Does a company that runs a service-matching marketplace app owe Retailers' Occupation Tax, Use Tax, or Service Occupation Tax on the small kits of branded items (placards, stickers, etc.) it gives to the service providers who sign up on its platform?

Plain-English summary

A company that runs a mobile-app marketplace connecting service providers with service recipients asked the Illinois Department of Revenue to confirm the tax treatment of two separate money flows: (1) the fee the company keeps for running the marketplace (matching, marketing, and payment processing), and (2) a small welcome kit of tangible items -- things like placards and stickers, and sometimes additional branded items -- that the company gives free of charge to each service provider who signs up.

The Department agreed with the company's own analysis. The underlying service between the service provider and the service recipient involves no transfer of tangible personal property, so it is not subject to Retailers' Occupation Tax ("ROT"), Use Tax, Service Occupation Tax ("SOT"), or Service Use Tax ("SUT"). The company's own marketplace-facilitation fee is likewise a non-taxable service. But because the company does hand over a small amount of tangible personal property (the welcome kit) as an incident to that service, the Department had to determine which of Illinois's four possible tax treatments for "servicemen" applies.

Since the value of the kits is far below 35% of the company's revenue from each service provider, the company is a "de minimis serviceman" under 86 Ill. Adm. Code 140.105(b). And because the company is not registered, and is not required to register, as a retailer under Section 2a of the Retailers' Occupation Tax Act, it owes only Use Tax -- not Service Occupation Tax -- on the Department's cost price of the items in the kits, consistent with 86 Ill. Adm. Code 140.108. The company confirmed it already reports and pays this Use Tax on kits shipped to Illinois-based service providers.

What this means for you

Gig-economy and marketplace-app operators

If your platform connects independent service providers with customers and you occasionally give providers free branded merchandise or supplies, this ruling shows how Illinois sorts out the tax consequences. Your facilitation fee itself is likely a non-taxable service. But any tangible items you give away incident to that service can trigger tax -- the key number to watch is the 35% cost-ratio test: compare the cost of the items you give a provider against your total revenue from that provider. Staying meaningfully under 35% keeps you a "de minimis serviceman," which is the more favorable of the two "serviceman" categories.

Businesses that give away small kits, samples, or supplies incident to a service

Even a de minimis serviceman is not off the hook entirely. If you are already registered (or required to register) as a retailer under Section 2a of the Retailers' Occupation Tax Act, you would instead owe Service Occupation Tax (and could bill Service Use Tax to recover it) rather than Use Tax. Whether you owe SOT or UT on the same de minimis items therefore turns entirely on your retailer-registration status, not on the items themselves.

Accountants and tax professionals

This PLR is a clean illustration of the four-way fork in 86 Ill. Adm. Code 140.105-140.109 for taxing tangible personal property transferred incident to a sale of service: (1) separately-stated sales price if a full "serviceman," (2) 50% of the lump-sum charge if a full "serviceman" billing a flat rate, (3) SOT on cost price if a registered de minimis serviceman, or (4) Use Tax on cost price if a de minimis serviceman not required to register. Because this PLR binds the Department only as to this taxpayer's specific facts, it is useful as persuasive analysis for similarly-situated marketplace businesses but cannot be cited as binding precedent for anyone else.

Common questions

Q: Does the marketplace-facilitation fee itself get taxed?
A: No. The Department concluded the fee the company earns for matching, marketing, and payment-processing services is compensation for a non-taxable service, not a sale of tangible personal property, so it is not subject to ROT, Use Tax, SOT, or SUT.

Q: What tax applies to the free kits given to service providers?
A: Because the company is a "de minimis serviceman" (the kits' cost is far below 35% of its revenue per provider) and is not registered, or required to register, as a retailer, only Use Tax applies -- calculated on the Department's cost price of the tangible items in the kit, not on any sales price (since the items aren't sold).

Q: What is a "de minimis serviceman" under Illinois law?
A: A service provider whose ratio of (a) the cost of tangible personal property transferred incident to sales of service to (b) total annual gross receipts from all sales of service is less than 35%. See 86 Ill. Adm. Code 140.105(b). A ratio of 35% or more instead makes the provider a full "serviceman" subject to different (generally higher) tax treatment under 86 Ill. Adm. Code 140.106.

