Does an out-of-state company that mails lab test kits to Illinois customers and analyzes the returned samples owe Illinois Use Tax, or is the whole transaction an untaxed service?

Plain-English summary

A company (referred to here as COMPANY) based outside Illinois, and CLIA-certified, wrote to the Illinois Department of Revenue asking for confirmation that the service it provides to Illinois residents is not subject to sales tax. COMPANY analyzes semen samples for male fertility using a lab-developed test (LDT). Customers pay COMPANY, receive a mail-in collection kit with a uniquely barcoded collection cup and preservation solution, produce and package the sample at home, and ship it back to COMPANY's out-of-state lab via overnight courier for analysis. COMPANY had been charging Illinois sales tax on the test based on its CPA's initial research, treating it as a retail sale of a diagnostic test kit, but after consulting its legal advisor and insurance broker, it came to believe the transaction was really a medical laboratory service rather than a sale of tangible personal property, and asked the Department to confirm that its services are not taxable so it could stop collecting tax, file a final return, and close its account.

The Department responded with a General Information Letter (GIL) rather than resolving whether COMPANY's specific test is taxable. It laid out the general framework instead: the Retailers' Occupation Tax (35 ILCS 120/2; 86 Ill. Adm. Code 130.101) taxes persons engaged in selling tangible personal property at retail in Illinois, while the Use Tax (35 ILCS 105/3; 86 Ill. Adm. Code 150.101) taxes the privilege of using, in Illinois, tangible personal property purchased anywhere at retail -- together these are commonly called "sales tax" in Illinois. If a purchase happens in Illinois, the purchaser pays Use Tax to the retailer at the time of purchase, and the retailer keeps that Use Tax to offset its own Retailers' Occupation Tax liability; if the purchase happens outside Illinois, the purchaser must self-assess and remit Use Tax directly to the Department.

The Department also explained that Retailers' Occupation Tax and Use Tax do not apply to sales of services as such. Under the Service Occupation Tax Act (86 Ill. Adm. Code 140.101), a business providing services ("servicemen") is instead taxed on any tangible personal property transferred as an incident to the service, and the transfer of that property can trigger either Service Occupation Tax or Use Tax liability for the serviceman depending on how it calculates its tax base. If a transaction involves no transfer of any tangible personal property to the customer at all, it generally is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

Applying this framework to shipped goods generally, the Department stated the rule that answers the question COMPANY actually needs answered about its kits: "When a company ships tangible personal property, in this case test kits, that are purchased outside the state to Illinois customers for their use, the company owes Use Tax on the company's cost price of the tangible personal property." The Department added that if the company already properly paid tax to another state on that same tangible personal property before shipping it into Illinois, it may credit that other state's tax against its Illinois Use Tax liability, citing 86 Ill. Adm. Code 150.310(a)(3). The Department did not separately state a conclusion on whether COMPANY's own semen-analysis service, considered apart from the kit itself, is or is not a taxable sale -- the response addresses the kit as tangible personal property and stops there.

What this means for you

Companies that mail sample-collection kits, testing supplies, or similar physical items to Illinois customers as part of a service

Even if you consider your core offering a "service" (lab analysis, diagnostics, testing), this GIL signals that the Department looks at whether tangible personal property changes hands, not just at how you characterize the overall transaction. If you ship a physical kit -- collection cup, packaging, preservation solution, etc. -- that you purchased outside Illinois to an Illinois customer for their use, the Department's stated position is that you owe Illinois Use Tax measured by your own cost price of that property, separate from whatever you charge the customer. If you already paid another state's sales/use tax on that same property, you can credit that payment against your Illinois Use Tax bill under 86 Ill. Adm. Code 150.310(a)(3), so you should track where and how much tax you already paid on the physical materials you ship.

Businesses trying to decide whether a bundled goods-plus-service offering is taxable

The GIL restates the general Service Occupation Tax framework: if you're a "serviceman" and no tangible personal property changes hands, there's no Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax exposure at all. But if tangible personal property IS transferred incident to your service, you as the serviceman are taxed on that property under Service Occupation Tax or Use Tax rules, depending which tax base you elect. This GIL does not resolve where COMPANY's own test kit falls on that spectrum -- it states the cost-price Use Tax rule for shipped property and leaves the service-vs-goods characterization of COMPANY's specific product unaddressed.

Accountants and tax professionals

Because this is a GIL, not a PLR, the Department did not decide whether COMPANY's specific lab test is a nontaxable service or a taxable retail sale of the kit -- it directed COMPANY to the general Use Tax, Retailers' Occupation Tax, and Service Occupation Tax rules and to the cost-price/credit rule in 86 Ill. Adm. Code 150.310(a)(3). A client in a similar situation who wants a binding determination on their own facts needs a PLR under 2 Ill. Adm. Code 1200.110, not reliance on this letter.

Common questions

Q: Does Illinois Use Tax apply when an out-of-state company ships a physical kit to an Illinois customer?
A: Per the Department's response, yes -- when a company ships tangible personal property that it purchased outside Illinois to Illinois customers for their use, the company owes Illinois Use Tax on its own cost price of that property.

Q: Can the company reduce its Illinois Use Tax if it already paid tax elsewhere on the same property?
A: Yes. If tax was properly due and paid in another state on the tangible personal property shipped into Illinois, the company may credit that tax paid against its Illinois Use Tax liability on its return, per 86 Ill. Adm. Code 150.310(a)(3).

