Can a payment processor's fees, or the retailer's own credit card fees, be excluded from gross receipts subject to Illinois Retailers' Occupation Tax?

Plain-English summary

A payment processing company asked the Illinois Department of Revenue whether the fees it charges merchants for processing customer card payments are subject to Illinois sales tax. The company acts as an aggregator: it moves funds from a customer's bank account to a merchant's bank account and charges the merchant a processing fee for that service. The company itself does not sell any tangible personal property.

The Department explained that Illinois' "sales tax" is really two taxes working together: the Retailers' Occupation Tax (imposed on retailers who sell tangible personal property) and the Use Tax (imposed on purchasers who buy that property, which the retailer collects and keeps to offset its own Retailers' Occupation Tax liability). If no tangible personal property changes hands, neither tax applies to that transaction on its own. But the Department did not stop there — it went on to address what a retailer's taxable "gross receipts" actually include.

Under 86 Ill. Adm. Code 130.410, a retailer computing its Retailers' Occupation Tax liability cannot deduct costs of doing business from gross receipts — not the cost of goods sold, labor, overhead, processing charges, or "any other expenses" — even if those costs are separately itemized on the customer's bill. The Department gave credit card fees as its go-to example: when a retailer accepts a card payment and a card company skims off a service fee, that fee is still part of the retailer's gross receipts subject to tax, not a deduction.

Applying that rule here, the Department concluded that a merchant using this company's payment-processing service must include the processing fee in its own gross receipts when calculating its Retailers' Occupation Tax liability, because Section 130.410 treats processing charges as a nondeductible cost of doing business. The Department noted, however, that the letter did not supply enough facts to say whether the processing company itself owes any sales tax on the fee it collects from merchants.

What this means for you

Retailers accepting card or processed payments

You cannot subtract credit card fees, payment-processor fees, or other transaction costs from your gross receipts before calculating Retailers' Occupation Tax — even if you list those fees as a separate line item to the customer. The full sale price, including any amount consumed by processing charges, remains part of your taxable gross receipts under 86 Ill. Adm. Code 130.410.

Payment processors and payment facilitators

This letter does not resolve whether a processing/aggregator business owes tax on the fees it collects from merchants; the Department said the facts presented were insufficient to decide that question. What is settled is the merchant side: the merchant's gross receipts (for Retailers' Occupation Tax purposes) must include the processing fee it pays you, since that fee is your merchant-customer's cost of doing business, not a deductible expense.

Accountants and tax professionals

When figuring a client's Retailers' Occupation Tax base, do not net out processing charges, credit card fees, labor, freight, overhead, or similar costs of doing business, per 86 Ill. Adm. Code 130.410. Remember also that this is a GIL, not a PLR — it directs the taxpayer to the relevant rule but is not binding on the Department and does not carry PLR-level reliance protection (2 Ill. Adm. Code 1200.120).

Common questions

Q: Can a retailer deduct credit card processing fees from gross receipts before calculating sales tax?
A: No. Costs of doing business, including credit card and payment processing fees, are part of the retailer's gross receipts subject to Retailers' Occupation Tax even when separately stated on the customer's bill, per 86 Ill. Adm. Code 130.410.

Q: Does a payment-processing company that never sells tangible personal property owe Retailers' Occupation Tax or Use Tax on its own fees?
A: The Department said neither tax applies if no tangible personal property is transferred, but it also said the letter did not give enough facts to determine what, if any, sales tax liability the processing company itself has on the fee it receives from merchants.