Q: Why does registration status matter if the items are the same either way?
A: Illinois's rules split de minimis servicemen into two tracks based on retailer-registration status under Section 2a of the Retailers' Occupation Tax Act: a registered de minimis serviceman owes Service Occupation Tax (and can bill Service Use Tax to the customer) under 86 Ill. Adm. Code 140.109, while an unregistered de minimis serviceman -- like the company here -- instead owes Use Tax under 86 Ill. Adm. Code 140.108.

Q: Can another company rely on this ruling for its own marketplace app?
A: No. As a Private Letter Ruling, this binds the Department only for the specific taxpayer and facts described, and it expires after 10 years under 2 Ill. Adm. Code 1200.110(e). A similarly situated business would need to request its own PLR or consult a licensed Illinois tax professional.

Citations and references

Statutes and rules:

• 35 ILCS 120/2 (ROT does not tax services)
• 35 ILCS 105/3 (Use Tax Act does not tax services)
• 35 ILCS 115/3 (Service Occupation Tax Act)
• 86 Ill. Adm. Code 130.101 (ROT imposed on retail sales of tangible personal property)
• 86 Ill. Adm. Code 130.120 (services generally not taxed under ROT)
• 86 Ill. Adm. Code 140.101 (SOT on tangible personal property transferred incident to service)
• 86 Ill. Adm. Code 140.105(a)-(b) (35% cost-ratio test: "serviceman" vs. "de minimis serviceman")
• 86 Ill. Adm. Code 140.106 (SOT/SUT liability for a full "serviceman")
• 86 Ill. Adm. Code 140.108(a), (a)(1) (Use Tax for an unregistered de minimis serviceman)
• 86 Ill. Adm. Code 140.109(a), (a)(4) (SOT/SUT for a registered de minimis serviceman)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on tangible personal property purchased at retail)
• 2 Ill. Adm. Code 1200.110 (PLR procedure; binding effect limited to the requesting taxpayer; 10-year expiration)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/st23-0004-plr.pdf

Original ruling text

ST-23-0004-PLR 07/19/2023 SALE OF SERVICE
A de minimis serviceman who is not registered as a retailer under Section 2a of
the Retailers’ Occupation Tax and is not required to be registered under Section
2a of the Retailers’ Occupation Tax owes Use Tax on the cost price of tangible
personal property transferred incident to sales of service. See 86 Ill. Adm. Code
140.108. (This is a PLR.)
July 19, 2023

NAME
TAXPAYER REPRESENTATIVE
ADDRESS
Dear NAME:
This letter is in response to your letter dated March 3, 2023, 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.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY for the issue or
issues presented in this ruling and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:
On behalf of our client, COMPANY ("Company"), please allow this to
serve as a request for a Private Letter Ruling as authorized by the Illinois
Department of Revenue (the "Department") per 2 Ill. Admin. Code
1200.110 with respect to the inquiry detailed below. If the Department has
any questions relating to the facts described, please contact the
undersigned.

TAXPAYER REPRESENTATIVE/ NAME
Page 2
July 19, 2023
The firm of TAXPAYER REPRESENTATIVE (the "Representative") is
authorized to request the Private letter Ruling on behalf of the Company.
Statement of Facts
Taxpayer Information
This Private letter Ruling ("PLR") is requested to determine the Retailers'
Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax
consequences of the actual business practices of the Company. The
Company is not currently the subject of litigation or audit regarding the
matters discussed in this PLR relating to Illinois transactions. To the best
of the knowledge of both the Company and Representative, the
Department has not previously ruled on this or a similar issue for the
taxpayer or any predecessor. The Company, and any of its
representatives, have not previously submitted the same or similar issue
to the Department and withdrawn before a letter ruling was issued. The
Company is registered with the Department for sales and use taxes.
Description of Company's Business Operations
The Company is a publicly held STATE1 corporation based in STATE2.
The Company operates a marketplace utilizing a mobile phone application
to facilitate SERVICE services ("Marketplace") by connecting SERVICE
PROVIDERS ("Service Providers") with SERVICE RECIPIENTS ("Service
Recipients") in real time. The Company's Marketplace provides
technological infrastructure, marketing, and account settlement services,
and the Service Providers who are matched through the Marketplace
provide services to their Service Recipients. The Service Providers do not
transfer any tangible goods as part of their services, and sales of tangible
goods are not facilitated through the Marketplace. The service provided by
Service Providers to Service Recipients is not subject to Illinois sales tax.
Material Facts Relating to PLR Request
Company’s Business Model
The Company's business model is comprised of two distinct service
transactions:
(1) The marketplace facilitation service provided by the Company in
exchange for compensation paid to the Company by the Service
Provider; and
(2) The SERVICE service ultimately provided by Service Providers to
Service Recipients.

