Could a retailer satisfy Illinois's unconditional-repayment requirement for an erroneous-sales-tax credit claim with a credit memorandum instead of first paying cash?

Plain-English summary

A manufacturer believed it had paid sales tax in error to a pallet supplier. The supplier was willing to seek a credit from IDOR, but the parties wanted to avoid an immediate cash repayment before the State processed the claim.

IDOR explained that only the person that remitted the erroneous tax to the Department could claim the credit. That claimant also had to establish that it bore the tax burden by unconditionally repaying the customer from whom it had collected the tax. The requirement prevents the retailer from keeping both the customer-paid tax and the State credit.

Cash was not the only way to meet the requirement. IDOR said an unconditional promissory note or irrevocable credit memorandum could qualify if it gave the purchaser an instrument on which the purchaser could demand payment of the recovered tax when the claim was allowed.

The response explained this claims procedure; it did not determine that the pallet purchases themselves qualified for the exemption asserted in the request.

Common questions

Who could file the claim? Only the person that remitted the tax erroneously paid to IDOR.

Was an immediate cash refund required? Not necessarily. An unconditional note or irrevocable credit memorandum could satisfy the repayment requirement.

Why did repayment matter? It showed that the retailer would not be unjustly enriched.

Did this GIL rule that the pallets were exempt? No. The requester asserted an exemption, but IDOR's response addressed only the credit-claim and repayment procedure.

Citations and references

• 86 Ill. Adm. Code 130.1501
• 86 Ill. Adm. Code 130.2070 (asserted in the request; exemption not decided)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0028.pdf

Original ruling text

ST 12-0028-GIL 06/15/2012 CLAIMS FOR CREDIT
This letter discusses claims for credit. See 86 Ill. Adm. Code Sections 130.1501. (This is
a GIL.)
June 15, 2012
Dear:
This letter is in response to your letter received May 31, 2012, 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:
This letter pertains to a case of overpaid sales tax by a corrugated container
manufacturer, which paid sales tax on exempt items to a pallet supply company. After
reviewing purchases made by COMPANY1 from COMPANY2, Inc, we found these
items to be exempt from sales tax as per TITLE 86-PART 130-SECTION 130.2070.
The pallets contain the tangible personal property manufactured by COMANY1, and
upon shipment of the product, the pallets are transferred and retained by COMPANY1’s
customers. COMPANY2, Inc. has agreed to help recover these funds from the Illinois
Department of Revenue, but requested COMPANY1 completes [sic] the research and
filing needed to complete the task.
When requesting a credit, or refund of overpaid sales tax via form ST-1-X from the
state of Illinois, the company that collected the sales tax (COMPANY2, Inc.) must
‘unconditionally’ have paid back the entity which overpaid (COMPANY1).
Is an invoiced credit filed (Acct. Payable for COMPANY2, Acct. Rec. for COMPANY1)
equivalent in the eyes of the law to an actual cash refund? COMPANY1 would like to
minimize the effect of this clerical error on COMPANY2, Inc.’s cash flow by allowing
them time to retrieve the money from the State of Illinois before returning the cash to
COMPANY1.
I appreciated any attention given to this matter, and please feel free to contact me
directly with any questions.

DEPARTMENT’S RESPONSE:

ST 12-0028-GIL
June 15, 2012
Page 2

Claims for credit and refunds are available when a taxpayer shows that he or she paid tax to the
Department as a result of a mistake of fact or law. See 86 Ill. Adm. Code 130.1501. If a retailer
collects and remits to the Department tax on an item that should have been exempt as a sale for
resale or under some other exemption, the retailer may file a claim for credit. This is true even if a
valid Certificate of Resale or other exemption certificate is provided for items after the initial purchase
and after tax has been paid. Only the remitter of the tax erroneously paid to the Department is
authorized to obtain a credit. In order to obtain a credit, one must first demonstrate that he or she has
borne the burden of the tax erroneously paid. The Department cannot approve any claim for credit
unless the claimant clearly establishes that he or she has unconditionally repaid the amount of the tax
to the person from whom he has collected the tax.
The retailer will be considered to have satisfied the unconditional repayment requirement where it
provides its purchaser with an instrument upon which the purchaser can make a demand upon the
retailer/claimant for payment of the tax recovered if the claim is allowed. The retailer's provision of
unconditional promissory notes or irrevocable credit memoranda to its purchasers who paid tax in
error would satisfy this requirement. The purpose of requiring the retailer to make an unconditional
repayment to its purchasers is to prevent unjust enrichment on the part of the retailer. Therefore, in
order to establish that it was not unjustly enriched, the retailer filing a claim for credit must be able to
demonstrate that it gave unconditional promissory notes or irrevocable credit memoranda to its
purchasers who paid tax in error to the retailer.
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