What did Illinois report in its 2011 multistate survey about transfer tax, discounts, gratuities, R&D, maintenance, and remote sellers?

Plain-English summary

Illinois answered new questions in a private publisher's annual state-tax survey. The Department did not approve the publication, and the answers reflect law as of July 1, 2011.

Real Estate Transfer Tax

The transfer declaration stated full actual consideration, including money or value attributable to personal property, real property, services, and other items. Tax was based on net consideration after allowed deductions, including a deduction for personal property transferred.

Discounts, coupons, gifts, and gratuities

An unreimbursed seller discount reduced taxable gross receipts to the amount actually received. If a manufacturer or another source reimbursed the coupon, both the customer payment and reimbursement were taxable.

For an unreimbursed buy-one-get-one offer, tax applied to the amount actually received for both items; the supposed free item was part of a special price, not a gift.

When property truly was purchased and given away, the donor was the end user and owed Use Tax.

A separately stated mandatory meal gratuity was exempt only to the extent actually distributed as tips or tip substitutes to employees directly preparing, serving, hosting, or cleaning up that function. Amounts retained for wages, benefits, or employer costs were taxable.

Research and development

Illinois reported no explicit R&D exemption in its Retailers' Occupation and Use Tax Acts. Under the historical rules, Manufacturer's Purchase Credit could offset state tax on qualifying production-related R&D property, but not local tax.

Maintenance and free items

A maintenance agreement included in a product's selling price was part of taxable gross receipts, with no later tax on covered services or parts.

If a retailer later gave a customer property it was not contractually obligated to provide, the retailer made a taxable gift and owed Use Tax as the donor.

Historical remote-seller answer

Illinois said it had no remote-seller notification law at the time, while P.A. 96-1544 required certain remote sellers to collect Use Tax. This 2011 answer is historical and does not describe current remote-seller duties.

What this means for you

Survey users

Use this page to understand the Department's 2011 positions only. Check current statutes and regulations before applying any rate, credit, or remote-seller statement.

Retailers

Distinguish unreimbursed price discounts from reimbursed coupons, and true gifts from bundled promotional pricing.

Common questions

Q: Did an unreimbursed coupon reduce taxable receipts?
A: Yes.

Q: Did the retailer owe tax on a genuine giveaway?
A: Yes, as the donor and end user.

Q: Did Illinois report a general R&D exemption?
A: No.

Q: Are the remote-seller answers current?
A: No. They report 2011 law.

Citations and references

• 35 ILCS 200/31 et seq. and 86 Ill. Adm. Code 120.20 — Real Estate Transfer Tax consideration and deductions.
• 86 Ill. Adm. Code 130.2125 and 150.305(c) — discounts, coupons, BOGO pricing, and gifts.
• 35 ILCS 120/2-5(15) and 86 Ill. Adm. Code 130.2145(d) — mandatory gratuities.
• 86 Ill. Adm. Code 140.301(b)(3) — maintenance agreements.
• P.A. 96-1544 — remote-seller collection law referenced in the 2011 survey.

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-11-0057.pdf

Original ruling text

ST 11-0057-GIL 07/14/2011 MISCELLANEOUS
This letter responds to an annual survey. See 86 Ill. Adm. Code, Parts 120, 130, 140, and

150. (This is a GIL.)

July 14, 2011

Dear Xxxxx:
This letter is in response to your email dated June 6, 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:
The ABC, in conjunction with XYZ, annually undertakes a major information collection
effort with respect to the application of the tax laws of the states. ABC's goal in
gathering this information is to assemble and publish the PUBLICATION. As the market
has shown, such a publication is a useful reference source for departments of revenue,
attorneys, corporate tax departments, and public accounting firms.
ABC is in the process of updating the PUBLICATION for its 2012 annual edition.
Accordingly, we ask for your state's assistance in preparing this important publication. I
have attached two Microsoft Word files—one for income tax and one for sales tax—to
serve as this year's questionnaire. The questionnaire follows the same format as in
past years. (If you do not have a copy of your 2010 response, and it would be helpful to
you in completing the 2011 questionnaire, please let me know and I will email you a
copy.)
This year, the numbering scheme and the sequence of the questions remains
essentially the same. Also, please note that the new questions are highlighted in red
font. Therefore, you should be able to easily follow the changes from last year to this
year. Because of anticipated time constraints for respondents, again this year we are
asking that you only respond to the questions for which your answers require a change
and the new questions. All unanswered questions will be considered the same as last
year's answer unless otherwise noted.

