, COMPANY will be rolling out new products containing hemp
extracts. Two of the products are balms containing differing concentrations of hemp
extract and that are intended for topical application. One full spectrum hemp extract
and 2 hemp extract isolate products are food-grade oils, which are administered via a
tincture dropper under the tongue. Hemp extract is growing in popularity and use as a
dietary supplement. Please note that hemp extract is being sourced from industrial

ST 20-0015-GIL
Page 2

hemp, as defined by the Agricultural Improvement Act of December 2018, containing
less than 0.3% THC.
We are seeking assurance both the Hemp Balm and the Hemp Extract Drops are
taxable per state regulations. If a regulation would apply deeming these products not
subject to the state sales tax, please provide applicable guidance on the sales tax
classification. I have included copies of the approved labels for your convenience.
Thank you for your assistance.

DEPARTMENT’S RESPONSE:
The Department’s regulation at 86 Ill. Adm. Code 130.310 discusses the appropriate tax rates
for food, soft drinks and candy. Food that is to be consumed off the premises where it is sold (other
than alcoholic beverages, food consisting of or infused with adult use cannabis, 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. Adult use cannabis is defined as
cannabis subject to tax under the Cannabis Cultivation Privilege Tax Law and the Cannabis
Purchaser Excise Tax Law and does not include cannabis subject to tax under the Compassionate
Use of Medical Cannabis Program Act. 86 Ill. Adm Code 130.310(c)(4). ILCS 130]. However,
cannabis as defined by the Cannabis Cultivation Privilege Tax Law and the Cannabis Purchaser
Excise Tax Law excludes industrial hemp as defined and authorized under the Industrial Hemp Act
(505 ILCS 5). 86 Ill. Adm. Code 423.105.
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. All adult use cannabis (e.g., cannabis flower, concentrate, cannabis-infused
products) is taxed at the State rate of 6.25%. 86 Ill. Adm. Code 130.310(d)(8).
A medicine or drug is defined as any pill, powder, potion, salve, or other preparation for human
use and that purports on the label to have medicinal qualities. See 86 Ill. Adm. Code 130.311.
Therefore, if vitamins, food supplements or meal replacement drink mixes are for human use and
purport on the label to have medicinal qualities, such items are considered to be drugs and are taxed
at the low rate of tax. Since not many vitamins, food supplements or meal replacement drink mixes
are likely to make medicinal claims, they would not qualify as a medicine or drug, however, such
items would be considered to be food subject to 86 Ill. Adm. Code 130.310 at taxed at the 1% rate.
The Department takes no position whether the labels on the products you describe make
medicinal claims and should be taxed as medicines or drugs. However, if the products are made
from industrial hemp and sold primarily for internal human consumption, they would be considered as
food and taxed at the rate of 1%, plus applicable local taxes.

ST 20-0015-GIL
Page 3

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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