TAXPAYER REPRESENTATIVE/ NAME
Page 3
July 19, 2023
The Company's Marketplace allows Service Providers and Service
Recipients to locate parties with whom they want to transact; allows
Services Providers and Service Recipients to view each other's ratings
shown in the app; and makes transactions easy for Service Providers and
Service Recipients, since the Marketplace includes a payment processing
function.
The Company uses independent, third-party payment processors to
manage the payment processing function by collecting funds from Service
Recipients and transferring those funds to Service Providers net of fees
charged to Service Providers by the Company for use of the Marketplace.
The fees that are netted from these payments are transferred to the
Company by the third-party payment processor.
For revenue accounting purposes and in accordance with generally
accepted accounting principles (GAAP), the Company recognizes revenue
on a net basis primarily based on its determination that it is not deemed to
be the primary obligor of the services provided by the Service Providers.
That is, the Company does not recognize the (gross) amount charged to a
Service Recipient as its revenue, and instead only recognizes the (net)
fees that are charged to Service Providers by the Company.
The Service Providers rely on the Company's Marketplace as a lead
generator and facilitator of the SERVICE services between Service
Providers and Service Recipients. The Service Recipients rely on the
Marketplace to connect them with vetted Service Providers who can timely
provide SERVICE services at a given place and time. At the completion of
the SERVICE service, the third-party payment processors ensure the
Service Provider receives payment from the Service Recipient. The thirdparty payment processors withhold the Company's fee for facilitating the
transaction from the amount paid to the Service Provider by the Service
Recipient, and remit the fee to the Company.
Each Service Provider who registers with the Company receives a small
kit from the Company containing items of tangible personal property.
These kits generally contain information and printed material (such as
placards and stickers) useful to a Service Provider when providing
services to Service Recipients. In some cases, the placards and stickers
may be required by local law. Service Providers in select markets who
complete a prescribed number of additional transactions with Service
Recipients may receive additional branded tangible personal property. The
kits are shipped via common carrier to Service Providers from outside
Illinois. The cash value of these items is relatively small, and the Company
does not charge the Service Providers for these items. In the event that a
Service Provider stops using the Marketplace, the Service Providers are

TAXPAYER REPRESENTATIVE/ NAME
Page 4
July 19, 2023
not required to return the items to the Company. Company reports and
pays Illinois use tax on the cost of the tangible personal property delivered
to Service Providers located in Illinois.
Requested Ruling
The Company requests that the Department rule on the Company's
provision of marketplace facilitation services as follows:
1.

2.
3.

The marketplace facilitation services are non-taxable services and
the fees received by the Company for providing those services are
not subject to the Retailers' Occupation Tax or Use Tax.
Service Occupation Tax is not applicable as the cost price of any
tangible property transferred as part of the service is de minimis.
Sales or use tax will be applicable to any tangible personal property
provided by the Company to Service Providers located in Illinois
based on the cost of the property delivered.

