Did Illinois decide whether an out-of-state mail-order medical-supply seller using a drop-ship distributor had nexus or qualified for reduced tax rates?

Plain-English summary

The Department did not decide whether the out-of-state mail-order seller had Illinois nexus or what rate applied to its medical supplies. The seller took orders from outside Illinois and used an out-of-state distributor to drop-ship prescription medical products to Medicare beneficiaries.

Illinois pointed to its general drop-shipment rule and its regulation for drugs, medicines, medical appliances, and grooming products. Products satisfying the medical-product rules received the reduced state rate described in the 2010 letter; nonqualifying products received the general rate. The GIL did not classify any specific item.

The letter's Quill physical-presence nexus analysis is historical and noncurrent because Wayfair overruled it.

What this means for you

Determine current nexus and drop-shipment duties separately from product classification. Prescription or Medicare status alone does not supply the answer in this GIL.

Common questions

Q: Did the GIL decide the seller had nexus?
A: No.

Q: Did it approve a reduced rate for all prescribed supplies?
A: No.

Subject

Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0088.pdf
• Later authority: South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018)

Original ruling text

ST 10-0088-GIL
NEXUS: This letter discusses nexus. See Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). (This
is a GIL.)

September 30, 2010

Dear Xxxxx:
This letter is in response to your letter dated August 11, 2010, in which you request
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:
COMPANY is a company that has recently expanded its mail order sales to all states.
Our business is the sale of Medical Supplies to Medicare Part B beneficiaries, the endusers. All of these products require a physician prescription and may not be dispensed
(sold) to the Medicare beneficiary without one.
Our main office is located in CITY/STATE and we drop ship our products throughout the
United States from the distributor in STATE2 from whom we purchase the products.
We are requesting a Letter Ruling for Sales Tax Nexus in the state.
Thank you for your attention.

DEPARTMENT’S RESPONSE:
Although we cannot give you a specific answer in the form of a General Information Letter, we
hope you find the following helpful.
NEXUS
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or
maintains an inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then
liable for Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding
Use Tax incurred by the purchasers.

Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.
A physical presence is not limited to an office or other physical building. Under Illinois law, it
also includes the presence of any agent or representative of the seller. The representative need not
be a sales representative. Any type of physical presence in the State of Illinois, including the vendor’s
delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Wagner, 171 Ill.2d 410, (1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
DROP SHIPMENTS
You may wish to review the Department’s drop shipment rules at 86 Ill. Adm. Code 130.225
which can be viewed on the Department’s Internet website. These rules provide guidance in general
drop shipment situations.
DRUGS, MEDICINES & MEDICAL APPLIANCES
Please see the Department’s regulation at 86 Ill. Adm. Code Section 130.311, which is its
regulation governing Drugs, Medicines, Medical Appliances and Grooming and Hygiene Products.
Those products that qualify as drugs, medicines and medical appliances are taxed at a lower State
rate of 1% plus any applicable local taxes. Those items that do not qualify for the low rate of tax are
taxed at the general merchandise rate of 6.25% plus applicable local taxes.
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,

Debra M. Boggess
Associate Counsel
DMB:msk