Does an out-of-state mail order pharmacy that fulfills prescription orders through a third-party partner's Illinois warehouse have to register and collect Illinois Service Use Tax or Service Occupation Tax?

Plain-English summary

A tax advisory firm (referred to here as COMPANY) wrote to the Illinois Department of Revenue on behalf of a client -- a health insurance provider and pharmacy benefit manager standing up its own mail order pharmacy ("Pharmacy A" for "Client A") -- asking a series of registration, tax-rate, and reporting questions about Illinois Service Occupation Tax (SOT) and Service Use Tax (SUT). Pharmacy A sells only prescription drugs (no over-the-counter retail sales), is headquartered outside Illinois, and has no Illinois locations or employees of its own. However, a third-party fulfillment partner that retains ownership of the drug inventory operates a fulfillment location inside Illinois and ships prescription orders to Illinois customers on Pharmacy A's behalf, with most (but not necessarily all) Illinois orders expected to be filled from that Illinois location. The firm asked the Department to confirm its understanding on registration (whether Pharmacy A should register as an "out-of-state remote retailer" and whether the third-party partner's Illinois location creates physical presence), tax rates (the 1.0% state rate for out-of-state shipments versus possible added RTA/MED local Service Occupation Tax for in-state fulfillment), and reporting mechanics (listing the third-party location as a "permanent site" on Form ST-1/ST-2).

Because the request asked the Department to confirm conclusions about a specific taxpayer's facts, it would ordinarily call for a binding Private Letter Ruling (PLR) under 2 Ill. Adm. Code 1200.110, but the Department determined the nature of the inquiry required a General Information Letter (GIL) instead -- a non-binding response under 2 Ill. Adm. Code 1200.120 that lays out the relevant law rather than applying it to the requester's facts.

The Department's response explains the overall framework: Retailers' Occupation Tax (ROT) and Use Tax apply to sales of tangible personal property (35 ILCS 120/2; 35 ILCS 105/3; 86 Ill. Adm. Code 130.101, 150.101), but do not apply to sales of service as such. Instead, the Service Occupation Tax Act taxes "servicemen" (including pharmacists filling prescriptions) on the tangible personal property they transfer incident to a sale of service (86 Ill. Adm. Code 140.101), and the companion Service Use Tax taxes the customer's use of that property, with servicemen required to collect it (86 Ill. Adm. Code 160.115). Servicemen calculate their tax base one of four ways depending on whether they separately state the property's selling price, use 50% of the total bill, or (if de minimis, meaning their cost ratio of transferred property to gross service receipts is under 35%, or 75% for pharmacists and graphic arts producers) use their own cost price, either as a registered de minimis serviceman (collecting Service Use Tax from customers) or an unregistered one (paying Use Tax to suppliers instead) (86 Ill. Adm. Code 140.105, 140.106, 140.108, 140.109). Prescription and nonprescription medicines, drugs, medical appliances, and insulin are taxed at the reduced 1% rate rather than the general 6.25% rate (86 Ill. Adm. Code 140.101, 160.101).

On the specific question of out-of-state servicemen, the Department explains that a serviceman making sales of service to Illinois purchasers from locations outside Illinois may be required to register and collect/remit Service Use Tax if it meets the definition of "serviceman maintaining a place of business in this State" under 35 ILCS 110/2 -- which can happen either through physical presence (including via a third-party fulfillment center located in Illinois) or through economic nexus. Effective October 1, 2018 (following South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), which abrogated the physical-presence rule of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and Illinois Public Act 100-587), an out-of-state serviceman with $100,000 or more in gross receipts from Illinois sales of service, or 200 or more separate Illinois sales-of-service transactions in the preceding four quarters, meets that definition and must register, collect, and remit Service Use Tax for the following year. The Department also addresses sourcing for local Service Occupation Tax: where an out-of-state serviceman's fulfillment happens at (or the property is subsequently produced at) a third-party fulfillment center located in Illinois, the serviceman must remit Service Occupation Tax -- and any applicable local service occupation tax -- based on that Illinois location (citing 86 Ill. Adm. Code 280.115 and the Department's own prior ruling, ST 20-0009-PLR). Separately, the Department notes that the Leveling the Playing Field for Illinois Retail Act (Public Acts 101-0031 and 101-0604) added remote-retailer remittance rules for Retailers' Occupation Tax (35 ILCS 120/1, 120/2(b)-(c)) but did not amend the Service Occupation Tax Act or Service Use Tax Act, so those "remote retailer" thresholds are a separate concept from the serviceman economic-nexus rules.