Statement of Law
Statutes, Rules, and Rulings:
35 ILCS 120/1
35 ILCS 120/2
35 ILCS 105/2
35 ILCS 105/3
35 ILCS 115/3
86 Ill. Adm. Code 130.120
86 Ill. Admin. Code 130.120
86 Ill. Admin. Code 140.101
86 Ill. Admin. Code 140.105
86 Ill. Admin. Code 140.106
86 Ill. Admin. Code 140.108
86 Ill. Admin. Code 140.109
Law Relevant to Company's Services
Illinois generally does not subject services to tax under the Retailers'
Occupation Tax ("ROT") and Use Tax ("UT") per 35 ILCS 120/2, 35 ILCS
105/3, and 86 Ill. Adm. Code 130.120. Further, the Service Providers
transferring tangible personal property to Service Recipients will incur
either Service Occupation Tax ("SOT") or UT liability upon the property
transferred per 35 ILCS 115/3, and 86 Ill. Admin. Code 140.101. This will
depend on whether a service provider is deemed a "serviceman" or "de
minimis serviceman," whether the customer is separately billed for

TAXPAYER REPRESENTATIVE/ NAME
Page 5
July 19, 2023
materials, and whether the service provider is registered to collect ROT or
is required to be. Depending upon the aforementioned factors, a service
provider may incur tax liability on the material transferred incident to their
service in one of four methods.
If a service provider is deemed a "serviceman," it will incur SOT based
upon either the separately stated sales price of materials to the customer
or based upon 50% of the total lump sum charge for service and materials
to the customer depending upon the method of billing. A service provider
transferring tangible personal property is considered a "serviceman" if the
ratio between the cost of tangible personal property transferred incident to
sales of service and the "serviceman's" total annual gross receipts from all
sales of service is 35% or greater per 86 Ill. Admin. Code 140.105(a). If
deemed a "serviceman" and the price of materials to the customer is
separately stated from the service charges, the SOT liability is based on
the sales price of the tangible personal property sold per 86 Ill. Admin.
Code 140.106(a)(1). If the "serviceman" does not separately state the
price of materials to the customer, the SOT liability is based upon 50% of
the entire customer charge per 86 Ill. Admin. Code 140.106(a)(2). The
"serviceman" may then bill Service Use Tax ("SUT") to its customer in the
amount of the SOT liability to recover the cost of the SOT remitted to
Illinois per 86 Ill. Admin. Code 140.106(e).
A service provider transferring tangible personal property is considered a
"de minimis serviceman" if the serviceman's cost ratio is less than 35%
per 86 Ill. Admin. Code 140.l05(b). If a "de minimis serviceman" is
required to be registered as a retailer under Section 2a of the Retailers'
Occupation Tax Act, the "de minimis serviceman" incurs SOT liability on
the cost price materials provided to the customer and may bill SUT to the
customer for this amount to recover the cost of SOT remitted to Illinois per

86. Ill. Admin. Code 140.109(a), (a)(4). However, if a "de minimis
    serviceman" is not required to be registered as a retailer under Section 2a
    of the Retailers' Occupation Tax Act, the "de minimis serviceman" incurs
    UT liability on the cost price of the materials provide to customers per 86
    Ill. Admin. Code 140.108(a), (a)(l).
    Analysis of Grounds for Requested Ruling
    We have examined the relevant statutes, regulations, and guidance
    issued by the Department. The Department has not issued any letter
    rulings or guidance on this topic within the last 10 years that the taxpayer
    or state can rely on.
    Company's Services:

TAXPAYER REPRESENTATIVE/ NAME
Page 6
July 19, 2023
The Company's primary service offering constitutes the sale of nontaxable services. The services include a number of elements including
marketplace facilitation, marketing, and account settlement services, all
which are simply technology-enabled. Furthermore, the transactions
between the Service Providers and Service Recipients are a non-taxable
service. There is no transfer of any tangible property as part of the service
provided by Service Providers to Service Recipients. Service Recipients
have access to the Marketplace that is made available by the Company to
connect them to Service Providers, and there is no charge made by
Company to Service Recipients or Service Providers to access the
Marketplace. Service Recipients are charged and pay for the services
provided by the in-state Service Provider. The Service Providers pay the
Company a fee only when there is a completed transaction between the
Service Provider and Service Recipient.
The Company's offering of marketplace facilitation services are not retail
sales of tangible goods, and as such, the Company should be considered
a service provider under SOT and SUT. As a service provider the
Company may incur tax liability on materials provided to Service Providers
as part of the services it provides. As noted above, the Company does
provide a small amount of tangible personal property to Service Providers
without a specific charge for such property. Therefore, because only an
insignificant amount of tangible personal property is transferred to Service
Providers, SOT would not apply.
The value of this property is significantly lower than 35% of the revenue
the Company receives from Service Providers. Therefore, the cost ratio
between the cost of tangible personal property transferred incident to
sales of service and compared to the total annual gross receipts from all
sales of services is insignificant. Therefore, the Company should be
considered a "de minimis serviceman." As noted above, the Company
does pay Illinois SUT on the items provided to its Service Providers which
should be the extent of the Company's SUT obligation related to the
providing of the above-described services in Illinois.
Authorities Contrary to Requested Ruling
As mentioned previously, Illinois has not issued any letter rulings or
guidance on this topic within the last 10 years that the taxpayer or state
can rely on.
Conclusion
The Company's marketplace facilitation services are non-taxable services
not subject to ROT. The Company's marketplace facilitation services are

