How do Illinois Service Occupation Tax rules apply to custom-printed loyalty cards stored in Illinois and later drop-shipped nationwide?

Plain-English summary

A printer produced restaurant loyalty cards in Illinois, sent them to an Illinois subcontractor, invoiced when ownership changed, stored the finished cards, and later shipped them nationwide. Illinois did not directly resolve the requester's four transaction-specific questions.

The GIL instead explained retail tax, graphic-arts, serviceman, subcontractor, resale, and interstate-commerce rules.

Custom printing versus stock products

Items that were neither stock nor standard and would not be sold to another customer for substantially the same price generally were not subject to Retailers' Occupation Tax when sold. Special-order or custom print items generally fell under Service Occupation Tax.

The Department did not expressly decide whether these loyalty cards met that test.

Four serviceman methods

When tangible property was transferred incident to service, a serviceman generally used one of four methods:

1. Tax on the separately stated selling price of the property.
2. Tax on 50% of the entire service bill.
3. Service Occupation Tax on cost price for a registered de minimis serviceman.
4. Use Tax on cost price for an unregistered de minimis serviceman not otherwise required to register.

For the first two methods, the tax base could not be lower than the serviceman's cost price. The 2011 GIL described de minimis status as transferred-property cost below 35% of annual service gross receipts, or 75% for pharmacists and graphic-arts producers.

Subcontracted services

In a multi-service transaction, the primary serviceman's cost price was the secondary serviceman's separately stated property price, or presumptively 50% of the secondary serviceman's total charge when no property price was stated.

When both were registered, the primary serviceman gave the secondary serviceman a resale certificate and later handled Service Occupation and corresponding Service Use Tax under the applicable method.

Interstate and resale issues remained fact-dependent

A serviceman owing Service Occupation Tax could claim available exemptions, including interstate commerce, and accept qualifying exemption certificates. The GIL also allowed specified de minimis servicemen incurring Use Tax to claim the interstate exemption.

The response did not decide when the stored cards entered interstate commerce, whether the corporate customer resold them to franchisees, or whether any gift-card exemption applied.

What this means for you

Printers using fulfillment vendors

Document whether the product is custom, when property is transferred, each subcontractor's registration and property charge, the shipment destination, and any resale or interstate-exemption certificate.

Restaurant and franchise systems

The corporate/franchisee relationship cannot be assumed from this GIL. Resale treatment requires facts and documentation beyond the printer's invoice destination.

Common questions

Q: Did Illinois say all cards were taxable when ownership changed in Illinois?
A: No. The GIL did not answer that question directly.

Q: Did it approve an exemption for gift or loyalty cards?
A: No.

Q: Could an interstate-commerce exemption apply?
A: Potentially, when the applicable serviceman and exemption requirements were met.

Citations and references

• 35 ILCS 105/3 and 86 Ill. Adm. Code 150.101 and 150.130 — Use Tax and purchaser responsibility.
• 86 Ill. Adm. Code 130.1995(b) and 130.2000 — custom printing and graphic arts.
• 86 Ill. Adm. Code 140.101 through 140.109 — Service Occupation Tax methods and de minimis rules.
• 86 Ill. Adm. Code 140.301(a) — primary and secondary servicemen.
• 86 Ill. Adm. Code 130.605 — interstate-commerce exemption.

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-11-0072.pdf

Original ruling text

ST 11-0072-GIL 09/01/2011 SERVICE OCCUPATION TAX
The Service Occupation Tax is a tax imposed upon servicemen engaged in the business of
making sales of service in this State, based on the tangible personal property transferred
incident to sales of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)

September 1, 2011

Dear Xxxxx:
This letter is in response to your letter dated July 7, 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:
My company currently has nexus in the state of IL. We have a transaction that needs
an official ruling on for [sic] sales tax. I have contacted both the online support and
phone bank and was directed to your office.
Below is the scenario:
Our IL location makes loyalty cards for a restaurant. We then ship them to an outsource
vendor located in IL. As soon as the outsource vendor has completed the cards, we
invoice the customer. The cards become customer owned finished goods. Ownership
changes at this point. No Shipping occurs. Time goes by (a week in this example), the
restaurant sends us a number of location [sic] to ship the cards to. The cards are
shipped all over the country and we invoice the corporate office of the restaurant for a
Drop Ship Fee and for Freight.
We are invoicing corporate office of the restaurant but shipping to the Franchisee. I
believe corporate then recoups their money from each franchisee.
My questions are:

1.)

Do we charge IL sales tax on all the cards since ownership changes hands in IL
even though we will eventually drop ship them into other states?

2.)

Do we charge sales tax on the drop ship fee and freight once we actually ship the
cards?

3.)

Is the restaurant reselling to the Franchisee? What is our legal obligation to
investigate the Corporate/Franchisee relationship to determine if they are
reselling? For example, we sell to another company who [sic] stores are not
independent corporations. However, we also sell to a company where the
Franchisees are independent corporations.

4.)

Are there any exemptions in IL where a gift card is considered reselling an item?

DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax Act
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. The tax is measured by the seller's gross receipts from retail sales made in the
course of such business. 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 the retailer does not
collect the Use Tax from the purchaser for remittance to the Department, the purchaser is responsible
for remitting the Use Tax directly to the Department. See 86 Ill. Adm. Code 150.130.
Graphic Arts
For your information, please refer to 86 Ill. Adm. Code 130.2000, which is the regulation for
"Persons Engaged in the Printing, Graphic Arts or Related Occupations, and Their Suppliers." Items
that would not be considered stock or standard items and would not be sold to someone other than
the purchaser for substantially the same price would not be subject to the Retailers’ Occupation Tax
when sold, but would be subject to the Service Occupation Tax. Special order or custom print items
are generally not considered stock or standard items and are generally not sold to someone other
than the purchaser for substantially the same price. Therefore special order or custom print items are
generally subject to the Service Occupation Tax. 86 Ill. Adm. Code 130.1995(b).
Service Occupation Tax Act
When a company contracts to print custom printed items, a special order printing situation may
exist. Illinois Service Occupation and Use Taxes do not apply to sales of service that do not involve
the transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information, see 86 Ill.
Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Services that involve the transfer of tangible personal property (such as, for example, written reports,

other tangible media and training manuals) incident to a sale of service may be subject to either
Service Occupation Tax liability or Use Tax liability.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm.
Code 140.101. The purchase of tangible personal property that is transferred to the service customer
may result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending
upon his activities. The serviceman’s liability may be calculated in one of four ways: (1) separately
stated selling price of tangible personal property transferred incident to service; (2) 50% of the
serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or (4) Use Tax on the serviceman's cost price if the
serviceman is a de minimis serviceman and is not otherwise required to be registered under
Section 2a of the Retailers' Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of the sale of service. The tax is then calculated on the separately-stated
selling price of the tangible personal property transferred. If the servicemen do not separately state
the selling price of the tangible personal property transferred, they must use 50% of the entire bill to
the service customer as the tax base. Both of the above methods provide that in no event may the
tax base be less than the servicemen's cost price of the tangible personal property transferred. See
86 Ill. Adm. Code 140.106.
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. See 86 Ill. Adm.
Code 140.109. Servicemen may qualify as de minimis if they determine that the annual aggregate
cost price of tangible personal property transferred as an incident of the sale of service is less than
35% of the total annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphics arts production). Servicemen no longer have the option of determining
whether they are de minimis using a transaction by transaction basis. Registered de minimis
servicemen are authorized to pay Service Occupation Tax (which includes local taxes) based upon
their cost price of tangible personal property transferred incident to the sale of service. Such
servicemen should give suppliers resale certificates and remit Service Occupation Tax using the
Service Occupation Tax rates for their locations. Such servicemen also collect a corresponding
amount of Service Use Tax from their customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess and remit Use Tax to the Department. The servicemen are
considered to be the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a "tax" from the service customers. See 86 Ill. Adm.
Code 140.108.
Multi-service situations exist where a primary serviceman subcontracts work to a secondary
serviceman. In multi-service situations, a primary serviceman’s cost price is determined either by the
separately stated selling price of the tangible personal property transferred from a secondary
serviceman, or if the secondary serviceman does not separately state the cost of goods, it is

presumed that the primary serviceman’s cost price is 50% of the secondary serviceman’s total
charge. See 86 Ill. Adm. Code 140.301(a).
When both primary servicemen and secondary servicemen are registered, primary servicemen
provide secondary servicemen with a Certificate of Resale. A primary serviceman would then incur
Service Occupation Tax based upon the separately stated selling price of the property, 50% of the bill
to the service customers or as outlined in method three described above. Upon selling their product,
servicemen are required to collect the corresponding Service Use Tax from their customers.
Please note that if an unregistered de minimis serviceman subcontracts service work to
another unregistered de minimis secondary serviceman, the primary serviceman does not incur a Use
Tax liability if the secondary serviceman (i) has paid or will pay Use Tax on his or her cost price of
any tangible personal property transferred to the primary serviceman and (ii) certifies that fact in
writing to the primary serviceman. This certification option is only available in multi-service situations
when both the primary and secondary servicemen are unregistered and de minimis. If the primary
serviceman is registered and the secondary serviceman is unregistered it will not work.
Interstate Commerce Exemption
A serviceman who incurs SOT on his or her selling price is authorized to claim any exemption
provided for in the Service Occupation Tax Act. For example, he or she may claim the interstate
commerce exemption or accept various exemption certificates from his or her customers (e.g.,
Certificates of Resale, exemption identification numbers). 86 Ill. Adm. Code 140.106(d). A de
minimis serviceman incurring Service Occupation Tax liability on his or her cost price also is
authorized to claim any of the various exemptions provided for in the Service Occupation Tax Act.
For example, he or she may claim the interstate commerce exemption or accept various exemption
certificates from his or her customers (e.g., he or she can accept Certificates of Resale). 86 Ill. Adm.
Code 140.109 (a)(3). The Department has also determined that a de minimis serviceman incurring a
Use Tax liability may claim any of the exemptions, except as provided in subsection (a)(2)(C),
authorized under the Service Occupation Tax Act. De minimis servicemen incurring Use Tax liability
may likewise claim the interstate commerce exemption, which is more fully explained at 86 Ill. Adm.
Code 130.605. 86 Ill. Adm. Code 140.108(a)(2)(B).
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