The GIL walks through this entire legal framework at length but, consistent with GIL practice, does not tell Pharmacy A whether it specifically must register, what its cost ratio is, or which of its sales trigger Illinois tax -- it leaves the fact-specific application to the taxpayer (or to a PLR request).

What this means for you

Mail order pharmacies and other out-of-state servicemen

If you sell services (including dispensing prescription drugs, which Illinois treats as a taxable service under the SOT/SUT rather than a sale of tangible personal property) to Illinois customers from outside Illinois, you may need to register and collect Illinois Service Use Tax if you either (a) have a physical presence in Illinois -- including indirectly, through a third-party fulfillment partner's Illinois warehouse -- or (b) exceed the economic-nexus thresholds of $100,000 in gross receipts or 200 separate transactions from Illinois sales of service in the preceding four quarters. Prescription drugs are taxed at the reduced 1% rate; if any fulfillment happens from an Illinois location within an RTA region or MED district, local service occupation tax may also apply on top of the 1% state rate. This GIL does not tell any particular company whether it meets these tests -- that requires applying your own facts, or requesting a binding PLR.

Third-party fulfillment arrangements

Using an unrelated third-party fulfillment partner's Illinois warehouse does not automatically shield an out-of-state serviceman from Illinois tax obligations. The Department's response indicates that fulfillment (or production) of tangible personal property from an Illinois-located third-party center, with delivery in Illinois, can create Service Occupation Tax liability sourced to that Illinois location, separate from whether the serviceman itself owns the property or has its own employees or offices in the state.

Accountants and tax professionals

The Department's answer is organized as a general roadmap: it distinguishes ROT/Use Tax (tangible personal property) from SOT/SUT (services); it walks through the four tax-base calculation methods and the de minimis cost-ratio test (35%, or 75% for pharmacists/graphic arts); it separately explains physical-presence nexus (including through third-party fulfillment centers) and economic nexus (the Wayfair-driven $100,000/200-transaction thresholds effective October 1, 2018); and it flags that the Leveling the Playing Field Act's remote-retailer rules apply to ROT, not to SOT/SUT. Because this is a GIL, none of this resolves your specific client's registration obligation, applicable local tax, or de minimis status -- those require applying the client's real cost ratio and fulfillment facts, or a PLR if a binding answer is needed.

Common questions

Q: Does this GIL say whether Pharmacy A must register and collect Illinois Service Use Tax?
A: Not definitively. The Department lays out the registration rules -- physical presence (including through a third-party Illinois fulfillment location) and the $100,000/200-transaction economic-nexus thresholds -- but does not state whether Pharmacy A's specific facts satisfy them. That gap is typical of a GIL, which directs taxpayers to the relevant law rather than resolving their facts.

Q: What tax rate applies to prescription drugs sold by a serviceman in Illinois?
A: Per 86 Ill. Adm. Code 140.101 and 160.101, prescription and nonprescription medicines, drugs, medical appliances, insulin, and related diabetic supplies are taxed at 1% (rather than the general 6.25% rate for other tangible personal property transferred incident to a sale of service).