Please complete the 2011 questionnaire and return it by July 15, 2011. The enclosed
questionnaire should be answered in accordance with laws in effect as of July 1, 2011.
If there is legislation pending or recently enacted that would alter your answers, please
explain any such changes that you are aware of at the time the questionnaire is
completed.
Beginning in the fall 2000, ABC began a tuition assistance program for state department
of revenue employees in appreciation for their assistance in publishing the
PUBLICATION. A limited amount of tuition assistance is available for courses in ABC's
Online Graduate Certificate in State and Local Taxation. This Certificate program is the
first of its kind in the nation to be offered totally online. To receive the Certificate,
students must complete the four-course curriculum. For further information about the
program or available tuition assistance contact INDIVIDUAL.
If you have any questions about the questionnaire or individual questions, please
contact me at. Thank you for your continued cooperation and support. Your
contributions are extremely valuable in maintaining the quality of this outstanding
reference work. A complimentary copy of the PUBLICATION will be sent to you when it
is published next year.
Your new questions are as follows:
[54] REAL ESTATE TRANSFER TAXES
▪ Does your state impose real estate transfer taxes upon the sale or arm’s length
transfer of real property?
Yes
No
▪ If YES, what is the measure of tax for the transfer tax?
Selling price of property Fair market value of property
Amount of mortgage or other indebtedness recorded in connection with
the sale
Other, explain:
▪ If the measure of tax is the selling price of property, can the proceeds be adjusted for
certain transactions that may be bundled into the selling price?
Yes
No
▪ If YES, what adjustments are allowed (check all that apply)?
Value of tangible personal property included in the selling price
Value of any intangible property included in the selling price
Any services or maintenance agreements that may be included in selling price
Other, explain:
[55) DISCOUNTS, TIPS, AND GRATUITIES
▪ Does your state impose tax upon tip or gratuity charges?
Yes, all tips are taxable
Yes, but only if tip is mandatory
No, tips and gratuities are not subject to tax

▪ How are third-party meal discount certificates and coupons, i.e., buy one get one free,
treated? (Assume the restaurant is not reimbursed for the value of the meal given
away.)
Sales tax is imposed upon only the amount paid by the customer, i.e., the cost of
the meals minus the discount or coupon
Sales tax is imposed upon the amount paid by the customer and the value of the
meal given away by the restaurant, i.e., the discount is ignored in making the
determination of the taxable measure
▪ Does the restaurant owe use tax on the cost of the meal given away?
Yes
No
▪ Are ‘suggested tips,’ shown on a receipt to assist the customer in determining how
large their tip should be, subject to tax?
Yes
No
[56) RESEARCH AND DEVELOPMENT (R&D) EXEMPTION
▪ Does your state provide an exemption for R&D-related purchases?
Yes
No
▪ If YES, which of the following purchases qualifies for the exemption (check all that
apply)?
Equipment used in R&D
Direct materials used or consumed in R&D
Internal labor applied to R&D
Indirect materials (miscellaneous supplies and consumables) used in R&D
▪ If equipment is exempt for use in R&D, what criteria are used to determine what
qualifies?
Must be ‘directly and exclusively’ used in R&D
Must be ‘predominantly’ used in R&D
Any use in R&D qualifies the item for the exemption
[57) FREE MAINTENANCE CHARGES INCLUDED IN SELLING PRICE. In recent
years many vendors, particularly automobile dealers, have begun to offer free
maintenance on the products they sell. The most commonly offered free maintenance
is free oil changes for the life of the vehicle.
▪ Does your state allow a resale exemption for purchases of items provided to their
customers free-of-charge?
Yes
No
▪ If YES, must the contract, invoice, or other document supporting the sale indicate
that the vendor is providing free maintenance for the life of the vehicle?
Yes
No
▪ If the contract, invoice, or other documentation does not indicate that the vendor is
providing the free maintenance for the life of the vehicle, does the vendor owe use tax
on the cost of the items provided to their customers free-of-charge?
Yes
No
[58) REMOTE SELLER NOTIFICATION. Many states have recently enacted statutes
that require unregistered remote sellers to notify the purchaser that they are not

registered to collect their state’s tax and to periodically provide a list of their in-state
customers to the state.
▪ Has your state enacted ‘Remote Seller Notification’ legislation:

