Does an outsourced veterinary pharmacy business owe Service Occupation Tax or Retailers' Occupation Tax on the products it supplies through participating veterinary hospitals to pet owners, and who is responsible for remitting that tax?

Plain-English summary

A company that provides outsourced pharmacy services to veterinary hospitals asked the Illinois Department of Revenue which party owes sales-related tax when its products end up with pet owners, and whether special rules on tangible-personal-property ratios applied to its business model. Because the letter only asked general questions rather than laying out a complete, specific set of facts, the Department responded with a General Information Letter (GIL) rather than a binding ruling — it explained the relevant tax framework instead of giving a yes/no answer.

The GIL walks through several distinct tax regimes that can apply to a business like this:

• Retailers' Occupation Tax and Use Tax (Illinois's "sales tax") apply to ordinary retail sales of tangible personal property.
• The Service Occupation Tax Act applies instead when a business (a "serviceman") transfers tangible personal property to a customer as an incident of providing a service — servicemen can compute their tax base four different ways, including a de minimis method for those whose product cost is a small share of their service revenue.
• Veterinarians specifically incur Service Occupation Tax when they transfer products to clients as part of an established veterinarian-client-patient relationship (VCPR), but incur ordinary Retailers' Occupation Tax when they sell products outside that relationship (e.g., to customers with no VCPR).
• Resale certificates let a wholesale seller sell tax-free to a buyer (such as a hospital) who will resell or use the property in its own taxable transactions.

Because the Department could not tell from the letter whether the company was selling to hospitals at wholesale, selling directly to pet owners at retail, or something in between, it declined to resolve the specific questions asked and instead pointed the company toward a Private Letter Ruling if it wants a binding answer.

What this means for you

Businesses supplying products through service providers (e.g., pharmacies, distributors)

If your company sells tangible personal property to a service-provider customer (like a veterinary hospital, contractor, or repair shop) who in turn uses or resells that property to its own end customers, the key question is whether your sale to that intermediary is a sale for resale. If so, you can generally accept a Certificate of Resale and sell tax-free, leaving the tax obligation to the intermediary. If your facts are ambiguous — as they were here — the Department may not be able to give definitive guidance without a formal Private Letter Ruling request.

Veterinarians and veterinary-adjacent businesses

Whether a sale of tangible personal property (medications, flea/tick products, shampoos, leashes, etc.) triggers Service Occupation Tax or Retailers' Occupation Tax turns on whether the veterinarian has a valid VCPR with the customer under the Veterinary Medicine and Surgery Practice Act of 2004. Products transferred incident to treatment within a VCPR are service transactions; sales without a VCPR are ordinary retail sales.

Servicemen deciding how to compute their tax base

If you transfer tangible personal property incident to a service, you can choose among four methods to compute Service Occupation Tax/Use Tax liability: separately stating the selling price of transferred property, using 50% of your total bill, or (if you qualify as a de minimis serviceman, generally under 35% cost-price-to-gross-receipts, or 75% for pharmacists and graphic arts producers) paying tax on your cost price, either as Service Occupation Tax if registered or as Use Tax to your suppliers if not.

Accountants and tax professionals

This GIL is a useful primer on how the Retailers' Occupation Tax Act, Use Tax Act, and Service Occupation Tax Act interact, and on the resale-certificate documentation standards under 86 Ill. Adm. Code 130.1405. But remember a GIL is non-binding — if a client needs certainty on a specific fact pattern, the Department recommends requesting a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Did the Department decide whether the pharmacy company or the veterinary hospitals must remit tax?
A: No. The Department said it could not tell from the letter whether the company's sales to pet owners were direct retail sales, wholesale sales to hospitals who then sold at retail, or some other arrangement, so it could not resolve the specific questions asked.

Q: When does a veterinarian owe Service Occupation Tax instead of Retailers' Occupation Tax?
A: When the veterinarian has a valid veterinarian-client-patient relationship (VCPR) with the customer under the Veterinary Medicine and Surgery Practice Act of 2004 and transfers tangible personal property as part of that treatment relationship. Sales made without a valid VCPR are ordinary retail sales subject to Retailers' Occupation Tax.

Q: What is a "de minimis serviceman" and why does it matter?
A: A serviceman qualifies as de minimis if the annual aggregate cost price of tangible personal property transferred incident to service is less than 35% of annual gross receipts from service transactions (75% for pharmacists and persons engaged in graphic arts production). Qualifying de minimis servicemen may pay tax based on their cost price rather than the selling price or 50%-of-bill methods, either through Service Occupation Tax (if registered) or Use Tax paid to suppliers (if not registered).

Q: What does a Certificate of Resale need to contain?
A: Under 86 Ill. Adm. Code 130.1405, it must include the seller's name and address, the purchaser's name and address, a description of the resold items, the purchaser's (or authorized agent's) signature and date, and a Registration Number, Resale Number, or Certification of Resale to an out-of-state purchaser.

