How did Illinois tax an optometrist's government-paid and privately paid medical-appliance charges, including shipping above actual cost?

Plain-English summary

An ophthalmology office asked how government and private payments, fixed copays, and shipping charges affected tax on medical appliances transferred with optometry services.

IDOR said direct Medicare and Medicaid payments could be exempt as governmental sales when documented with an active E number. Patient or private-insurance portions remained taxable. The response did not expressly decide whether the separately named State plan qualified.

The GIL described four serviceman methods and said most optometrists were registered de minimis servicemen, paying Service Occupation Tax on the cost of transferred property. For a partly exempt transaction, the cost portion corresponding to the exempt payment was outside the tax base and the remaining portion was taxable.

Delivery charges were excluded only when separately agreed from the property price and limited to actual transportation cost. A separate invoice line alone did not prove the agreement; a separate contract or genuine pickup-versus-delivery option could. Any amount above delivery cost was taxable.

The response did not choose a medical-appliance rate or decide whether a fixed copay should be treated as tax-included.

Common questions

Were direct Medicare and Medicaid payments exempt? They could be with proper E-number documentation.

Were patient and private-insurance portions exempt? No.

Was shipping above actual cost taxable? Yes.

Did IDOR answer the fixed-copay question? No.

Citations and references

• 86 Ill. Adm. Code 130.2080(a), 130.410, and 130.415(d)
• 86 Ill. Adm. Code 140.101 and 140.106 through 140.109
• Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009)

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-11-0110.pdf

Original ruling text

ST 11-0110-GIL 12/29/2011 DELIVERY CHARGES
Charges designated as delivery or transportation charges are not taxable if it can be shown
that they are both agreed to separately from the selling price of the tangible personal property
which is sold and that such charges are actually reflective of the costs of shipping. See 86 Ill.
Adm. Code 130.415. (This is a GIL.)

December 29, 2011

Dear Xxxxx:
This letter is in response to your letter dated July 12, 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:
We have questions concerning sales tax law that we are asking for further clarification.
An agent with the Illinois Department of Revenue said that we could request an answer
from your department since they were unable to give us an answer and support the
decision with information from the Department’s website. Our question relates to an
ophthalmology office.
When applying ST10-0118-GIL 12/20/2010 Medical Appliances, we understand the
following:
When health care professionals such as optometrists render service, they
are not subject to Retailers' Occupation Tax liability. They are, however,
subject to liability under the Service Occupation Tax Act to the extent they
transfer tangible personal property incident to their rendering service.
When applying ST08-00036-GIL 03/21/2008 Medical Appliances, we understand the
following:
Sales made to Medicaid and Medicare are exempt from tax as sales to a
government body so long as the exemption is properly documented

through provision of an active exemption identification number. While no
tax may be due on payments made directly to vendors by Medicare,
Medicaid, or the Illinois Department of Healthcare and Family Services,
tax is due upon any portions of bills paid by individuals or private
insurance companies not covered by Medicare, Medicaid, or the Illinois
Department of Healthcare and Family Services. This means, for example,
when Medicare directly pays 80% of the medical bill and the remaining
20% is billed to the patient or his insurance company, assuming proper
documentation of the exemption, the 80% is tax exempt as a
governmental payment while the 20% is taxable. It is important to note
that payments will only be exempt from tax when they are paid directly by
the government agency. It is not enough that a payment to the vendor is
made by a patient or insurance and reimbursed by the government
agency.
Our questions are as follows:
1.

Are qualifying taxable sales, which are provided to patients covered by
COMPANY State of Illinois, treated for sales tax; the same way sales to Medicaid
and Medicare patients are?

2.

In addition, are the excess shipping and handling charges the over actual cost
taxable for Medicaid and Medicare patients?

3.

If the excess shipping and handling is taxable, which sales tax rate is applied
when the sales are related to qualifying medical appliances that are taxed at the
lower qualifying rate?

4.

When the patient’s taxable co-pay is a set exact fee, are the amounts received
assumed to have sales tax already included in that set amount or is the full
amount received subjected to sales tax? For example: If the patient’s co-pay
$20.00, is it assumed that the $20 represents sales and sales tax? Or is the sale
accounted for at $20 and the seller responsible to remit sales tax in addition to
the $20? Please keep in mind that the seller, by contact [sic], cannot receive
additional receipts and will not be paid the sales tax that should then be
assessed.