Q: When does an out-of-state serviceman have to register for Illinois Service Use Tax based on economic nexus alone?
A: Effective October 1, 2018, an out-of-state serviceman with $100,000 or more in gross receipts from sales of service to Illinois purchasers, or 200 or more separate such transactions, in the preceding four quarterly periods meets the definition of "serviceman maintaining a place of business in this State" under 35 ILCS 110/2 and must register to collect and remit Service Use Tax for the following year.

Q: Does using a third-party fulfillment partner's Illinois warehouse create Illinois tax obligations even without economic nexus?
A: The Department's response indicates that fulfillment from (or production at) a third-party fulfillment center located in Illinois, with delivery in Illinois, can independently create Service Occupation Tax liability sourced to that Illinois location -- separate from the economic-nexus thresholds, citing 86 Ill. Adm. Code 280.115 and the Department's prior ruling ST 20-0009-PLR.

Q: Why did the Department issue a GIL instead of directly confirming the firm's stated understanding on each point?
A: The firm's letter asked the Department to confirm conclusions about a specific taxpayer's facts (Pharmacy A's registration status, applicable rates, and reporting) -- the kind of fact-specific question that normally calls for a binding PLR under 2 Ill. Adm. Code 1200.110. The Department instead issued a GIL, which directs the taxpayer to the applicable statutes and regulations (2 Ill. Adm. Code 1200.120) without confirming or denying the taxpayer's specific conclusions, and is not binding on the Department.

Q: Can Pharmacy A (or a similarly situated company) rely on this GIL for legal protection?
A: No. A GIL is not a statement of Department policy and is not binding on the Department, even for the company that requested it. A company wanting a binding answer on its own registration or sourcing facts needs to request a PLR.

Citations and references

Statutes:

• 35 ILCS 110/2 (Service Use Tax Act -- "serviceman maintaining a place of business in this State"; economic nexus thresholds)
• 35 ILCS 105/3 (Use Tax Act -- imposition of Use Tax)
• 35 ILCS 120/1, 120/2, 120/2(b), 120/2(c) (Retailers' Occupation Tax Act -- imposition of tax; remote retailer definition and remittance thresholds)

Regulations:

• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)
• 86 Ill. Adm. Code 130.101, 130.701 (Retailers' Occupation Tax Act regulations)
• 86 Ill. Adm. Code 140.101, 140.105, 140.106, 140.108, 140.109, 140.501(a) (Service Occupation Tax Act regulations)
• 86 Ill. Adm. Code 150.101, 150.803 (Use Tax Act regulations; economic nexus)
• 86 Ill. Adm. Code 160.101, 160.105, 160.115 (Service Use Tax Act regulations)
• 86 Ill. Adm. Code 280.115 (local service occupation tax situsing)

Cases:

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

Other Department guidance referenced:

• ST 20-0009-PLR (sourcing of Service Occupation Tax for out-of-state servicemen using in-state third-party fulfillment centers)

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/ST24-0012-GIL.pdf

Original ruling text

ST 24-0012-GIL 03/22/2024 SERVICE USE TAX ACT
Out-of-State servicemen making sales of service to Illinois purchasers from locations outside
Illinois may be required to register with the Department and collect and remit Service Use Tax
on those sales. See 86 Ill. Adm. Code 160.115; 35 ILCS 110/2. (This is a GIL.)
March 22, 2024
COMPANY
NAME
ADDRESS
Dear XXXX:
This letter is in response to your email dated February 26, 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 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:
Hope you both are doing well! We wanted to circle back to the discussion we had last
MONTH regarding the Illinois tax implications for mail order pharmacies. One of our
clients (referred to as Client A in our original email dated DATE) is now in the process of
registering its new mail order pharmacy to collect Illinois tax and is preparing to file its
initial periods of returns; however, they have some concerns around how to
appropriately register the entity and how to appropriately report the pharmacy’s sales to
Illinois customers. Unfortunately, when our client contacted the Department directly for
clarification (Central Registration and [email protected]), they received some
guidance that conflicts with the guidance you had provided us over the phone in
MONTH so we are hoping you can quickly help clear up any confusion and ensure our
client is prepared to comply with its Illinois tax obligations.
Below is a summary of our client’s facts and the key topics and questions at issue. We
are also attaching again our understanding of the relevant authority on these topics.
Please let us know if you have any clarifying questions or if it would be helpful to
schedule a call to talk through these questions. Otherwise, a quick confirmation in
writing of each item would be greatly appreciated.
Thank you,
NAME
Facts