Q: Is this GIL binding on the Department?
A: No. A General Information Letter merely points to relevant regulations and is not a statement of Department policy; it is not binding. A business wanting a binding answer on its specific facts must request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Citations and references

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition and regulations)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax imposition and regulations)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax Act; basis of tax and calculation methods)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman percentage thresholds)
• 86 Ill. Adm. Code 140.108 (unregistered de minimis servicemen; Use Tax to suppliers)
• 86 Ill. Adm. Code 130.2165(b) (veterinarians as retailers outside service transactions)
• 225 ILCS 115 (Veterinary Medicine and Surgery Practice Act of 2004; VCPR)
• 86 Ill. Adm. Code 130.1405 (Certificates of Resale requirements)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0001-gil.pdf

Original ruling text

ST-22-0001 01/04/2022 SERVICE OCCUPATION TAX
This letter discusses the Service Occupation Tax. 86 Ill. Adm. Code 140.101.
This is a GIL.)
January 4, 2022
Dear NAME:
This letter is in response to your letter 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, dba BUSINESS, provides outsourced pharmacy services for
participating veterinary hospitals. Our human-grade institutional pharmacy
is licensed in and meets or exceeds the regulatory requirements of all 50
states, and our eCommerce website is pharmacy-certified by the National
Association of Boards of Pharmacy (NABP).
Any service that BUSINESS provides for the veterinary hospital occurs on
a wholesale transaction basis, and all retail transactions occur between
the veterinarian and the pet owner. The products ordered through our
system are invoiced and charged to the pet owner separately from
products or services delivered at the hospital’s physical location.
BUSINESS requests a formal letter ruling on the following questions
pertaining to Title 86 Part 130 Section 130.2165 Veterinarians:

1. In our business model, which entity is responsible for remitting
   retail tax assessed against the pet owners – BUSINESS, or its
   participating hospitals?
2. Do the rules for taxing tangible personal property in excess of
   the stated ratio of total revenue apply to our business model?
   If you have further questions please contact me at PHONE
   NUMBER or E-MAIL ADDRESS. I look forward to your decision soon.

BUSINESS
Page 2
January 4, 2022

DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax and Use Tax
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 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. 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 purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
Service Occupation Tax
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under
the Service Occupation Tax Act, businesses providing services (i.e., servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See
86 Ill. Adm. Code 140.101. The transfer of tangible personal property to service
customers may result in either Service Occupation Tax liability or Use Tax liability for
servicemen, depending upon which tax base they choose to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) separatelystated selling price of tangible personal property transferred incident to service; (2) 50%
of the serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost
price if the serviceman is a registered de minimis serviceman; or (4) Use Tax on the
serviceman's cost price if the serviceman is de minimis and is not otherwise required to
be registered under Section 2a of the Retailers' Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately
stated selling price of the tangible personal property transferred. If servicemen do not
wish to separately state the selling price of the tangible personal property transferred,
those servicemen must use the second method where they will use 50% of the entire
bill to their service customers as the tax base. Both of the above methods provide that
in no event may the tax base be less than the cost price of the tangible personal
property transferred. Under these methods, servicemen may provide their suppliers
with Certificates of Resale when purchasing the tangible personal property to be

BUSINESS
Page 3
January 4, 2022

transferred as a part of sales of service. They are required to collect the corresponding
Service Use Tax from their customers.
The third way servicemen may account for their tax liability only applies to de
minimis servicemen who have either chosen to be registered or are required to be
registered because they incur Retailers’ Occupation Tax liability with respect to a
portion of their business. Servicemen may qualify as de minimis if they determine that
their annual aggregate cost price of tangible personal property transferred incident to
sales of service is less than 35% of their annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphic arts production). See
86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the
cost price of tangible personal property transferred incident to sales of service.
Servicemen that incur Service Occupation Tax collect the Service Use Tax from their
customers. They remit tax to the Department by filing returns and do not pay tax to their
suppliers. They provide suppliers with Certificates of Resale for the tangible personal
property transferred to service customers.
The final method of determining tax liability may be used by de minimis
servicemen that are not otherwise required to be registered under Section 2a of the
Retailers' Occupation Tax Act. Servicemen may qualify as de minimis if they determine
that the annual aggregate cost price of tangible personal property transferred as an
incident of sales of service is less than 35% of the servicemen's annual gross receipts
from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and
remit tax, the servicemen must register, self-assess, and remit Use Tax to the
Department. The servicemen are considered to be the end-users of the tangible
personal property transferred incident to service. Consequently, they are not authorized
to collect a "tax" from the service customers. See 86 Ill. Adm. Code 140.108.
Veterinarians
In conducting a veterinary practice, veterinarians may incur different types of tax,
depending upon the nature of their activities. When licensed veterinarians transfer
tangible personal property to their clients as a result of the practice of veterinary
medicine, a service transaction occurs that results in liability under the Service
Occupation Tax Act. Veterinarians also sometimes sell items of tangible personal
property to clients or even to the public outside the scope of a service transaction. In
such cases, they are considered retailers engaged in the business of selling tangible
personal property at retail and incur Retailers' Occupation Tax liability. 86 Ill. Adm.
Code 130.2165(b).