TAXPAYER REPRESENTATIVE/ NAME
Page 7
July 19, 2023
not subject to SOT as there is no significant provision of tangible personal
property to Company's customers (i.e., Service Providers). Further, the
Company's services are not subject to SUT as the cost ratio is considered
de minimis.
We respectfully request a letter ruling on the issues presented in this
letter. Thank you for your time and consideration in this matter. If you have
any questions, or require additional information, please feel free to contact
me.
Updated information provided to the Department indicates that, in fact, the Company
pays Illinois UT (not SUT) on the items provided to its SERVICE PROVIDERS.

TAXPAYER REPRESENTATIVE/ NAME
Page 8
July 19, 2023
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property at retail to purchasers for use
or consumption. See 86 Ill. Adm. Code 130.101. 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 86 Ill. Adm. Code 150.101. These taxes
comprise what is commonly known as “sales tax” in Illinois.
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 purchase of tangible personal property that is
transferred to the service customer may result in either Service Occupation Tax liability
or Use Tax liability for the servicemen depending upon his activities. The serviceman’s
liability may be calculated in one of four ways:
1) separately-stated 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.
If the transaction does not involve the transfer of any tangible personal property to the
customer, then it generally would not be subject to Retailers’ Occupation Tax, Use Tax,
Service Occupation Tax, or Service Use Tax.
Based on the information provided in your letter, the SERVICE service provided
by SERVICE PROVIDERS (Service Providers) to SERVICE RECIPIENTS (Service
Recipients) is a provision of service in which no tangible personal property is
transferred. This SERVICE service is not subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax.
With respect to the marketplace facilitation service provided by COMPANY (i.e.,
the mobile phone application to facilitate SERVICE services) in exchange for the
compensation paid to COMPANY by the SERVICE PROVIDER , it is the Department’s
opinion that this is a service incident to which a small amount of tangible personal
property (ITEMS) is transferred by COMPANY to the SERVICE PROVIDER . This
marketplace facilitation service is not subject to Retailers’ Occupation Tax and no
corresponding Use Tax is owed by SERVICE PROVIDERS. The ITEMS that each
SERVICE PROVIDER who registers with COMPANY receives from COMPANY
contains items of tangible personal property, such as placards and stickers, and, in
some cases, additional branded tangible personal property. COMPANY does not
charge for these items and the SERVICE PROVIDERS are not required to return the

TAXPAYER REPRESENTATIVE/ NAME
Page 9
July 19, 2023
items if the SERVCIE PROVIDER stops using the marketplace. The value of the
property transferred to SERVICE PROVIDERS is significantly lower than 35% of the
revenue COMPANY receives from Service Providers. Based on these representations,
the Department agrees that COMPANY is a de minimis serviceman and since
COMPANY is not registered as a retailer under Section 2a of the Retailers’ Occupation
Tax and is not required to be registered as a retailer under Section 2a of the Retailers’
Occupation Tax, COMPANY owes only Use Tax on the cost price of tangible personal
property transferred incident to the service in accordance with item 4 listed above. See
86 Ill. Adm. Code 140.108.
The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
If you have further questions concerning this Private Letter Ruling, you may
contact me at (217) 782-2844. If you have further questions related to the Illinois sales
tax laws, please visit our website at www.tax.illinois.gov or contact the Department’s
Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Samuel J. Moore
Chairman, Private Letter Ruling Committee
SJM