Enclosed are copies of the referenced Department responses.
Thank you for your clarification and assistance

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. Sales of services by optometrists are subject to
Service Occupation Tax, unless an exemption exists.

Sales to a governmental body are subject to tax unless the governmental body has an active
exemption identification "E" number. If an organization or governmental body does not have an "E"
number, then its purchases are subject to tax. Only sales to the organization or governmental body
holding the "E" number are exempt, not sales to individual members of the organization.
Accordingly, sales made to Medicare and Medicaid are exempt from tax as sales to a
governmental body so long as the exemption is properly documented through the use of an active
exemption identification number (“E” number). See 86 Ill. Adm. Code 130.2080(a). While no tax may
be due on payments made directly to vendors by Medicare or Medicaid, tax is due upon any portion
of the sale that is paid by individuals or private insurance companies not covered by Medicare and
Medicaid. For example, when Medicare directly pays 80% of the total sale and the remaining 20% of
the sale is paid by the patient or his insurance company, assuming proper documentation of the
exemption, the 80% is tax exempt as a sale to a governmental body while the 20% is taxable.
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. In any event, persons
making purchases from servicemen incur a corresponding Service Use Tax.
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. Persons making purchases from
this class of registered de minimis servicemen incur the corresponding Service Use Tax on their
purchases absent exemptions. The servicemen 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 tangible
personal 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 optometrists are registered de minimis servicemen because they are generally registered
under the Retailers’ Occupation Tax Act because they sell other kinds of tangible personal property.
(See the third method payment above.) These servicemen pay Service Occupation Tax to the
Department based upon the cost price of tangible personal property transferred incident to their sales
of service. If a portion of a sale of service by a registered de minimis serviceman is to an exempt
organization, such as a governmental entity with an E-number, that portion of the transaction is not
taxable. As a technical matter, that portion of the transaction that is not taxable represents the
portion of the cost price of the tangible personal property transferred incident to the sale of service
that is not subject to the Service Occupation Tax. Likewise, the remaining portion of the transaction
that is taxable represents the portion of the cost price of the tangible personal property transferred
incident to the sale of service that is subject to the Service Occupation Tax. However, unlike the
Retailers’ Occupation Tax, servicemen are not required to separately state the tax and many do not.
For this reason, it may appear that they are not collecting the tax when, in fact, they may be indirectly
collecting it from the individual or third party.
The Department’s regulation “Cost of Doing Business Not Deductible” 86 Ill. Adm. Code
130.410, provides, in part, that in computing Retailers' Occupation Tax liability, no deductions shall be
made by a taxpayer from gross receipts or selling prices on account of the cost of property sold, the
cost of incoming freight or transportation costs, or any other expenses whatsoever. Costs of doing
business are an element of the retailer’s gross receipts subject to tax even if separately stated on the
bill to the customer.
Note, if a seller delivers the tangible personal property to the buyer, and the seller and the
buyer agree upon the transportation or delivery charges separately from the selling price of the
tangible personal property which is sold, then the cost of the transportation or delivery service is not a
part of the "selling price" of the tangible personal property personal property which is sold, but instead
is a service charge, separately contracted for, and need not be included in the figure upon which the
seller computes his or her tax liability. See the Department’s regulation at 86 Ill. Adm. Code
130.415(d).
As noted in subsection (d) of Section 130.415, if the seller and the buyer agree upon the
transportation or delivery charges separately from the selling price of the tangible personal property
which is sold, then the cost of the transportation or delivery service is not a part of the "selling price"
of the tangible personal property personal property which is sold, but instead is a service charge,
separately contracted for, and need not be included in the figure upon which the seller computes his
Retailers' Occupation Tax liability.
A separate listing on an invoice of such charges is not sufficient to demonstrate a separate
agreement. The best evidence that transportation or delivery charges were agreed to separately and
apart from the selling price is a separate and distinct contract for transportation or delivery. However,
documentation which demonstrates that the purchaser had the option of taking delivery of the
property, at the seller's location, for the agreed purchase price, or having delivery made by the seller
for the agreed purchase price, plus an ascertained or ascertainable delivery charge, will suffice. As
stated in Section 130.415 of the Department’s regulations, if the charges for transportation or delivery
exceed the cost of delivery or transportation, the excess amount is subject to tax.

Please be aware, however, in light of a Supreme Court of Illinois case of Kean v. Wal-Mart
Stores, Inc., 235 Ill.2d 351, 919 N.E.2d 926 (2009) concerning the taxation of delivery charges, the
Department is considering amending Section 130.415.
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