When a drop-shipped sale touches Illinois, whose sales count toward Illinois's $100,000/200-transaction economic nexus threshold for remote retailers?

Plain-English summary

This GIL is the Department's response to a multistate survey about how "drop shipments" interact with Illinois's economic nexus threshold for remote (out-of-state) retailers. Since January 1, 2021, a remote retailer is treated as doing business in Illinois — and must collect and remit Retailers' Occupation Tax — once it either (1) has $100,000 or more in cumulative gross receipts from Illinois sales, or (2) enters into 200 or more separate Illinois transactions.

The survey posed two drop-shipment fact patterns:

• Scenario 1: Out-of-state Company A sells to out-of-state Company B for resale, and Company B has Company A ship the goods directly to Company B's customer in Illinois.
• Scenario 2: Out-of-state Company A sells to Illinois-based Company B for resale, and Company B has Company A ship the goods to Company B's customer in another state.

The Department's answer turns on a basic principle: a sale for resale never counts toward the seller's own threshold, but the downstream retail sale to the actual end purchaser counts toward whichever party made that retail sale. In Scenario 1, Company B's sale to the Illinois customer is a taxable retail sale that counts toward Company B's Illinois threshold — not Company A's, since Company A's sale to Company B was for resale. In Scenario 2, Company A's sale to Company B is for resale (even though delivered to Illinois-based Company B), so it does not count toward Company A's threshold at all. In both scenarios, the resale leg only escapes the threshold count if it is properly documented as a sale for resale under 86 Ill. Adm. Code 130.1405 — undocumented "resales" are treated as taxable retail sales that do count.

What this means for you

Remote and multistate sellers

If you sell into Illinois through a drop-shipment arrangement, track which leg of the transaction is the resale and which is the retail sale to the end customer. Only the retail sale to the actual Illinois (or other-state) purchaser counts toward an economic nexus threshold, and it counts toward the party that made that retail sale — not toward an upstream wholesaler that only sold for resale.

Wholesalers and drop-shippers

Properly documenting a sale for resale (per 86 Ill. Adm. Code 130.1405) is what keeps that sale out of your own threshold calculation. Without adequate resale documentation, the Department will treat the sale as a taxable retail sale delivered to an Illinois purchaser, which then counts toward your $100,000/200-transaction threshold.

Accountants and tax professionals

This letter is a useful plain-language walkthrough of how 35 ILCS 120/2(b) and 86 Ill. Adm. Code 131.115/131.120 apply specifically to drop-shipment fact patterns, which the underlying regulations don't spell out directly. Note that "gross receipts" for threshold purposes includes even otherwise-exempt sales (other than resales, marketplace-facilitated sales, and occasional sales), so exempt retail sales still count toward the numbers.

Common questions

Q: In a drop-shipment sale, whose Illinois economic nexus threshold does the sale count toward?
A: The retail sale to the actual end purchaser counts toward the threshold of whichever company made that retail sale. A sale for resale between the two businesses does not count toward either party's threshold, regardless of where the goods are shipped.

Q: Does it matter that the goods physically pass through or ship to Illinois?
A: Not by itself. What matters is which transaction is the taxable retail sale and which is the sale for resale. In Scenario 2, Company A's sale to Illinois-based Company B is still a sale for resale (not a retail sale to an Illinois purchaser), so it doesn't count toward Company A's threshold even though Company B is located in Illinois.

Q: What happens if the resale isn't properly documented?
A: An undocumented "resale" is treated as a taxable retail sale by the seller to the Illinois purchaser, and it counts toward that seller's economic nexus thresholds. See 86 Ill. Adm. Code 130.1405 for how to properly document a sale for resale.

Q: What are Illinois's current economic nexus thresholds for remote retailers?
A: As of January 1, 2021, a remote retailer must collect and remit Illinois Retailers' Occupation Tax if it has $100,000 or more in cumulative gross receipts from sales to Illinois purchasers, or 200 or more separate transactions with Illinois purchasers, in a 12-month period. See 35 ILCS 120/2(b) and 86 Ill. Adm. Code 131.115.

Q: Do exempt sales count toward the threshold?
A: Yes, generally. Other than sales for resale, sales made through a marketplace facilitator, and occasional sales, all sales of tangible personal property count toward the thresholds even if they are otherwise exempt from tax. See 86 Ill. Adm. Code 131.120(b).

Citations and references

Statutes and regulations:

• 35 ILCS 120/1 (Retailers' Occupation Tax Act definitions, including remote retailer)
• 35 ILCS 120/2(b) (economic nexus thresholds for remote retailers)
• 86 Ill. Adm. Code 130.225 (drop shipments)
• 86 Ill. Adm. Code 130.1405 (documenting a sale for resale)
• 86 Ill. Adm. Code 131.105 (definition of remote retailer)
• 86 Ill. Adm. Code 131.110(a) (remote retailer tax liability)
• 86 Ill. Adm. Code 131.115 and 131.120 (calculating gross receipts/transactions for thresholds)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• 45 Ill. Reg. 9625 (emergency rule amending 86 Ill. Adm. Code 131.120(b), effective July 13, 2021)

