How does Illinois decide which local Retailers' Occupation Tax applies when a business sells products shipped directly from an out-of-state manufacturer to customers?

Plain-English summary

An Illinois resident starting a business selling therapeutic medical laser devices asked the Department how sales tax applies when the devices are manufactured out of state and shipped directly from that out-of-state manufacturer to customers -- never passing through the seller's hands in Illinois. The taxpayer also asked whether they'd owe sales tax in both Illinois and the customer's state, and whether they'd have to collect and remit tax for other states.

The Department explained that Illinois sales tax (technically the Retailers' Occupation Tax, paid by the retailer, paired with Use Tax, paid by the purchaser) is triggered by the seller's business of selling, not by any single sale. Because of that, figuring out which jurisdiction's local tax applies requires a fact-specific look at where the retailer's actual selling activities happen -- things like where sales staff work, where orders are accepted, where payment is received or invoices are issued, where inventory sits, and where the company's headquarters and decision-making are located (86 Ill. Adm. Code 270.115). The Department could not tell from the letter alone which jurisdiction that would be for this taxpayer and pointed them to the regulation and the Department's online tax rate finder instead.

On the specific interstate question, the Department drew a clear line: if the laser device ships from an out-of-state manufacturer directly to an out-of-state customer, that's a sale in interstate commerce, and Illinois sales tax does not apply at all (35 ILCS 120/2-60). But if the sale is made in Illinois to an Illinois purchaser, Illinois sales tax applies even though the product physically ships from the out-of-state manufacturer. The Department could not advise on other states' tax laws.

What this means for you

Drop-shippers and multi-state online retailers

If your product ships directly from a manufacturer or supplier to the customer and never touches your own Illinois location, that specific sale may fall outside Illinois sales tax entirely -- but only if both the seller's shipping point and the customer are out of state. The moment either the sale is made in Illinois or the purchaser is in Illinois, Illinois tax can apply regardless of where the physical product ships from.

Business owners with sales activity spread across locations

If your selling activities (sales staff, order acceptance, payment/invoicing, inventory, headquarters) are split across more than one city, county, or state, you can't assume a single "obvious" answer for which local Retailers' Occupation Tax rate applies. The Department requires you to weigh the "primary selling activities" first, and only turn to the listed "secondary selling activities" if no single jurisdiction has more than two of the primary ones. Use the Department's online tax rate finder at mytax.illinois.gov as a starting tool, but keep records of where each activity actually happens.

Accountants and tax professionals

This GIL is a good plain-language walkthrough of the Hartney Fuel Oil / Ex-Cell-O Corp. line of sourcing case law now codified at 86 Ill. Adm. Code 270.115. Remember the default backstops in the regulation: if primary/secondary activity analysis doesn't clearly resolve a jurisdiction, sourcing falls to wherever inventory or headquarters is located (whichever has more selling activity), and if that's still unclear, there's a rebuttable presumption in favor of the headquarters location.

Common questions

Q: I sell a product that ships straight from an out-of-state manufacturer to my customer -- do I ever owe Illinois sales tax on it?
A: If both the manufacturer's shipping point and the customer are outside Illinois, no -- the Department says that's a sale in interstate commerce and Illinois sales tax doesn't apply. But if the sale is made to an Illinois purchaser, Illinois sales tax applies even though the product ships from an out-of-state manufacturer.

Q: If I sell to a customer in another state, do I pay sales tax in both Illinois and that state?
A: This GIL doesn't fully resolve that for every fact pattern -- it says the Department can't opine on other states' laws, and whether Illinois tax is owed on a given sale depends on where you (the retailer) are engaged in the business of selling. Sales made in interstate commerce out of Illinois are not subject to Illinois sales tax.

Q: How do I figure out which city or county's local sales tax rate applies to my business?
A: Local Retailers' Occupation Tax is owed to the jurisdiction where the retailer's business of selling is actually carried on -- not simply where a sale happens to be delivered. The Department's regulation (86 Ill. Adm. Code 270.115) lists "primary selling activities" (sales staff location, where the seller accepts/binds the sale, where payment or invoicing occurs, inventory location, headquarters) to weigh first, then "secondary selling activities" if needed. The Department's online tax rate finder at mytax.illinois.gov can help once you know the jurisdiction.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter, which only directs the taxpayer to relevant regulations and information -- it is not a statement of Department policy and is not binding.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on the business of selling tangible personal property at retail)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail for use in Illinois)
• 86 Ill. Adm. Code 150.130 (retailer collects Use Tax; purchaser remits directly if not collected)
• 86 Ill. Adm. Code 270.115 (sourcing of local Retailers' Occupation Tax; primary/secondary selling activities)
• 35 ILCS 120/2-60 (no Illinois Retailers' Occupation Tax on sales in interstate commerce)