BUSINESS
Page 4
January 4, 2022

Retailers' Occupation Tax liability will be incurred on the sale of any tangible
personal property to persons with whom the veterinarian has not established a valid
veterinarian-client-patient relationship (VCPR) in accordance with the Veterinary
Medicine and Surgery Practice Act of 2004 (the Act). 225 ILCS 115. Such items may
be medicinal (e.g., a flea and tick product for application on an animal) or non-medicinal
(e.g., nonmedicated shampoos, combs, leashes, collars). Under the Act, to maintain a
valid VCPR, a veterinarian must maintain sufficient knowledge of the animal to initiate
treatment and be readily available for follow-up.
If the Company does not have a valid VCPR with any of its customers, it would
not qualify as a serviceman on this basis.
Resale
When an Illinois retailer sells tangible personal property and delivers it in Illinois,
sales tax is due unless an exemption can be documented. The resale exemption is
applicable when making sales to a purchaser who will in turn sell the tangible personal
property. For general information regarding resale certificates, the Department’s
regulation for resale certificates, “Seller's Responsibility to Obtain Certificates of Resale
and Requirements for Certificates of Resale,” is found at 86 Ill. Adm. Code 130.1405. If
an electronic resale certificate is kept, it should contain all of the information required
under 86 Ill. Adm. Code 130.1405.
A Certificate of Resale is a statement signed by the purchaser that the property
purchased by him is purchased for purposes of resale. Provided that this statement is
correct, the Department will accept Certificates of Resale as prima facie proof that sales
covered thereby were made for resale. In addition to the statement, a Certificate of
Resale must contain:
1)

The seller's name and address;

2)

the purchaser's name and address;

3)

a description of the items being purchased for resale;

4)

purchaser's signature, or the signature of an authorized employee or
agent of the purchaser, and date of signing; and

5)

Registration Number, Resale Number, or Certification of Resale to out-ofState Purchaser.

Failure to present an active registration number or resale number and a
certification to the seller that a sale is for resale creates a presumption that a sale is not
for resale. This presumption may be rebutted by other evidence that all of the seller’s

BUSINESS
Page 5
January 4, 2022

sales are sales for resale, or that a particular sale is a sale for resale. For example,
other evidence that might be used to document a sale for resale, when a registration
number or resale number and certification to the seller are not provided, could include
an invoice from the purchaser to his customer showing that the item was actually resold,
along with a statement from the purchaser explaining why it had not obtained a resale
number and certifying that the purchase was a purchase for resale in Illinois. The risk
run by companies in accepting such a certification and the risk run by purchasers in
providing such a certification is that an Illinois auditor is more likely to go behind a
certificate of resale that does not contain a signature and require that more information
be provided as evidence that the particular sale was, in fact, a sale for resale.
It is unclear what the exact nature of your relationships are with veterinarian
hospitals and pet owners. It is also unclear how the products are billed and sold. It
appears from your letter the Company makes two types of sales: 1) wholesale sales to
veterinarian hospitals, who in turn sell the items at retail to customers or provide the
items incident to the provision of service; and 2) sales to pet owners. If the sales to
veterinarian hospitals are sales at wholesale and the veterinarian hospitals sell the
items to customers at retail, the veterinarian hospitals may provide you with resale
certificates and purchase the items tax free. However, if the veterinarian hospitals
provide the items to their customers incident to sale of service, then the veterinarian
hospitals are acting as servicemen and their tax obligation is met by one of the four
methods explained above. Note that a serviceman may not provide a certificate of
resale to its suppliers if it is an unregistered, de minimis serviceman who, therefore,
owes Use Tax.
The Department is unable to provide any guidance on sales of items made by the
Company to pet owners. The Department does not understand the exact nature of the
sales made by the Company to pet owners. It is unclear whether the Company is
selling the items at retail directly to the pet owners, or the Company is making sales at
wholesale to veterinarian hospitals, who in turn sell the items at retail to pet owners.
There is also some question whether the Company fulfills the orders on behalf of the
veterinarian hospitals.
If the Company would like to receive a binding ruling, it may request private letter
ruling. See 2 Ill. Adm. Code 1200.110.
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

BUSINESS
Page 6
January 4, 2022

Associate Counsel

RSW/ld