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/st21-0027-gil.pdf

Original ruling text

ST-21-0027 07/29/2021 MISCELLANEOUS
This letter responds to an annual survey. (This is a GIL.)
July 29, 2021
Dear NAME:
This letter is in response to your letter dated May 20, 2020, 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:
Our firm is surveying states on whether destination sales of drop
shipments are to be included in your state’s sales tax economic presence
nexus threshold. We would appreciate your response to this survey.
Please consider the following two fact scenarios:
Fact Scenario No 1:
Company A located in State 1 sells tangible personal property to
Company B located in State 2. Company B requests that the tangible
personal property be shipped directly to Company B’s customer in Illinois
(here “drop shipment”).
Does your state require Company A to include the drop shipment sales to
Company B that were shipped to Illinois in determining Company A’s
requirement to collect and remit sales tax in Illinois?
Your response:
Yes
No
Fact Scenario No 2:
Company A located in State 1 sells tangible personal property to
Company B located in Illinois. Company B requests that the tangible
personal property be shipped directly to Company B’s customer in State 2.

COMPANY
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July 29, 2021
Does your state require Company A to include the drop shipment sales to
Company B that were shipped to State 2 in determining Company A’s
requirement to collect and remit sales tax in Illinois?
Your response:

Yes

No

Please feel free to provide additional information or explanation below.
DEPARTMENT’S RESPONSE:
A Remote Retailer is a retailer that does not maintain within this State, directly or
by a subsidiary, an office, distribution house, sales house, warehouse or other place of
business, or any agent or other representative operating within this State under the
authority of the retailer or its subsidiary, irrespective of whether that place of business or
agent is located in Illinois permanently or temporarily or whether the retailer or
subsidiary is licensed to do business in this State. A retailer that fulfills any orders from
its inventory in Illinois is not a remote retailer. See 35 ILCS 120/1; 86 Ill. Adm. Code
131.105. As of January 1, 2021, a remote retailer is engaged in the occupation of
selling at retail in Illinois for purposes of the Retailers’ Occupation Tax Act if either of the
following thresholds is met:
A) The cumulative gross receipts from sales of tangible personal property to
purchasers in Illinois are $100,000 or more; or
B) The remote retailer enters into 200 or more separate transactions for the sale
of tangible personal property to purchasers in Illinois.
See 35 ILCS 120/2(b); 86 Ill. Adm. Code 131.115. A remote retailer meeting either of
these thresholds is liable for all applicable State and local retailers' occupation taxes
administered by the Department on all retail sales shipped or delivered to Illinois
purchasers. See 86 Ill. Adm. Code 131.110(a); Section 131.115(a). Sections 131.115
and 131.120 further discuss how to calculate sales to determine whether a retailer
meets either of these thresholds.
In determining whether a remote retailer meets either threshold establishing tax
remittance obligations, “gross receipts” means all the consideration actually received for
a sale. See 86 Ill. Adm. Code 131.120(a)(1). An “Illinois purchaser” is a person in
Illinois who, through a sale at retail, acquires the ownership of tangible personal
property for a valuable consideration. See Section 131.120(a)(2). A remote retailer
enters into a sale when it takes action that binds it to a sale and can occur even before
the tangible personal property sold has been shipped to the purchaser. See Section
131.120(a)(3).
Other than sales for resale, sales made through a marketplace
facilitator, and occasional sales, all sales of tangible personal property, even if they are
exempt from tax, must be included for purposes of calculating the thresholds. See 86

COMPANY
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July 29, 2021
Ill. Adm. Code 131.120(b), amended by emergency rule at 45 Ill. Reg. 9625, effective
July 13, 2021, for a maximum of 150 days.
The Department’s regulations regarding Drop Shipments can be found at 86 Ill.
Adm. Code 130.225. A drop-shipment situation is normally one in which an out-of-State
purchaser makes a purchase for resale from a company which is registered with Illinois
and has that company drop-ship the property to the purchaser’s customer located in
Illinois. The company, as a seller required to collect Illinois tax, must either charge and
collect tax or document appropriate exemptions when making deliveries in Illinois. In
Scenario 1, while the sale from Company A to Company B is a sale for resale,
Company B’s sale to the Illinois purchaser is a sale at retail. Therefore, this sale from
Company B to the Illinois purchaser must be counted in Company B’s gross receipts
and as a transaction in determining whether Company B meets either threshold for
establishing tax remittance obligations. The transaction would not count towards
Company A’s gross receipts or transactions in determining whether Company A meets
either threshold for establishing tax remittance obligations as it is a sale for resale. In
Scenario 2, Company A, located in State 1, makes a sale for resale to Company B,
located in Illinois. Company B requests Company A to drop-ship the tangible personal
property to the purchaser located in State 2. Because Company A’s sale to the Illinois
based Company B is for resale, it does not count in Company A’s gross receipts or as a
transaction in determining whether Company A meets either threshold.
If the sale is properly documented as a sale for resale, it would not count toward
the thresholds establishing tax remittance obligations. However, if there is not proper
documentation that it is a sale for resale, it would be considered a taxable retail sale by
Company A when it is delivered to a purchaser in Illinois and would count toward the
thresholds. Please review 86 Ill. Adm. Code 130.1405 for information to properly
document a sale for resale.
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