Cases cited in the ruling:

• Automatic Voting Machs. v. Daley, 409 Ill. 438 (1951)
• Mahon v. Nudelman, 377 Ill. 331 (1941)
• Standard Oil Co. v. Dep't of Finance, 383 Ill. 136 (1943)
• Young v. Hulman, 39 Ill. 2d 219 (1968)
• Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316 (1943)
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0018-gil.pdf

Original ruling text

ST-21-0018-GIL 04/22/2021 LOCAL TAXES
The occupation of selling is comprised of the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods to the
final consummation of the sale by the passing of title and payment of the
purchase price. Thus, establishing where "the taxable business of selling is being
carried on" requires a fact-specific inquiry into the composite of activities that
comprise the retailer’s business. 86 Ill. Adm. Code 270.115. (This is a GIL.)

Dear NAME:

April 22, 2021

This letter is in response to your letter received February 4, 2021, 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 have some tax questions for the Illinois Department of Revenue Legal
Services. My situation is perhaps a little different. I'm a resident of Illinois
and I'm starting a business in Illinois that sells therapeutic medical lasers.
I'm selling a medical therapeutic laser device that's manufactured in STATE
and will be shipped to our customers from STATE. So, the products will not
be shipped to me in Illinois and then shipped to our customers.
The ST-l Instructions start out saying this:
"Who must file Form ST-1? You must file Form ST-1, Sales and Use Tax and
E91l Surcharge Return, if you are making retail sales of any of the following
in Illinois":
It's my understanding that I have to pay 6.25% if sell a laser device in
Illinois.
The other questions I have are:
What if I sell a laser device to a doctor in another state? Do I pay a sales tax
in Illinois and the other state? I've always thought it was the end user
that's making the retail purchase who is responsible to pay the sales tax to
the state they're in because they are the one buying the product. Also,

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April 22, 2021
would I be responsible to collect the sales tax for another state and send it to
that state?
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. The tax is measured by the seller's
gross receipts from retail sales made in the course of such business. "Gross receipts"
means the total selling price or the amount of such sales. 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 retailer does not collect the Use Tax from the purchaser for remittance to
the Department, the purchaser is responsible for remitting the Use Tax directly to the
Department. See 86 Ill. Adm. Code 150.130. When an Illinois retailer sells tangible
personal property and delivers it in Illinois, sales tax is due unless an exemption can be
documented.
If sales are made to Illinois purchasers from locations in Illinois, State and local
retailers’ occupation tax is incurred at the rate in effect where the sales are made. The
Illinois Department of Revenue offers a tax rate finder on its website to determine the
applicable sales tax rate (including any applicable local Retailers’ Occupation Taxes) for
your business’s location. The tax rate finder can be found at https://mytax.illinois.gov/.
Because the tax is imposed on the retail business of selling and not on specific
sales, the jurisdiction in which the sale takes place is not necessarily the jurisdiction
where the retailers' occupation tax is owed. Rather, it is the jurisdiction where the seller
is engaged in the business of selling that can impose the tax. Automatic Voting Machs.
v. Daley, 409 Ill. 438, 447 (1951) ("In short, the tax is imposed on the "occupation" of
the retailer and not upon the "sales" as such.") (citing Mahon v. Nudelman, 377 Ill. 331
(1941) and Standard Oil Co. v. Dep't of Finance, 383 Ill. 136 (1943)); see also Young v.
Hulman, 39 Ill. 2d 219, 225 (1968) ("the retailers occupational tax...imposes liability
upon the occupation of selling at retail and not on the sale itself"). See, for example, 86
Ill. Adm. Code 270.115(b)(1). The Illinois Department of Revenue has created
administrative rules that govern the sourcing of local retailers’ occupation taxes. See,
for example, 86 Ill. Adm. Code 270.115. The rules provide that:
The occupation of selling is comprised of "the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods

NAME
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April 22, 2021
to the final consummation of the sale by the passing of title and payment
of the purchase price". Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321
(1943). Thus, establishing where "the taxable business of selling is being
carried on" requires a fact-specific inquiry into the composite of activities
that comprise the retailer’s business. Hartney Fuel Oil Co. v. Hamer, 2013
IL 115130, paragraph 32 (citing Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316,
321-22 (1943)). 86 Ill. Adm. Code 270.115(b)(2).
Some retailers are engaged in retail operations with selling activities in multiple
jurisdictions within the State, or in jurisdictions located in more than one state. The
selling activities that comprise these businesses "are as varied as the methods which
men select to carry on retail businesses." Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321
(1943). Consequently, "it is...not possible to prescribe by definition which of the many
activities must take place in [a jurisdiction] to constitute it an occupation conducted in
[that jurisdiction] . . . . It is necessary to determine each case according to the facts
which reveal the method by which the business was conducted." Ex-Cell-O Corp. v.
McKibbin, 383 Ill. 316, 321-22 (1943); see also Hartney Fuel Oil Co. v. Hamer, 2013 IL
115130, paragraph 36. See, for example, 86 Ill. Adm. Code 270.115(b)(3).
A seller incurs Retailers' Occupation Tax in the county or municipality if its
predominant and most important selling activities take place in the jurisdiction. Isolated
or limited business activities within a jurisdiction do not constitute engaging in the
business of selling in that jurisdiction when other more significant selling activities occur
outside the jurisdiction, and the business predominantly takes advantage of government
services provided by other jurisdictions. Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 32223 (1943); Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, paragraphs 30 through 35.
See, for example, 86 Ill. Adm. Code 270.115(b)(5). The Department’s regulations
enumerate several “primary selling activities” and “secondary selling activities” to aid in
this inquiry, which are listed at 86 Ill. Adm. Code 270.115(c)(1) and (4). “Primary selling
activities” include:
A) Location of sales personnel exercising discretion and authority to solicit
customers on behalf of a seller and to bind the seller to the sale;
B) Location where the seller takes action that binds it to the sale, which
may be acceptance of purchase orders, submission of offers subject to
unilateral acceptance by the buyer, or other actions that bind the seller
to that sale;
C) The location where payment is tendered and received, or from which
invoices are issued with respect to each sale;
D) Location of inventory if tangible personal property that is sold is in the
retailer's inventory at the time of its sale or delivery; and

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April 22, 2021
E) The location of the retailer's headquarters, which is the principal place
from which the business of selling tangible personal property is
directed or managed. In general, this is the place at which the offices
of the principal executives are located. When executive authority is
located in multiple jurisdictions, the place of daily operational decision
making is the headquarters.
See, for example, 86 Ill. Adm. Code 270.115(c)(1). If the primary selling activities occur
in multiple jurisdictions, but no individual jurisdiction has more than two primary selling
activities, you must consider the listed secondary selling activities to determine the
jurisdiction where you are engaged in the business of selling. “Secondary selling
activities” include:
A) Location where marketing and solicitation occur;
B) Location where the seller engages in activities necessary to procure
goods for sale;
C) Location of the retailer's officers, executives or employees with
authority to set prices or determine other terms of sale if
determinations are made in a location different than that identified in
subsection (c)(1)(A);
D) Location where purchase orders or other contractual documents are
received when purchase orders are accepted, processed or fulfilled in
a location or locations different from where they are received;
E) Location where title passes; and
F) Location where the retailer displays goods to prospective customers,
such as a showroom.
See, for example, 86 Ill. Adm. Code 270.115(c)(4).
Every retailer in this State must determine the taxing jurisdictions where it is
engaged in the business of selling with respect to each of its sales by applying the
standards set forth in Section 270.115(c), except when a retailer is engaged in particular
selling activities identified by a statute that specifies the taxing jurisdiction where
retailers engaged in those activities shall remit retailers' occupation tax. See, for
example, 86 Ill. Adm. Code 270.115(c). If you are engaged in any special selling
activity where your remittance of retailers’ occupation tax would be directed by statute
rather than these rules, please refer to the applicable statute.
Except as provided in subsection (d), a retailer that is not engaged in the
business of selling in a jurisdiction under subsection (c)(2) is engaged in the business of

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April 22, 2021
selling in the jurisdiction where its inventory is located under subsection (c)(1)(D), or
where its headquarters is located under subsection (c)(1)(E), whichever jurisdiction is
the location where more selling activities occur, considering both primary and secondary
selling activities. A retailer that is not engaged in the business of selling in a jurisdiction
under subsection (c)(2) or (c)(5) is presumed to be engaged in the business of selling at
the location of its headquarters absent clear and convincing evidence to the contrary.
See, for example, 86 Ill. Adm. Code 270.115(c)(5) and (6).
Your letter does not provide sufficient information regarding the nature of your
Illinois sales to enable the Department to provide any opinion as to the location where
you are engaged in the business of selling. Please review the Department’s regulations
at 86 Ill. Adm. Code 270.115 for guidance.
Regarding sales of tangible personal property that is shipped from an out-of-state
manufacturer to an out-of-state consumer, Illinois sales tax would not apply. These
sales would constitute sales into interstate commerce upon which Illinois sales tax
cannot be imposed. See 35 ILCS 120/2-60. However, for sales of tangible personal
property made in Illinois to an Illinois purchaser, Illinois sales tax would apply even if the
property is shipped from an out-of-state manufacturer.
We are unable to provide guidance on the tax laws of other states. For
information on the tax laws of other states, please reach out to the regulatory body for
each state at issue.
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,
Alexis K. Overstreet
Associate Counsel
AKO:rkn