Could an Illinois pharmacy fill prescriptions tax-free when a tax-exempt health center paid for uninsured patients?

Plain-English summary

A prescription sale could be tax-free if the purchaser was an organization holding an Illinois E number; without an E number, the sale could not be made tax-free. The pharmacy dispensed prescriptions to uninsured patients without collecting payment and billed a tax-exempt health center each month.

The Department explained that qualifying religious, educational, and charitable organizations receive an exemption identification number after applying to Illinois. If drugs were sold to an organization holding that E number, the sale could be free of tax.

The letter also described the pharmacy rules. Most pharmacists were registered de minimis servicemen. They paid Service Occupation Tax based on the cost of property transferred with their services and collected corresponding Service Use Tax from customers. When the customer held an E number, the customer was exempt from Service Use Tax and the pharmacist was exempt from Service Occupation Tax.

The GIL did not decide whether monthly payment by the health center made the center the purchaser in the described prescription transactions.

What this means for you

A pharmacy needed to verify the Illinois E number and document that the exempt organization was the purchaser. A center's tax-exempt description or payment of a patient's bill did not receive a binding approval in this GIL. If the sale was not exempt, the letter stated that qualifying drugs and medicines were subject to the historical reduced State rate plus applicable local taxes.

Common questions

Q: Was a tax-exempt label enough?
A: No. The organization needed an Illinois E number for the exemption described in the letter.

Q: Did the health center's payment automatically make the prescription tax-free?
A: The GIL did not decide that fact. It stated the conditional rule for drugs sold to an E-number organization.

Q: What if the organization had no E number?
A: The letter says the sale could not be made free of tax.

Subject

Exempt Organizations

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0039.pdf

Original ruling text

ST 11-0039-GIL 05/26/2011 EXEMPT ORGANIZATIONS
Organizations that make application to the Department and are determined to be exclusively
religious, educational, or charitable, receive an exemption identification "E" number. See 86 Ill.
Adm. Code 130.2007. (This is a GIL.)

May 26, 2011

Dear Xxxxx:
This letter is in response to your letter dated April 15, 2011, 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:
I am writing on behalf of ABC. We are a pharmacy that provides prescriptions to
patients who do not have prescription drug coverage. Due to the patients not having
coverage, the CENTER (who is tax exempt) pays for the patient’s prescriptions. Should
we charge tax on the prescription?
Example:
Patient comes to the pharmacy to get their prescription filled. The patient has no
prescription drug coverage. We fill the prescription and the patient leaves, with no
payment being made. We bill, once a month, the CENTER for the patients [sic]
prescription. The CENTER pays the bill. Do we charge sales tax?
DEPARTMENT’S RESPONSE:
Retailers' Occupation Tax and Use Tax do not apply to receipts from sales of personal
services. Under the Service Occupation Tax Act, servicemen are taxed on tangible personal property
transferred incident to sales of service. For your general information, please see the Department’s
Regulation at 86 Ill. Adm. Code 140.101 regarding sales of service and Service Occupation Tax
which can be found on the Department’s website.

The purchase of tangible personal property that is transferred to service customers may result
in either Service Occupation Tax liability or Use Tax liability for the servicemen, depending upon
which tax base the servicemen choose to calculate their liability. Servicemen may calculate their tax
base in one of four ways: (1) separately stated selling price; (2) 50% of the entire bill; (3) Service
Occupation Tax on cost price if they are registered de minimis servicemen; or, (4) Use Tax on cost
price if the servicemen are de minimis and are not otherwise required to be registered under the
Retailers' Occupation Tax Act.
Using the first method, 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 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. Under these
methods, servicemen may provide their suppliers with Certificates of Resale when purchasing the
tangible personal property to be transferred as a part of the sales of service.
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 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 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. This class of registered de minimis
servicemen also collects the corresponding Service Use tax from their customers absent exemptions.
They remit the tax to the Department by filing returns and do not pay tax to suppliers. They provide
suppliers with Certificates of Resale for the property transferred to service customers.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under the Retailers' Occupation Tax Act. 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). Such de minimis servicemen may pay Use Tax to their suppliers or may self-assess and
remit Use Tax to the Department when making purchases from unregistered out-of-State suppliers.
Those servicemen are not authorized to collect "tax" from their service customers, nor are they liable
for Service Occupation Tax. It should be noted that servicemen no longer have the option of
determining whether they are de minimis using a transaction by transaction basis.
Most pharmacists are registered de minimis servicemen. (See the third method payment
above.) These servicemen pay Service Occupation Tax based upon the cost price of tangible
personal property transferred incident to sales of service. They collect the corresponding Service Use
Tax from their customers. If their customers are holders of an “E” number, the customer is exempt
from paying the Service Use Tax, and the servicemen are exempt from paying the Service
Occupation Tax.
Some health-care related organizations that make application to the Department are
determined to be exclusively organized and operated for charitable purposes. These organizations
receive a tax exemption identification number (“E” number).

If the drugs are sold to an organization that has obtained an “E” number from the Department,
then the sale may be made free of tax. If the organization has not obtained an “E” number, then the
sale cannot be made free of tax. Note, in Illinois, products that qualify as drugs, medicines and
medical appliances are taxed at a lower State rate of 1% plus any applicable local taxes. See the
Department’s regulation at 86 Ill. Adm. Code Section 130.311 which governs Drugs, Medicines,
Medical Appliances and Grooming and Hygiene Products.
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