Yes

No

▪ If YES, is specific wording required on the invoice to the customer or just a general
statement?
Specific wording
General statement
▪ If specific wording is required on the invoice, what must it contain to be within the
statute’s notification requirements? ____
▪ Are remote unregistered sellers required to providing [sic] a list of purchasers on an
annual or other periodic basis to your state?
Yes
No

DEPARTMENT’S RESPONSE:
The Department cannot approve publications other than those issued by the Department of
Revenue. However, we hope the following information will provide sufficient guidance to answer your
questions and update our answers to last year’s survey questions.
Real Estate Transfer Tax Law
Transfers of title to real estate located in Illinois are subject to the provisions of the Real Estate
Transfer Tax Law. 35 ILCS 200/31 et seq. The full actual consideration for a transfer or aggregated
transfers shall be stated in the transfer declaration. The full actual consideration is the total sale price
or amount actually paid (or required to be paid) for the real estate or beneficial interest in real
property, whether paid in money or otherwise, including personal property, real property, services, or
other item of value. See 86 Ill. Adm. Code 120.20. Although the full actual consideration is stated in
the transfer declaration, the tax is based on the net consideration after allowed deductions. A
deduction is allowed for the amount of personal property transferred to the transferee. See Section
120.20(c) for a list of deductions.
Discounts, Tips and Gratuities
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 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 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
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 from any source for that discount, only the (discounted) amount received by
the seller is taxable. For example, if a retailer sells an item for $10 and the purchaser provides the
retailer with a $1 in-store coupon for which the retailer receives no reimbursement from the
manufacturer of the item or any other source, the retailer’s gross receipts of $9 are subject to
Retailers' Occupation Tax. See 86 Ill. Adm. Code 130.2125(b)(1).
When a retailer receives full or partial coupon reimbursement (from a manufacturer, distributor
or any other source), the retailer incurs Retailers' Occupation Tax liability on the receipts received

from the purchaser and the amount of any coupon reimbursement. For example, if a retailer lists an
item for sale for $15 and the purchaser provides the retailer with a $5 manufacturer’s coupon for
which the retailer receives full reimbursement from the manufacturer of the item, the retailer’s gross
receipts are the $10 received from the customer and the $5 received from the manufacturer for a total
of $15 that is subject to Retailers' Occupation Tax. See 86 Ill. Adm. Code 130.2125(b)(2).
When a retailer issues a coupon to a purchaser which entitles the purchaser to a free item
conditioned on the purchase of a separate item (two-for-one, buy one get one free, etc.), the retailer's
gross receipts are measured only by the amount actually received from the purchaser for both items.
Thus, tax is only incurred on the amount actually received from the purchaser. The retailer does not
incur tax based upon the value of the free item received because technically the item was not free
and no gift was intended. The retailer was simply offering a special price for both items sold.
Likewise, if a retailer provides a customer with a card, coupon or other certificate later to be
used to reduce (“discount”) the purchase price of an item or items and the retailer is not to be
reimbursed for that discount from a manufacturer or any other source, the amount representing that
discount would not be subject to Retailers’ Occupation Tax liability. See in general 86 Ill. Adm. Code
130.2125(b)(1).
When property is purchased and then given away in Illinois, the donor has made a taxable use
of the property by making such gift. Therefore, it is the donor of the gift who is deemed the end user
of the property and who is subject to the Use Tax, rather than the donee. See 86 Ill. Adm. Code
150.305(c) and see also 86 Ill. Adm. Code 130.2125(c) concerning “Gift Situations.” The donor may
satisfy this Use Tax obligation either by paying tax to his supplier or by self-assessing Use Tax and
paying directly to the Department as discussed above.
The proceeds of mandatory service charges separately stated on customers' bills for the
purchase and consumption of food and beverages purchased at retail from a retailer are exempt from
tax to the extent that the proceeds of the service charge are in fact turned over as tips or as a
substitute for tips to the employees who participate directly in preparing, serving, hosting or cleaning
up the food or beverage function with respect to which the service charge is imposed. This procedure
is required by 35 ILCS 120/2-5(15).
Specifically, Section 130.2145(d) states as follows:
“Mandatory gratuities are not included in the taxable receipts of persons operating
restaurants, hotels and other places of business which come within the Act, if such
mandatory gratuity is added to banquet or dinner checks in the form of a percentage of
the total bill, or as a flat rate, to the extent that the proceeds of the service charge are in
fact turned over as tips or as a substitute for tips to the employees who participate
directly in preparing, serving, hosting or cleaning up the food or beverage function with
respect to which the service charge is imposed. (Section 2-5(15) of the Act) If any part
of the service charges are used to fund or pay wages, labor costs, employee benefits or
employer costs of doing business, that part of the service charge is includable in gross
receipts.
Therefore if the employer separately states the mandatory gratuity charge, and if the entire
gratuity is distributed to the servers or other employees who participated directly in serving, preparing,
hosting, or cleaning up the food or beverage function with respect to which the mandatory gratuity is
charged, the gratuity is not subject to Retailers' Occupation Tax. However, if the employer retains
and uses the entire mandatory service charge for any other use, including paying employee wages,
the mandatory gratuity/service charge is subject to tax.

