Were sales-based 'hostess dollars' excluded from taxable receipts as an unreimbursed discount?

Plain-English summary

Sales-based “hostess dollars” were included in taxable gross receipts when the hostess applied them to merchandise. The direct seller awarded credits based on party sales; unused credits expired and could not pay tax or shipping.

The GIL values a hostess reward credit at its dollar amount when applied. It distinguishes that reward from an ordinary seller-funded discount: if the seller simply reduces price and receives no reimbursement, only the discounted consideration is taxable; a reimbursed discount remains taxable.

The letter also explains that a manufacturer, importer, or wholesaler could file and remit for local distributors only under a Department-approved agency agreement, using Form RR-80. Under that arrangement, tax was based on the ultimate consumer sale, and affected distributors retained the agreement or remained responsible for their own registration and returns.

What this means for you

Do not treat a sales-performance reward as an ordinary price reduction. Document how the credit is earned and used, and confirm that any supplier-filed distributor arrangement has Department approval.

Common questions

Q: Did unused hostess dollars create taxable receipts?
A: The GIL addresses credits when applied to merchandise; unused credits became worthless under the facts.

Q: What value entered receipts when the credit was used?
A: The dollar amount credited.

Q: Could the company automatically file for distributors?
A: No. The agency arrangement required Department acceptance.

Subject

Gross Receipts

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-10-0114.pdf

Original ruling text

ST 10-0114-GIL 12/15/2010 GROSS RECEIPTS
This letter discusses the tax consequence of reward credits. See 86 Ill. Adm. Code 130.401(c).
(This is a GIL.)

December 15, 2010

Dear Xxxxx:
This letter is in response to your letter dated December 1, 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:
Background
We are a direct sales company that markets items exclusively through independent
distributors. Distributors recruit hostesses to hold home parties. A hostess holds a
sales party for her friends and relatives in her home where the company’s products are
demonstrated and sold. The hostess earns ‘hostess dollars’ depending on sales made
at the party. These dollars become worthless if the hostess does not use them on the
order form she submits for that sales demonstration. The hostess is not permitted to
assign the ‘hostess dollars’ discount to another person, nor may she use it to pay
applicable sales taxes or shipping charges due on her purchase of products.
Hostess orders may include one or more customers, and contain promotional items for
the hostess known as hostess benefits (hostess dollars and hostess free gifts).
Distributors submit to the corporation the sales tax for remittance to the state. These
orders may be shipped to customers, distributors, or hostesses.
Issue
•

The hostess dollars are a credit based on sales of the party that must be used
when the party order is placed. If not used by the hostess, the hostess dollars
are lost. Should our client collect sales tax on the gross amount (entire sales

price of items purchased including hostess dollars) or the net amount (entire
sales price of items purchased less the hostess dollars) thereby treating the
hostess dollars as a trade discount?
If you have any additional questions concerning this issue, please call me.

DEPARTMENT’S RESPONSE:
The Retailers’ Occupation Tax Act, 35 ILCS 120/1 et seq., imposes a tax upon persons
engaged in the business of selling tangible personal property at retail. The State tax rate is 6.25% of
gross receipts for most items, and a lower rate of 1% for qualifying food, drugs and medical
appliances. Local occupation taxes may also be applicable.
Gross receipts subject to Retailers' Occupation Tax are defined as all the consideration
actually received by the seller. If a seller provides a discount to a purchaser and does not receive a
reimbursement or rebate for that discount, only the (discounted) amount received by the seller is
taxable. If a seller receives a reimbursement or rebate for a discount, the amount of that
reimbursement or rebate is considered part of the taxable gross receipts received by the seller. See
86 Ill. Adm. Code 130.2125.
The Department’s regulations provide that credits awarded to a host or hostess for sponsoring
a party for friends at which a seller may show and solicit orders for her merchandise, and which are
awarded based upon the amount of sales generated at the party, are included in gross receipts
subject to tax when applied toward purchases of the seller’s merchandise. The value of the reward
credit equals the dollar amount credited when the reward credit is applied. See 86 Ill. Adm. Code
130.401(c).
You note in your letter that Distributors submit to the COMPANY the sales tax they receive
from the independent distributors and remits the sales tax collected to the State.
Information
concerning the "Filing of Returns for Retailers by Suppliers Under Certain Circumstances" may be
found at 86 Ill. Adm. Code 130.550. This regulation explains that manufacturers, importers or
wholesalers can enter into an "agency agreement" with the Department, whereby they register, file
returns and remit Retailers' Occupation Tax on behalf of their local distributors. Please note that such
arrangement must be accepted by the Department and is subject to any written objections of the
retailers that would be affected.
The Agency Agreement (RR-80) may be used to obtain approval of such an arrangement with
the Department. Under this type of agreement, the manufacturers, importers or wholesalers sell
products to local distributors and collect tax from the distributors based upon the selling price to the
ultimate consumers. The applicable tax is not based upon the sale to the local distributors. The
appropriate tax must be collected for the sale to the distributors' ultimate customers, which includes
State and any applicable local tax. In general, the determination of any local tax liability will depend
on the location where the purchase order is accepted from the ultimate customer. See 86 Ill. Adm.
Code 270.115.
When manufacturers, importers or wholesalers operate under this type of agency agreement,
the local distributors need not register, file returns or remit taxes since the manufacturers, importers
or wholesalers have agreed to this responsibility. The local distributors should, however, retain a
copy of the agreement. If they fail to provide such documentation upon demand by the Department,
they will be required to register, file returns, and remit the appropriate amount of tax directly to the

Department. Distributors who prefer to register and remit their own taxes may opt out of the agency
agreement.
Taxpayers may acquire form RR-80 (Agency Agreement) by contacting the Department’s
Central Registration Unit, attention Manager, located at Illinois Department of Revenue, 101 West
Jefferson, Springfield, Illinois 62702.
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:msk