When a jewelry retailer lets a customer trade in old jewelry toward a new purchase, can the retailer exclude the value of that trade-in from the "gross receipts" it owes Illinois sales tax on?

Plain-English summary

A retail conglomerate specializing in gold, diamond, platinum, pearl, and precious-stone jewelry (referred to here as COMPANY) wrote to the Illinois Department of Revenue asking about the sales tax treatment of customer trade-ins. COMPANY explained that customers often trade in their outdated jewelry toward the purchase of new pieces; because the old jewelry usually isn't suitable for resale in its current form, COMPANY typically melts it down into gold bars that are then sold to wholesalers. COMPANY said it doesn't currently offer sales tax credits for trade-ins (it doesn't currently accept jewelry trade-ins at all) but wanted to know whether customers would be eligible for a sales tax credit if it started doing so, noting that another state had issued a favorable letter ruling on a similar trade-in arrangement to a different company.

COMPANY asked for this as a Private Letter Ruling (PLR), but the Department declined to issue one and responded instead with a General Information Letter (GIL). The Department explained that it will not issue a PLR where existing regulations are already dispositive of the question, citing 2 Ill. Adm. Code 1200.110(a)(3)(D) -- and that was the case here, because 86 Ill. Adm. Code 130.425 already addresses trade-ins directly.

The Department's response lays out the general framework: the Retailers' Occupation Tax (Illinois's "sales tax") is imposed at 6.25% of "gross receipts" from retail sales of tangible personal property, and Use Tax applies to property purchased at retail for use in Illinois (35 ILCS 120/2, 120/2-10; 35 ILCS 105/3). "Gross receipts" means the total selling price or amount of the sale -- but, under 35 ILCS 120/1 and 86 Ill. Adm. Code 130.425, gross receipts do NOT include the value of or credit given for traded-in tangible personal property, as long as the traded-in item is of "like kind and character" as the item being sold (this trade-in exclusion applied prior to January 1, 2020, and again beginning January 1, 2022). When that like-kind test is met, the trade-in's value isn't gross receipts subject to Retailers' Occupation Tax at all -- the seller doesn't need to include it in gross receipts on the return, or can deduct it if it was already included.

The Department explained the actual legal test for "like kind and character": whether the retail sale of the traded-in item by the person who accepts it in trade would itself be subject to Retailers' Occupation Tax, or whether such a sale would be exempt as an isolated or occasional sale (86 Ill. Adm. Code 130.425(d)). The Department said it construes "like kind and character" broadly, and gave a jewelry-specific example directly on point: a jeweler may accept a ring as a trade-in toward a simultaneous purchase of a bracelet, because the jeweler would owe Retailers' Occupation Tax on the ring if it sold that ring at retail -- regardless of whether the jeweler actually resells the ring after taking it in trade.

What this means for you

Jewelry retailers and other retailers who accept trade-ins

If you accept a customer's used item in trade toward a new purchase, the value of that trade-in is excluded from your taxable gross receipts as long as the traded-in item is of "like kind and character" as the item you're selling. The Department reads this test broadly: it doesn't matter whether the item is literally the same type of piece (the Department's own example pairs a traded-in ring with a purchased bracelet), and it doesn't matter what you actually do with the traded-in item afterward (melting it down, reselling it, etc.). What matters is whether YOU would owe Retailers' Occupation Tax if you sold the traded-in item at retail yourself, or whether that sale would be exempt as an isolated or occasional sale.

Retailers who currently don't offer trade-in credits

This GIL confirms that offering a trade-in credit toward a new jewelry (or similar) purchase can legitimately reduce your Retailers' Occupation Tax base, not just the customer's out-of-pocket price -- the trade-in value is excluded from gross receipts, so you don't collect or remit sales tax on it, provided the like-kind-and-character test is met.

Accountants and tax professionals

Note why the Department issued a GIL rather than the PLR the client requested: under 2 Ill. Adm. Code 1200.110(a)(3)(D), the Department won't issue a PLR where existing regulations (here, 86 Ill. Adm. Code 130.425) are already dispositive of the question. This GIL restates settled trade-in law rather than resolving a novel fact pattern, and it is not binding on the Department even as to the requesting taxpayer -- if a client needs a binding answer on unusual facts (e.g., a trade-in structure that might NOT qualify as "like kind and character"), a PLR request may still be worth pursuing on a genuinely unresolved point.