Q: Did the Department decide whether COMPANY's semen-analysis service itself is taxable?
A: Not directly. The Department described the general dividing line -- services alone aren't subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax if no tangible personal property is transferred, while tangible personal property transferred incident to a service is taxed under Service Occupation Tax or Use Tax rules -- but the letter's operative conclusion addresses the shipped test kit as tangible personal property, without a separate express holding on the service itself.

Q: Why did the Department issue a GIL instead of a binding ruling on COMPANY's specific facts?
A: COMPANY asked the Department to confirm that its own specific service is not taxable, which is the kind of fact-specific question a PLR is meant to resolve (2 Ill. Adm. Code 1200.110). The Department instead issued a GIL, which only directs the taxpayer to the relevant statutes and regulations (2 Ill. Adm. Code 1200.120) and is not binding on the Department.

Q: Can COMPANY rely on this GIL to stop collecting Illinois sales tax?
A: Not with legal certainty. A GIL is not a statement of Department policy and is not binding on the Department, even as to the taxpayer who requested it. A company wanting a binding, fact-specific answer needs to request a PLR.

Citations and references

Statutes:

• 35 ILCS 105/3 (Use Tax Act -- imposition of tax on the privilege of using tangible personal property purchased at retail)
• 35 ILCS 120/2 (Retailers' Occupation Tax Act -- tax on selling tangible personal property at retail)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax Act regulations)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax Act regulations)
• 86 Ill. Adm. Code 150.101 (Use Tax Act regulations -- definition of "retailer")
• 86 Ill. Adm. Code 150.310(a)(3) (credit against Illinois Use Tax for tax properly paid to another state on the same property)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

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/st23-0031-gil.pdf

Original ruling text

ST-23-0031-GIL 10/10/2023 USE TAX
When a company ships tangible personal property that is purchased outside the
state to Illinois customers for their use, the company owes Use Tax on the
company's cost price of the tangible personal property. However, if tax was
properly due and paid in another state on the tangible personal property shipped
into Illinois, then the company may credit the amount of that tax paid on its return
in determining its Illinois Use Tax liability. See 86 Ill. Adm. Code 150.310(a)(3).
(This is a GIL.)
October 10, 2023
NAME
COMPANY
ADDRESS
Dear NAME
This letter is in response to your letter dated September 19, 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.
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 am writing to get official confirmation that the service COMPANY
provides to individuals who reside in Illinois is not subject to sales tax.
We are a CLIA certified lab based in STATE that analyzes semen for
male fertility. Our test is classified as a Lab Developed Test (LDT).
The FDA requirements for a diagnostic test to be classed as LDT,
and therefore subject to regulatory discretion, include single
laboratory development and use, authorized physician instruction, and
CLIA certification and accreditation.
Although our lab is located in STATE, we provide testing to individuals
across the USA through mail-in sample collection. The individual pays
COMPANY for the test and is then sent the sample collection kit to his
home. The male's semen sample is produced & collected at home

COMPANY
Page 2
October 10, 2023
using the collection kit developed by COMPANY which includes a
collection cup with a unique barcode and preservation solution. The
preservation solution is added to the sample after it is produced and
the sample is sent back to our STATE lab in the same packaging with a
prepaid label via overnight courier service for testing.
We have been charging sales tax on the test based on our CPA's initial
research as though this was a retail sale of a diagnostic test kit.
However, upon further research and discussion with our legal advisor
and insurance broker, both of whom specialize in healthcare, they do
not feel we should be charging sales tax since it is a medical laboratory
test (a service) vs a retail sale of a tangible good. Since we have
previously been charging tax to Illinois individuals, it was advised that
we reach out to the state to describe our business and get confirmation
that our lab services as described above are not subject to sales tax.
While the sample is collected at home, it is NOT an "at-home
diagnostic test kit" such as a pregnancy test, COVID test, etc. The
sample collection kit is of no value since it is merely a means to collect
and transport the sample to our lab and is not considered tangible
personal property. No results are derived from the kit at home and the
analysis must be done in our STATE lab by trained Clinical Lab
personnel. Therefore, COMPANY is providing clinical lab services,
NOT a retail diagnostic test kit.
Based on the above description of our business, can you please
confirm that the services we provide are not taxable?
Upon
confirmation that COMPANY should not be charging sales tax, we will
stop collecting, file a final return, remit taxes collected and close our
account.
Please respond with the determination either via email to E-MAIL or via
US mail to the corporate office. You may reach out to me via email or
phone at PHONE with any questions.
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

COMPANY
Page 3
October 10, 2023
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.
If a transaction does not involve the transfer of any tangible personal property to
the customer, then the transaction with the customer generally would not be subject to
Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
As noted above, the Use Tax is a privilege tax imposed on the privilege of using,
in this State, any kind of tangible personal property that is purchased anywhere at retail
from a retailer, as "retailer" is defined in the Use Tax Act. 86 Ill. Adm. Code 150.101.
When a company ships tangible personal property, in this case test kits, that are
purchased outside the state to Illinois customers for their use, the company owes Use
Tax on the company's cost price of the tangible personal property. However, if tax was
properly due and paid in another state on the tangible personal property shipped into
Illinois, then the company may credit the amount of that tax paid on its return in
determining its Illinois Use Tax liability. See 86 Ill. Adm. Code 150.310(a)(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
RSW