How do Illinois sales and service taxes apply to foodservice arrangements with exempt hospitals and nursing homes?

Plain-English summary

A foodservice company described eight hypothetical arrangements involving agency versus independent-contractor status, company- versus client-supplied labor, per-patient rates versus expense reimbursement, and exempt versus for-profit healthcare customers. IDOR said it could not determine the invoices' tax treatment without the contracts and clearer facts about the parties' legal relationships.

The GIL provided these general rules:

• A genuine sale for resale is not taxable when supported by an active and properly completed resale certificate under Rules 130.210, 130.1405, and 130.1415.
• A nonprofit hospital that is exclusively charitable and holds an Illinois exemption “E” number can operate a dining facility without tax when it primarily benefits patients, visitors, employees, volunteers, and attending doctors and is not open to the public. The same framework applies to qualifying nonprofit nursing homes under Rule 130.2005(b)(1).
• Nonprofits that are not exclusively charitable, religious, or educational remain liable for Retailers' Occupation Tax on retail sales.
• A hospital acting as a serviceman may owe Service Occupation Tax on property transferred with service, using one of the methods described in Rules 140.106, 140.108, and 140.109.
• Property transferred to residents whose care is paid directly by a governmental body can be exempt with required documentation under Rule 130.2080; property transferred to non-government-funded patients is taxable.

What this means for you

Healthcare foodservice contractors

Contract structure and documentation control. “Exempt customer” does not answer who buys the food and supplies, who transfers them, or whether the transaction is a resale or service.

Hospitals and nursing homes

Maintain the E number, government-purchaser documentation, and resale certificates that support each claimed exemption.

Common questions

Did IDOR decide the eight scenarios? No. The facts and contracts were insufficient.

Is every nonprofit healthcare facility exempt? No. The GIL focused on qualifying exclusively charitable facilities with an E number.

Are all patient-related transfers exempt? No. The government-funded and non-government-funded portions can receive different treatment.

Citations and references

• 86 Ill. Adm. Code 130.210, 130.1405, 130.1415, 130.2005, and 130.2080
• 86 Ill. Adm. Code 140.106, 140.108, and 140.109

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0010.pdf

Original ruling text

ST-14-0010-GIL 03/10/2014 EXEMPT ORGANIZATIONS
This letter discusses the rules regarding sales to exempt purchasers and certificates of resale. See 86 Ill. Adm.
Code 130.210, 86 Ill. Adm. Code 130.1415, and 86 Ill. Adm. Code 130.2005

March 10, 2014

Dear Xxxxx:
This letter is in response to your letter dated August 12, 2013, 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:
COMPANY (COMPANY) is seeking sales tax guidance on behalf of our client. We are
requesting the Department to issue a General Information Letter based on the following
facts and circumstances.
Facts:
Our client is a foodservice company providing food, nutrition and dining services to
hospitals, healthcare and senior living facilities. In providing these services sometimes
the company is acting as an independent contractor and sometimes they are acting as
an agent for the client. Some of the clients are tax exempt entities and some are for
profit organizations. For some of the contracts the foodservice company supplies the
hourly labor to fulfill these services and other times the hourly labor is supplied by the
client. Finally, some of the billings from the foodservice company to the client are based
on a per patient/resident day rate using a midnight census. Other billings from the
foodservice company to the client are based on a negotiated fee plus reimbursement of
all purchases paid by the foodservice company for payroll, food and supplies.
Issues:
Our client is requesting a ruling on the taxability of the invoices involved in providing
these services based on the following scenarios.

The foodservice company is acting as an independent contractor, the foodservice
company supplies the hourly labor, charges from the foodservice company to the
client are based on a per patient/resident day rate and the client is an exempt
entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the foodservice
company supplies the hourly labor, charges to the client are based on a per
patient/resident day rate and the client is a for profit entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the client
supplies the hourly labor, charges to the client are based on a per
patient/resident day rate and the client is an exempt entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the client
supplies the hourly labor, charges to the client are based on a per
patient/resident day rate and the client is a for profit entity.

1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the foodservice
company supplies the hourly labor, charges to the client are based on a
negotiated fee plus reimbursement of all expenses paid by the foodservice
company and the client is an exempt entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the foodservice
company supplies the hourly labor, charges to the client are based on a
negotiated fee plus reimbursement of all expenses and the client is a for profit
entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice Company Is acting as an independent contractor, the client
supplies the hourly labor, charges to the client are based on a negotiated fee plus
reimbursement of all expenses and the client is an exempt entity.
1)
2)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?