Common questions

Q: Is the value of a trade-in included in taxable gross receipts under Illinois sales tax?
A: No, not if the traded-in item is of "like kind and character" as the item being purchased. Under 35 ILCS 120/1 and 86 Ill. Adm. Code 130.425, that value is excluded from gross receipts and isn't subject to Retailers' Occupation Tax.

Q: What does "like kind and character" mean?
A: Per 86 Ill. Adm. Code 130.425(d), the test is whether the retail sale of the traded-in item by the person accepting it in trade would itself be subject to Retailers' Occupation Tax, or would qualify as an exempt isolated or occasional sale. The Department construes this broadly -- its own example is a jeweler accepting a ring in trade toward a bracelet purchase.

Q: Does it matter that the jewelry retailer melts down traded-in gold jewelry into bars instead of reselling the pieces?
A: The Department's response does not condition the trade-in exclusion on what the retailer later does with the traded-in item -- its ring/bracelet example notes the exclusion applies "regardless of whether you, in fact, resell it after accepting it in trade."

Q: Why did the Department issue a GIL instead of the Private Letter Ruling the company requested?
A: The Department will not issue a PLR when existing regulations are already dispositive of the request, per 2 Ill. Adm. Code 1200.110(a)(3)(D). Because 86 Ill. Adm. Code 130.425 already directly addresses trade-in treatment, the Department declined the PLR request and issued a GIL instead.

Q: Can this GIL be relied on as binding by the requesting company or anyone else?
A: No. A GIL is not a statement of Department policy and is not binding on the Department, even as to the company that requested it. A taxpayer who needs a binding answer on facts not already resolved by existing regulations would need to pursue a PLR.

Citations and references

Statutes:

• 35 ILCS 120/1 (Retailers' Occupation Tax Act -- definition of "selling price"/"gross receipts," including the trade-in exclusion)
• 35 ILCS 120/2 (imposition of Retailers' Occupation Tax on retail sellers of tangible personal property)
• 35 ILCS 120/2-10 (Retailers' Occupation Tax rate: 6.25% of gross receipts)
• 35 ILCS 105/3 (imposition of Use Tax)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax -- nature of the tax)
• 86 Ill. Adm. Code 130.425 (trade-in deduction from gross receipts; "like kind and character" test)
• 86 Ill. Adm. Code 150.101 (Use Tax -- nature of the tax)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure, including 1200.110(a)(3)(D) and (a)(4))
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0011-GIL.pdf

Original ruling text

ST 24-0011-GIL 03/12/2024 GROSS RECEIPTS
“Gross receipts” means all the consideration actually received by the seller, except traded-in
tangible personal property where the item that is traded-in is of like kind and character as that
which is being sold. 86 Ill. Adm. Code 401 & 425. (This is a GIL.)
March 12, 2024
NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated February 8, 2024, 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 Department will respond to all requests for private letter rulings either by issuance of a
ruling or by a letter explaining that the request for ruling will not be honored. 2 Ill. Adm. Code
1200.110(a)(4). The Department has declined your request for a PLR. A private letter ruling will not
be issued if there are regulations dispositive of the subject of the request. 2 Ill. Adm. Code
1200.110(a)(3)(D). The Department has decided to issue a general information letter. In your letter
you have stated and made inquiry as follows:
I am writing on behalf of COMPANY, a renowned retail conglomerate specializing in
gold, diamond, platinum, pearl, and precious stone jewelry, with its principal place of
business located at ADDRESS, USA, and Employer Identification Number (EIN) XXXX.
Our contact person for this matter is REPRESENTATIVE CPA, who can be reached at
EMAIL or PHONE.
We respectfully request a Private Sales Tax Letter Ruling on a matter pertaining to the
application of sales tax on trade-in deductions.
Facts:
In the world of fashion, jewelry holds a significant role, and our valued customers often
choose to exchange their outdated jewelry for newer pieces. As a retailer specializing
in gold, diamond, platinum, pearl, and precious stone jewelry, we recognize that the old
jewelry received during these transactions is not suitable for resale in its current state

COMPANY/NAME
Page 2
March 12, 2024
due to its outdated styles. We typically melt down the old gold jewelry to create gold
bars, which are then sold to wholesalers. The issue in question arises from the
exchange of old jewelry, primarily gold and diamond pieces, for new merchandise, and
whether the customer is eligible for a sales tax credit when engaging in such
transactions.
Furthermore, on December 1, 20XX, the State of STATE has issued a Letter Ruling in
this matter to COMPANY1. allowing them to deduct the value of the old jewelry being
traded-in from the taxable sales price of the new jewelry. We are attaching the said
Letter Ruling with this request for your perusal.
Scenario:

1. The company acquires old jewelry, such as gold and diamond pieces, from
   customers.
2. The credit from this trade-in is applied toward the customer’s purchase of new
   jewelry merchandise.
3. Old gold jewelry, due to its outdated nature, is melted down to form gold bars,
   which are subsequently sold to wholesalers.
4. At present, we do not provide sales tax credits for trade-ins to our customers,
   as we do not offer the option of exchanging old jewelry.
5. On December 1, 20XX, the State of STATE has issued a Letter Ruling in the
   same matter to COMPANY1. We are requesting a similar Letter Ruling for
   COMPANY.
   Disclosure:
   COMPANY is not currently involved in any ongoing matters related to this issue
   concerning the taxpayer’s return for a previous period. No issues are under
   examination as part of a Department audit, and there are no pending litigations in which
   the Department is named as a plaintiff or defendant concerning the taxpayer or related
   entities.
   We hereby affirm that the facts and scenario presented herein are accurate to the best
   of our knowledge, and the Department has not previously issued a ruling on the same
   or a similar issue for the taxpayer or any predecessors, representatives, nor have we
   previously submitted a request on the same or a similar issue to the Department that
   was subsequently withdrawn before a letter ruling was issued.
   We kindly request the Department’s guidance and clarification on whether customers
   are eligible for sales tax credits when they trade in their old jewelry for new merchandise
   as described in the scenario outlined above.
   DEPARTMENT’S RESPONSE:

COMPANY/NAME
Page 3
March 12, 2024
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.
The tax imposed by the Retailers’ Occupation Tax Act is at the rate of 6.25% of gross receipts
from sales of tangible personal property made in the course of business. 35 ILCS 120/2-10. “Gross
receipts” from the sales of tangible personal property at retail means the total selling price or amount
of such sales. “Selling price” or the “amount of sale” means the consideration for a sale valued in
money whether received in money or otherwise, including cash, credits, property, other than as
hereinafter provided, and services, but, prior to January 1, 2020 and beginning again on January 1,
2022, not including the value of or credit given for traded-in tangible personal property where the item
that is traded-in is of like kind and character as that which is being sold. 35 ILCS 120/1; 86 Ill. Adm.
Code 130.425.
The value of tangible personal property taken by a seller in trade as all or a part of the
consideration for a sale, where the item that is traded-in is of like kind and character as that which is
being sold, shall not be considered to be “gross receipts” subject to the Retailers’ Occupation Tax and
need not be included in the seller’s return, or may be deducted in the return from gross receipts if
included in gross receipts as reported in the return. 86 Ill. Adm. Code 130.425(e).
The real test of whether a traded-in item is of “like kind and character as that which is being
sold” and would, therefore, not be gross receipts subject to the Retailers’ Occupation Tax, is whether
the retail sale of the traded-in tangible personal property by the person who accepts it in trade would
be subject to Retailers' Occupation Tax, or whether such sale would be exempt as an isolated or
occasional sale. 86 Ill. Adm. Code 130.425(d). The Department generally construes "like kind and
character" broadly. For example, as a jeweler, you may accept a ring as a trade-in on a simultaneous
purchase of a bracelet, since you would be subject to Retailers’ Occupation Tax on the ring if you
sold it at retail, regardless of whether you, in fact, resell it after accepting it in trade.
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:sc