Q: If a merchant uses a payment aggregator, whose gross receipts include the processing fee?
A: The merchant's. Because processing charges are a nondeductible cost of doing business under Section 130.410, the merchant must include the processor's fee in its own gross receipts when computing Retailers' Occupation Tax liability.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 2 Ill. Adm. Code 1200.120, meant to point the taxpayer to relevant regulations. It is not a statement of Department policy and does not bind the Department the way a Private Letter Ruling would.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act — tax on sellers of tangible personal property)
• 86 Ill. Adm. Code 130.101 (nature of the Retailers' Occupation Tax)
• 35 ILCS 105/3 (Use Tax Act — tax on the privilege of using tangible personal property)
• 86 Ill. Adm. Code 150.101 (nature of the Use Tax)
• 86 Ill. Adm. Code 130.410 (costs of doing business as part of gross receipts)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

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/ST24-0042-GIL.pdf

Original ruling text

ST 24-0042-GIL 12/11/2024 RETAILERS’ OCCUPATION TAX
Costs of doing business are an element of the retailer’s gross receipts subject to
Retailers’ Occupation Tax even if separately stated on the bill to the customer. 86 Ill.
Adm. Code 130.410. (This is a GIL.)
December 11, 2024
NAME
EMAIL
Dear NAME:
This letter is in response to your letter dated November 25, 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 https://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:
We have contacted the sales tax department for the below query. They have
informed us to contact you in case the reply they gave doesn't fit. Since the
reply given by the Sales tax department does not satisfy our query we want to
seek your help on the below query. (Attaching the email conversation
between the sales tax department.)
We are writing to seek clarification regarding the taxability of our fees as a
payment processing business under sales tax. Specifically, we are interested
in understanding whether the fees we charge for our payment processing
services are subject to state sales tax.
To provide some context, our payment processing fees are similar to those
charged by companies like COMPANY. These fees are levied for processing

NAME
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December 11, 2024
online transactions, which includes the secure transfer of funds from the
customer to the merchant account securely.
Given the nature of our services, we want to ensure that we are in full
compliance with state tax regulations. Could you please provide guidance on
whether these payment processing fees are subject to state sales tax?
For better clarification, Please [sic] note that we are not the entity that charges
a processing fee directly to the end customer along with the item sold i.e.
tangible property. Instead, we act as a payment processing aggregator.
We enable a payment processor that allows our customers (who are
merchants) to collect payments from their customers through various
methods such as credit cards. For facilitating this payment process -transferring funds from the end customer's bank account to our customer's
bank account -- we charge our customers a processing fee.
We would like to understand the taxability of the fee we charge from
customers. It is purely service not clubbed with any other tangible products.
Thank you for your time and assistance. We look forward to your prompt
response.
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 no tangible personal
property is being transferred to customers, then neither Illinois Retailers’ Occupation Tax nor
Use Tax would apply.
When computing Retailers’ Occupation Tax liability, the retailer may not deduct from
gross receipts or selling prices on account of the cost of property sold, the cost of materials
used, labor or service costs, idle time charges, incoming freight or transportation costs,
overhead costs, processing charges, clerk hire or salesmen’s commissions, interest paid by

NAME
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December 11, 2024
the seller, or any other expenses. Costs of doing business are an element of the retailer’s
gross receipts subject to tax even if separately stated on the bill to the customer.
A good example is credit card fees or charges. A retailer may choose to accept
payment from a customer using a credit or debit card, and the retailer may not receive the
full amount of payment due to the service charges or fees charged by the credit or debit card
company. These charges or fees are part of the retailer’s cost of doing business and are not
deductible from the gross receipts subject to tax. 86 Ill. Adm. Code 130.410
Your letter states that you process payments on behalf of merchants. You collect
payments from their customers through various methods such as credit cards and forward
the payments, minus your processing fee, to the merchants. Section 130.410 includes
processing charges in the retailer’s cost of doing business. Based on the simple facts in
your letter, merchants must include your processing fee in their gross receipts when
determining their Retailers’ Occupation Tax liability.
Your letter does not provide sufficient facts to determine what, if any, sales tax
liability you may have on the processing fee you receive from merchants.
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 800-732-8866.
Very truly yours,
Richard S. Wolters
Associate Counsel
RSW:slc