Were custom-printed magnetic hotel, casino, loyalty, and gift cards a taxable sale of property or a sale of service in Illinois?

Plain-English summary

A company manufactured custom-printed magnetic cards for use as hotel room keys, casino play cards, loyalty cards, and gift cards. It asked whether the custom printing made the transaction a nontaxable service rather than a taxable sale of tangible property.

IDOR characterized the transaction as a sale of service, but that did not make the physical cards tax-free. The card itself and its custom printing were tangible personal property transferred incident to the service, so the seller had to account for tax using the method applicable to its business.

The GIL described four methods: Service Occupation Tax on the separately stated selling price of the transferred property; Service Occupation Tax using 50% of the entire bill; Service Occupation Tax on cost for a registered de minimis serviceman; or Use Tax on cost for a qualifying unregistered de minimis serviceman.

Under the first two methods, the tax base could not be less than the seller's cost of the transferred property. The historical de minimis test generally compared annual property cost with total annual service receipts, rather than testing each transaction separately.

Common questions

Did custom printing make the physical cards nontaxable? No. IDOR said the card and custom printing were taxable property transferred incident to a sale of service.

Was the entire bill always the tax base? No. The applicable method could use a separately stated property price, 50% of the bill, or a qualifying serviceman's cost.

Could an unregistered de minimis serviceman collect tax from customers? No. Under the fourth method, the serviceman was the end user and paid or self-assessed Use Tax on cost.

Citations and references

• 86 Ill. Adm. Code 140.101 through 140.109
• 86 Ill. Adm. Code 130.101 and 150.101

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-12-0034.pdf

Original ruling text

ST 12-0034-GIL 07/20/2012 SERVICE OCCUPATION TAX
This letter concerns tax imposed on tangible personal property transferred incident to
sales of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)
July 20, 2012
Dear:
This letter is in response to your letter dated May 22, 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:
Please provide information regarding the sales/use tax responsibility of a company
which manufactures magnetic cards similar to credit cards.
These cards are manufactured and sold with varying purposes:
Hotel room access key cards
Casino gamblers (gamblers pay the casino for certain amount of money to use in
the casino; the cards are swiped as the gambler plays)
Loyalty rewards (frequent users; purchases are tracked by swiping the cards and
rewards points are built up; usually this is a restaurant chain)
Gift cards (certain retail chains provide gift cards to be sold at outlets such as
STORE or major grocery stores)
In each case, the cards are custom printed with the information specific to the hotel,
casino, restaurant, or retailer; rendering them unusable by any other entity or for any
other purpose. Typically, room access cards and casino cards are returned by the user
to the establishment when the guest (or gambler) leaves, but loyalty reward cards and
gift cards are kept by the retail customer until redeemed.
Please respond with information regarding the sales/use tax requirements for providing
these cards. Is it a service, and therefore not a taxable service (because of the custom
print issue), or a sale of taxable tangible personal property?
Your assistance is most appreciated.

ST 12-0034-GIL
July 20, 2012
Page 2
DEPARTMENT’S RESPONSE:
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. 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 serviceman depending upon his activities. For your
general information see of 86 Ill. Adm. Code 140.101 through 140.109 regarding sales of service and
Service Occupation Tax.
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) Service Occupation
Tax on separately stated selling price of tangible personal property transferred incident to service; (2)
Service Occupation Tax 50% of the servicemen's entire bill; (3) Service Occupation Tax on the
servicemen's cost price if the servicemen are registered de minimis servicemen; or (4) Use Tax on
the servicemen's cost price if the servicemen are de minimis and are 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. Such de
minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their suppliers are

ST 12-0034-GIL
July 20, 2012
Page 3
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.
In general, a manufacturer who manufactures and sells custom-printed magnetic cards is engaged in
a sale of service. Any tangible personal property transferred incident to that sale of service (such as
the card itself and any custom printing added) is subject to tax. The taxpayer must use one of the
methods itemized above, depending on the taxpayers specific situation, to pay the tax.
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.]
Sincerely,

Samuel J. Moore
Associate Counsel