Research and Development
Illinois does not have an explicit research and development exemption in the Retailers’
Occupation Tax Act and Use Tax Act. However, Manufacturer's Purchase Credit earned on the
purchase of manufacturing machinery and equipment can be used to satisfy any State taxes incurred
on the purchase of production related tangible personal property used or consumed by a
manufacturer or graphic arts producer in research and development.
When a manufacturer purchases manufacturing machinery and equipment, the State of Illinois
provides a Manufacturer's Purchase Credit (MPC) in addition to the exemption for manufacturing
machinery and equipment. See 86 Ill. Adm. Code 130.331. A purchaser of manufacturing machinery
and equipment that is exempt under the manufacturing machinery and equipment exemption also
earns MPC in an amount equal to a fixed percentage of the tax which would have been incurred
under the Use Tax or Service Use Tax. 35 ILCS 105/3-85; 35 ILCS 110/3-70.
In addition, MPC may also be used to satisfy Use Tax or Service Use Tax liability that is
incurred on the purchase of production related tangible personal property that does not qualify for the
manufacturing machinery and equipment exemption. The amount of MPC that can be applied to a
purchase of production related tangible personal property is limited to the State rate of tax incurred on
that property (6.25%). MPC cannot be used to satisfy any local taxes incurred on the purchase of
production related tangible personal property.
"Production related tangible personal property" includes all tangible personal property used or
consumed in a production related process by a manufacturer in a manufacturing facility in which a
manufacturing process described in Section 2-45 of the Retailers' Occupation Tax Act takes place,
and all tangible personal property used or consumed by a manufacturer or graphic arts producer in
research and development regardless of use within or without a manufacturing or graphic arts
production facility. See 35 ILCS 105/3-85.
Maintenance Agreements
The taxation of maintenance agreements is discussed in subsection (b)(3) of Section 140.301
of the Department’s administrative rules under the Service Occupation Tax Act. See 86 Ill. Adm.
Code Sec. 140.301(b)(3). The taxability of agreements for the repair or maintenance of tangible
personal property depends upon whether charges for the agreements are included in the selling price
of the tangible personal property. If the charges for the agreements are included in the selling price
of the tangible personal property, those charges are part of the gross receipts of the retail transaction
and are subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed. A manufacturer’s warranty that is provided without
additional cost to a purchaser of a new item is an example of an agreement that is included in the
selling price of the tangible personal property.
When a retailer, after a sale of tangible personal property, subsequently transfers to a
customer an item free of charge that the retailer is not contractually obligated to provide pursuant to
the terms of the sale, the retailer has made a taxable use of the property by making such gift.
Therefore, it is the donor of the gift who is deemed the end user of the property and who is subject to
the Use Tax, rather than the donee. See 86 Ill. Adm. Code 150.305(c) and see also 86 Ill. Adm.
Code 130.2125(c) concerning “Gift Situations.” The donor may satisfy this Use Tax obligation either
by paying tax to his supplier or by self-assessing Use Tax and paying directly to the Department as
discussed above.

Remote Seller Notification
The State of Illinois does not have a remote seller notification law. However, the State recently
enacted a law that requires remote sellers to collect Use Tax in certain situations. See P.A. 96-1544.
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