COMPANY/NAME
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March 22, 2024
•

•
•

•

Client A is a health insurance provider and pharmacy benefit manager (PBM) who is
standing up a mail order pharmacy of its own (referred to here as Pharmacy A).
Client A has engaged us to help them understand the multistate indirect tax
obligations of the mail order pharmacy and to prepare their systems to collect the
proper amount of tax, where applicable.
Pharmacy A only makes sales of prescription drugs. It does not make any retail
sales of tangible personal property (e.g., over-the-counter medicines).
Although Pharmacy A is the dispensing pharmacy of record on the prescription drug
transactions, Pharmacy A engages a third-party fulfillment partner who is
responsible for maintaining the drug inventory and shipping the prescription drugs to
Pharmacy A’s customer at Pharmacy A’s direction. The third-party fulfillment partner
retains ownership of the drug inventory at all times. At no point does Pharmacy A
own the drug inventory located at the third-party fulfillment partner’s locations.
Pharmacy A is headquartered outside of Illinois and does not have any business
locations or employees located in Illinois. However, Pharmacy A’s third-party
fulfillment partner operates a fulfillment location inside the state of Illinois from which
the third-party fulfillment partner will fulfill prescription drug orders on behalf of
Pharmacy A. It is assumed that most of Pharmacy A’s prescription drug sales to
Illinois customers will be fulfilled from of [sic] the third-party fulfillment partner’s
Illinois fulfillment location; however, it is possible that an Illinois customer’s order
could be fulfilled from one of the third-party fulfillment partner’s locations outside of
Illinois.

Registration Questions
•

Given that pharmacists who sell drugs on the prescription of a licensed physician are
viewed as serviceman and their sale of prescription drugs is governed by the
Service Occupation Tax (SOT) Act, and given that Pharmacy A only makes sales of
prescription drugs and does not make any retail sales of tangible personal property,
it’s our understanding that Pharmacy A should not be registered as an “out-of-state
remote retailer.” Please confirm.

•

Does the third-party fulfillment partner’s location in Illinois create a physical presence
for Pharmacy A? If so, how should REG-1 be completed to properly reflect that
relationship and the third-party fulfillment partner’s physical location?

Tax Rate Questions
•

Below are the tax rate questions we had previously posed. Based on our discussion
on DATE, you confirmed our understanding on all five (5) of these items. Please
confirm that each of these statements remain accurate.
o

It is our understanding that when a mail order pharmacy ships prescription drugs
from a location outside of Illinois to a customer’s Illinois address, the prescription
drugs would only be subject to the 1.0% state rate. Please confirm.
 It is our understanding that this is true regardless of whether the out-ofstate mail order pharmacy has established physical presence nexus or

COMPANY/NAME
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March 22, 2024
economic nexus (i.e., the “destination” sourcing rules of the Leveling the
Playing Field Act do not apply to serviceman subject to SOT). Please
confirm.
o

It is our understanding that when a mail order pharmacy ships prescription drugs
from a location inside Illinois to a customer’s Illinois address, the RTA SOT or
MED SOT (0.25%-1.25%) may apply in addition to the 1.0% state rate based if
[sic] the location from which the prescription drugs are shipped to the customer is
located in the RTA region or MED district. Please confirm.
 It is our understanding that this is true regardless of whether the
prescription drug inventory located in Illinois is owned directly by the mail
order pharmacy or owned by a third-party fulfillment partner shipping the
prescription drugs to the Illinois customer on behalf of the dispensing mail
order pharmacy. Please confirm.

o

It is our understanding that if the location from which the sale is fulfilled is within
Illinois but is not located in the RTA region or MED district, the prescription drugs
would only be subject to the 1.0% state rate, even if the ship-to address of the
customer is located in the RTA region or MED district (i.e., it is the location of the
serviceman’s inventory that determines whether the RTA SOT or MED SOT
apply to the transaction, not the location at which the customer receives the
prescription drugs). Please confirm.

Reporting Questions
•

Assuming you confirm that the above understanding of the applicable tax rates
remains accurate, please confirm logistically how Pharmacy A would report the sales
fulfilled from the third-party fulfillment partner’s location inside Illinois. Based on our
experience filing returns within MyTax, it seems Pharmacy A would need to list the
third-party fulfillment partner’s Illinois location as a “permanent site.” Please confirm.

DEPARTMENT’S RESPONSE:
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.
Retailers’ Occupation Tax and Use Tax do not apply to sales of service. The Service
Occupation Tax Act (SOT) imposes a tax upon persons engaged in this State in the business of
making sales of service, based on tangible personal property transferred incident to sales of
service. Under the SOT, businesses providing services (i.e., servicemen) are taxed on tangible

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personal property transferred as an incident to sales of a service. See 86 Ill. Adm. Code 140.101.
For Illinois servicemen, the transfer of tangible personal property to service customers may result in
either Service Occupation Tax liability (which includes local service occupation taxes) or Use Tax
liability for servicemen, depending upon which tax base they use to calculate their liability.
Servicemen who make retail sales that are sourced in Illinois, even if those sales are a small part of
their business, are required to register with the Department and remit Retailers’ Occupation Tax. See
86 Ill. Adm. Code 130.701.
The Service Use Tax is a privilege tax imposed on the privilege of using, in this State, tangible
personal property that is received anywhere as an incident to a purchase of service from a
serviceman. However, if the serviceman would not be taxable under the SOT despite all elements of
the sale of service occurring in Illinois, then the tax imposed by the Service Use Tax Act (SUT) does
not apply to the use of such property in this State. Any evidence that property was sold by any person
for delivery to a person residing in or engaged in business in this State shall be prima facie evidence
that such property was sold for use in this State.
The SOT and the SUT impose tax at the rate of 1% on food for human consumption that is to
be consumed off the premises where it is sold (other than alcoholic beverages, food consisting of or
infused with adult use cannabis, soft drinks, candy, and food that has been prepared for immediate
consumption) and prescription and nonprescription medicines, drugs, medical appliances and insulin,
urine testing materials, syringes and needles used by diabetics, for human use transferred incident to
a sale of service. See 86 Ill. Adm. Code 140.101 and 160.101. For general merchandise, the rate of
the Service Occupation Tax and Service Use Tax is 6.25% of the serviceman’s selling price of the
tangible personal property transferred by the serviceman as an incident to a sale of service. 86 Ill.
Adm. Code 140.101 and 160.101.
Calculation of Tax Incurred by Servicemen and Cost Ratio
Service Occupation Tax
Servicemen may calculate their tax liability in one of four ways: (1) Service Occupation Tax on
the separately-stated selling price of tangible personal property transferred as part of the service; (2)
Service Occupation Tax on 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. See 86 Ill. Adm. Code 140.105; 86
Ill. Adm. Code 140.106. For purposes of this letter, servicemen who meet either criteria (1) or (2) are
referred to as “de maximis” servicemen.
Using the first method, de maximis 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. See 86 Ill. Adm. Code 140.106(a). Servicemen who incur Service
Occupation Tax on their selling price should provide Certificates of Resale to their suppliers when
purchasing tangible personal property that will be transferred to service customers and are required

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to collect the corresponding Service Use Tax from their customers. See 86 Ill. Adm. Code 140.106(b)
and (e).
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 must
calculate their cost ratio to determine whether they are de minimis. The cost ratio is a measure of the
amount of tangible personal property transferred incident to a sale of service. It is calculated by
comparing the serviceman’s materials cost to his total income from services. The cost of materials
that are not transferred to customers incident to a service, such as those sold at retail, removed from
inventory for use, or incorporated into repairs of real estate, must be excluded when determining the
cost ratio. See 86 Ill. Adm. Code 140.105(c). 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
140.109. If the serviceman’s cost ratio is equal to or exceeds 35% (75% in the case of pharmacists
and persons engaged in graphic arts production), the serviceman is considered a “de maximis”
serviceman.
Registered de minimis servicemen are authorized to pay Service Occupation Tax based upon
the cost price of tangible personal property transferred incident to sales of service. Servicemen that
incur Service Occupation Tax based upon their cost price 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. See 86 Ill. Adm. Code 140.109(a)(1) and (a)(4).
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
(referred to as “unregistered de minimis servicemen”). 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 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.
Service Use Tax Act
Servicemen who incur and remit Service Occupation Tax to the Department as well as
servicemen who come within the definition of a “Serviceman maintaining a place of business in this
State” (as set out in 86 Ill. Adm. Code 160.105 and in Section 2 of the Service Use Tax Act) and who,
therefore, have a Service Use Tax collection obligation, shall collect Service Use Tax from users at
the time of purchase. The Service Use Tax shall be based on the selling price of the tangible
personal property transferred incident to the sale of service if stated separately on the invoice from
the serviceman. If not stated separately, then the tax will be imposed on 50% of the entire billing from
the serviceman. However, the Service Use Tax which is collected by a registered de minimis
serviceman shall be based upon the serviceman’s cost price of tangible personal property transferred
incident to the serviceman’s sales of service. 86 Ill. Adm. Code 160.115.

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Out-of-State Sales of Service
Out-of-State servicemen making sales of service to Illinois purchasers from locations outside
Illinois may be required to register with the Department and collect and remit Service Use Tax on
those sales. If the serviceman meets the definition of a “serviceman maintaining a place of business
in this State” in Section 2 of the SUT, 35 ILCS 110/2, and either (1) his or her cost ratio is equal to or
greater than 35% (75% in the case of servicemen transferring prescription drugs or engaged in
graphic arts production), or (2) he or she is required or elects to register under Section 2a of the
Retailers’ Occupation Tax Act, the serviceman must register with the Department to collect and remit
Service Use Tax on sales of service to Illinois purchasers from locations outside of Illinois. The
Department is authorized to require these servicemen to act as tax collectors because they have
established sufficient contacts, or nexus, with Illinois. For de maximis servicemen, this Service Use
Tax would be based on the selling price of the tangible personal property transferred incident to the
sale of service if stated separately on the invoice from the serviceman. If not stated separately, then
the tax will be imposed on 50% of the entire billing from the serviceman. For registered de minimis
servicemen, the Service Use Tax will be imposed on the serviceman’s cost price of the tangible
personal property transferred.
Out-of-State servicemen who also make retail sales to Illinois customers that are sourced
outside of Illinois, even if those sales are a small part of their business, are required to register with
the Department and remit, with respect to those transactions, either Use Tax, if they meet the
definition of “retailer maintaining a place of business in this State”, or Retailers’ Occupation Tax, if
they do not have a physical presence in Illinois and meet a tax remittance threshold in 35 ILCS
120/2(b). Out-of-State servicemen who also make retail sales to Illinois customers that are sourced
inside of Illinois must register under Section 2a of the Retailers’ Occupation Tax Act. Any out-of-State
serviceman maintaining a place of business in this State who is required or has elected to register
under Section 2a of the Retailers’ Occupation Tax Act must register with the Department to collect
and remit Service Use Tax on all of their sales of service to Illinois customers. If such serviceman is
a deminimis serviceman, the Service Use Tax for such serviceman is based upon the serviceman’s
cost price of tangible personal property transferred incident to the serviceman’s sales of service. 86
Ill. Adm. Code 160.115.
Finally, out-of-State servicemen who do not meet the definition of “serviceman maintaining a
place of business in this State” and whose cost ratio is less than 35% (less than 75% in the case of
servicemen transferring prescription drugs or engaged in graphic arts production) are not required to
register with the Department to collect and remit Service Use Tax on their sales of service to Illinois
consumers. Such serviceman would owe use tax on their cost price of the tangible personal property
that they transfer in Illinois incident to sales of service (note, however, such a serviceman who places
prescription pharmaceuticals in the U.S. mail outside of Illinois and loses the right of recall of such
pharmaceuticals outside Illinois is not using the pharmaceuticals in Illinois and would not owe Illinois
Use Tax on the pharmaceuticals).
Where tangible personal property is located in this State at the time of its transfer (or is
subsequently produced in Illinois) as an incident to a sale of service, and is then delivered in Illinois,
the de maximus out-of-State serviceman incurs Service Occupation Tax liability on the selling price of
the property. 86 Ill. Adm. Code 140.501(a). A registered de minimis out-of-State serviceman would
incur SOT on the cost price of the property.

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Economic Nexus
In South Dakota v. Wayfair, Inc., 583 U.S. 1089 (2018), 138 S. Ct. 2080, the U.S. Supreme
Court upheld a South Dakota statute that imposed tax collection obligations on remote retailers that
met specific selling thresholds but had no physical presence in the state. This decision abrogated the
longstanding physical presence requirement of Quill, deeming it “unsound and incorrect.” See Quill
Corporation v. North Dakota, 504 U.S. 298 (1992). Illinois Public Act 100-587 enacted nexus
standards, effective October 1, 2018, that are virtually identical to those upheld in Wayfair. For the
purposes of this letter, this non-physical presence nexus is referred to as “economic nexus”.
Effective October 1, 2018, an out-of-State serviceman making sales of service to Illinois
purchasers with gross receipts totaling $100,000 or more or making 200 or more separate sales of
service transactions meets the definition of “serviceman maintaining a place of business in this State”.
Out-of-State servicemen must determine on a quarterly basis whether they meet either of the tax
remittance thresholds for the preceding 12-month period. If a threshold is met, the serviceman will be
required to register and collect and remit Service Use Tax from their Illinois customers for one year.
At the end of that one-year period, the serviceman may reassess on a yearly basis looking at the last
four quarters. See 35 ILCS 110/2.
The principles provided in 86 Ill. Adm. Code 150.803 are applicable to out-of-State servicemen
with no physical presence in Illinois who have met a tax remittance threshold. However, note that
Section 150.803 also applies to periods after December 31, 2020, for the purposes of such
servicemen. In determining whether an out-of-State serviceman meets the thresholds above, see 86
Ill. Adm. Code 150.803(e)(3). In addition, if an out-of-State serviceman makes exclusively nontaxable
sales of service, that serviceman is not subject to the economic nexus requirements. See 86 Ill. Adm.
Code 150.803(e)(2). If, however, the out-of-State serviceman makes both taxable and nontaxable
sales of service into Illinois, all sales of service are included, including the nontaxable sales of service
(other than sales for resale and other sales specified at 86 Ill. Adm. Code 150.803(e)(3)(E)). See 86
Ill. Adm. Code 150.803(e)(3).
Applicability of Leveling the Playing Field for Illinois Retail Act
Public Acts 101-0031 and 101-0604 enacted the Leveling the Playing Field for Illinois Retail
Act. The Act implemented a series of structural changes to the Illinois sales tax law that are intended
to “level the playing field” between Illinois-based retailers and remote retailers by imposing State and
local retailers’ occupation taxes on Illinois retailers, remote retailers and marketplace facilitators alike.
Public Acts 101-0031 and 101-0604 require “remote retailers” to collect and remit State and local
retailers’ occupation taxes. Beginning January 1, 2021, a retailer must remit Retailers’ Occupation
Tax if the retailer is a remote retailer and the retailer met a tax remittance threshold during the
preceding four quarterly periods ending on the last day of March, June, September, and December.
35 ILCS 120/2(c).
A retailer is a “remote retailer” if the retailer 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 retailer’s authority or a subsidiary
of the retailer, irrespective of whether such place of business or agent is located here permanently or
temporarily or whether the retailer or the retailer's subsidiary is licensed to do business in this State.
35 ILCS 120/1.

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Public Acts 101-0031 and 101-0604 did not amend the Service Occupation Tax Act or the
Service Use Tax Act. Local service occupation taxes are not imposed on servicemen maintaining a
place of business in this State, including servicemen whose only nexus is triggered by meeting one of
the tax remittance thresholds. Servicemen who come within the definition of “Serviceman maintaining
a place of business in this State” as set out in 86 Ill. Adm. Code 160.105 and in Section 2 of the SUT
remain obligated to collect and remit Service Use Tax for sales of service to Illinois customers
sourced outside of the State. 86 Ill. Adm. Code 160.115(a).
Jurisdictional Issues – Service Occupation Taxes
If the Illinois Service Occupation Tax on a transaction is being remitted to the Department by
the serviceman, the serviceman shall also pay any local service occupation tax to the Department on
the same transaction if such serviceman engages in the business of making sales of service within a
jurisdiction that has adopted a local service occupation tax. If a purchase order is accepted outside
this State but the tangible personal property which is sold incident to the sale of service is in the
inventory of a serviceman located in a jurisdiction that has imposed a local service occupation tax at
the time of its sale (or is subsequently produced in that jurisdiction) then delivered in Illinois to the
service customer, the place where the property is located at the time of the sale (or where the
property is subsequently produced) will determine where the seller is engaged in business for local
service occupation tax purposes with respect to such sale. See, for example, 86 Ill. Adm. Code
280.115.
For sales of service made by an out-of-State serviceman maintaining a place of business in
this State but fulfilled by third-party fulfillment centers located in Illinois and then delivered in Illinois to
the purchaser, the out-of-State serviceman must remit Service Occupation Tax and any applicable
local service occupation taxes based on the Illinois location at which the tangible personal property
was subsequently produced by the out-of-State serviceman through its agreement with the third-party
fulfillment center. See generally ST 20-0009-PLR. As previously discussed, the Service Occupation
Tax will be incurred either on the separately stated selling price of the tangible personal property
transferred incident to the service; or, if the serviceman does not wish to separately state the selling
price of the tangible personal property transferred, the serviceman incurs tax on 50% of the entire bill
to its customers as the tax base; or, if the serviceman is a registered de minimis serviceman, on the
serviceman’s cost price of the tangible personal property transferred.
Registration and Returns
Servicemen maintaining a place of business in this State who make transfers of general
merchandise; qualifying foods, drugs, and medical appliances; and/or prepaid wireless
telecommunications service in Illinois must file Form ST-1, Sales and Use Tax and E911 Surcharge
Return. If a serviceman has one business but sells items at more than one location (site), the
serviceman must collect and remit service occupation taxes according to the rates of each particular
location. Such serviceman must complete and attach Form ST-2, Multiple Site Form, to its Form ST1 to show the breakdown of taxes collected and paid from each site. MyTax Illinois allows users to
calculate their tax due for each location on Form ST-2, Multiple Site Form, and combine their liability
on a single Form ST-1. Sales from locations within Illinois are reported on lines 4 and 5 while sales
from locations outside of Illinois are reported on lines 6 and 7. See ST-1 Instructions, for reporting
periods January 2024 and after.

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I hope this information is helpful. If you require additional information, please visit our website
at https://tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,
Alexis K. Overstreet
Deputy General Counsel
Sales and Excise Tax Policy
AKO:slc