3)
4)
5)

Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

The foodservice company is acting as an independent contractor, the client
supplies the hourly labor, charges to the client are based on a negotiated fee plus
reimbursement of all expenses and the client is a for profit entity.
1)
2)
3)
4)
5)

Are invoices from the food vendor to the contractor (foodservice company)
taxable or exempt?
Are invoices from the food vendor directly to the client taxable or exempt?
Are invoices for supply purchases from the supplier to the foodservice company
taxable or exempt?
Are invoices for supply purchases from the supplier directly to the client taxable
or exempt?
Does the taxability change if the foodservice company is acting as an agent of
the client instead of acting as an independent contractor?

Thank you for your cooperation in this matter. Please direct your response or any
questions you may have to the undersigned.
DEPARTMENT’S RESPONSE:
Unless an exemption applies, the Illinois Retailers' Occupation Tax (ROT) 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.
Your letter posits several questions based on eight hypothetical scenarios. The Department
does not respond to hypothetical questions. We cannot address many of the issues you have
inquired about without reviewing contracts and other pertinent documents. Furthermore, we do not
have specific enough information regarding the legal relationships between the parties and the
activities of the parties, to determine who incurs tax liability and the nature of that liability. We have
included general guidance and references to regulations and case law, which we hope you find
helpful. Since we are unable to ascertain the exact nature of the legal relationship between your
client and its customers, we can provide only general information.
One of the scenarios your letter mentions is a sale for resale. A transaction is not taxable if the
entity you are selling to presents to the seller an active certificate for resale and certifies that the sale
is for resale. See 86 Ill. Adm. Code 130.210 and 86 Ill. Adm. Code 130.1405. See 86 Ill. Adm. Code
130.210 and 130.1415 for criteria for sales of tangible personal property for resale.

Many
of
your
questions
refer
to
transactions
with
exempt
entities.
Under Subpart (b)(1)(A) of 86 Ill. Adm. Code 130.2005, nonprofit hospitals that qualify as exclusively
charitable institutions and that have obtained an exemption identification "E" number from the
Department are not taxable on their operation of restaurant facilities which are conducted primarily for
the benefit of the hospital's employees, and which are not open to the public. The Department has
determined that a nonprofit hospital dining facility is not considered to be open to the public if the
facility is restricted to patients and their visitors, hospital employees (including staff doctors),
volunteer workers in the hospital and doctors attending patients in the hospital. Section
130.2005(b)(1)(C) allows the same distinctions to apply to nonprofit nursing homes when they qualify
as exclusively charitable institutions. Please note that nonprofit entities which are not exclusively
charitable, religious or educational organizations are liable for ROT when selling tangible personal
property at retail.
Hospitals often act as servicemen and may be subject to Service Occupation Tax. This would
impact your liability when you sell to the hospital. It is not clear from your letter whether the hospital
is subject to the Service Occupation Tax Act. Under the Service Occupation Tax Act, servicemen are
taxed on tangible personal property transferred as an incident of sales of service. 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 the cost price if they are registered de minimis servicemen; or, (4)
Use Tax on the 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. See 86 Ill. Adm. Code 140.106.
See also 86 Ill. Adm. Code 140.108 and 86 Ill. Adm. Code 140.109.
To the extent that a nursing home or hospital transfers tangible personal property incident to
service to residents whose care is being paid for directly by a governmental body, the facility is
exempt from the Service Occupation Tax, provided that it obtains the required documentation from
the government purchaser. Please see 86 Ill. Adm. Code 130.2080. This is because no tax is
imposed upon the purchase of tangible personal property by governmental bodies. If, however, the
facility is not completely 100% government funded, its tax liability is handled differently. Purchases it
makes that will be transferred to government-funded patients remain tax-exempt as governmental
purchases. Property transferred to non-government funded patients, however, is taxable.
You mention that sometimes contracts are based on negotiated rates and reimbursement of
expenses. We suggest that you refer to Chet’s Vending Service, Inc. v. Department of Revenue, 71
Ill.2d 38 (1978), to determine what may be included in gross receipts. In Chet’s Vending Service, the
Illinois Supreme Court ruled that subsidies paid by an employer to a caterer who catered food and
beverages through cafeterias or automatic vending machines located on the employer's industrial site
were not taxable as gross receipts under the Retailers' Occupation Tax Act. See Chet’s Vending
Service, Inc., 71 Ill. 2d at 43. Again, we do not have enough information to provide specific
responses to your questions. Under any of these scenarios, please take care in properly
documenting tax-exempt purchases whether using certificates of resale or “E” numbers. Resale
certificates must be completed properly. If record keeping is not done correctly, you could be subject
to additional liability, including penalties and interest.
I hope this information is helpful. You may wish to review our regulations. 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,

Cara Bishop
Associate Counsel

CB: