What did Illinois's 2015 rules require of an online textbook retailer with employees in Illinois?

Plain-English summary

An out-of-state online textbook retailer operated white-label college bookstores, sold physical and digital books, and offered rentals and marketplace purchases. It had an Illinois salesperson and account manager but no Illinois inventory, retail store, or other property.

IDOR said the Illinois personnel made it appear that the retailer had to register and collect Use Tax. The activities might also create Retailers' Occupation Tax and local-tax liability, but the Department lacked enough detail to decide that question.

Under the 2015 Internet-sale sourcing rule described in the letter, IDOR presumed the retailer's predominant selling activities occurred outside Illinois. Such sales carried the 6.25% general Use Tax rate without local tax unless clear and convincing evidence placed the predominant selling activities in Illinois. Illinois inventory at sale or customer pickup at an Illinois business location were examples that could overcome the presumption.

The retailer had to add tax to the physical textbook's selling price and could not pay it instead of collecting it. A student's purchase was not exempt merely because the student attended an exempt school. A direct sale to an exempt organization required a valid E-number; a school buying books for resale should provide a resale certificate.

Downloaded books were intangible and not subject to Retailers' Occupation, Use, Service Occupation, or Service Use Tax, whether sold or rented. Downloaded canned software remained taxable under the cited software rules.

For physical textbook rentals structured as true leases, the lessor owed Use Tax on cost and rental receipts were not taxed. A nominal purchase option converted the arrangement into a conditional sale with taxable total receipts.

What this means for you

This is historical 2015 nexus, rate, and sourcing guidance. It illustrates how in-state personnel, fulfillment location, direct organizational purchases, product format, and rental terms affected different parts of an online textbook business, but its nexus and rate rules should not be assumed current.

Common questions

Did Illinois personnel create a collection duty? IDOR said they appeared to do so.

Were digital textbooks taxable? No, under the electronic-information treatment described.

Did a college's exemption cover a student's own purchase? No.

Citations and references

• 86 Ill. Adm. Code 150.201, 150.801, and 150.401.
• 35 ILCS 105/2(1.1) and (1.2).
• 86 Ill. Adm. Code 693.115(d)(3).
• 86 Ill. Adm. Code 130.1935, 130.2105(a)(3), and 130.2010(a).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0035-gil.pdf

Original ruling text

ST 15-0035 GIL 06/19/2015 NEXUS

A retailer maintaining a place of business in Illinois must collect tax from users in accordance
with the Retailers’ Occupation Tax Act and the Use Tax Act by adding the tax to the selling
price of tangible personal property, when sold for use. See 86 Ill. Adm. 150.401.

June 19, 2015

Dear Mr. XXXX:

This letter is in response to your letter dated, March 17, 2015, 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:

| am the CFO of COMPANY. (Illinois DOR# XXXX-XXXX; FEIN XX-XXXXXXX), an
online textbook retailer located in STATE 1. On DATE, | called your tax help line with
some questions | had related to sales and use tax collection and remittance. They were
very helpful and answered my questions. However, | was told that in order to get a
written response for our records | should send a letter directly to the Illinois Department
of Revenue at the above address which is the purpose of this letter.

Facts about the Company:

As mentioned above, COMPANY is an internet retailer selling textbooks via our website

XXXXXX.com. We primarily work with colleges and universities who wish to eliminate

their book [sic] and mortar bookstores and create a white-labeled online bookstore

where their students:

e Can log-on through their university credentials;

e Go to a webpage specifically tailored for them showing their courses and required
textbooks for those courses;

e Can choose in what form and from who they wish to buy their textbooks (physical
copy in new or used condition; digital textbooks; rental textbooks; purchase from an
online marketplace or direct from us or a publisher);

e Choose their method of payment (they can pay by credit card or using financial aid

vouchers) provided by the institution or other financial aid programs
Once the student chooses what textbook(s) to purchase, COMPANY:

e Transmits data and delivery instructions to our fulfillment partners to ensure the
textbooks are delivered to the student. Our fulfillment partners can be textbook
publishers, book rental and used textbooks companies, digital textbook providers
and marketplace sellers. In some cases, we fulfill textbooks directly from our own
inventory located in STATE 2.

e Creates a billing related to the order. If the student chooses to pay by credit card,
we bill the student directly. If the student wishes to pay through financial aid
vouchers, we bill and collect monies owed directly from the institution providing the
financial, usually the college and university.

Other general facts:

e We are located in STATE 1. All contracts are signed from the STATE 1 office by
myself or our CEO;

e We have a salesperson and account manager in Illinois. We have no textbooks,
retail locations or other property in the state of Illinois.

e We file tax, sales and use tax and withholding returns in Illinois.

Question 1:

| would like to Know what sales tax rate we should be charging Illinois consumers. The
tax representative | spoke with on the Illinois tax help line told me that we are only
obligated to collect and remit the state rate of 6.25% and the consumer would be
responsible for any local taxes. Can you answer two questions for me:

(1) Is COMPANY’S obligation to collect and remit only the state rate of 6.25%?
(2) Can we collect the state AND local rate and remit it to Illinois to relieve the consumer
of any additional payment obligations?

Questions 2:

Many of the institutions we deal with are either tax exempt themselves or provide
financial aid vouchers via programs which are tax exempt. We bill the institutions
directly for books purchased via financial aid voucher programs. Can you answer the
following questions for me as it relates to consumer purchases made via financial aid:

(1) In cases where the institutions are tax exempt and students purchase textbooks via
their own individual credit cards do we need to collect and remit sales tax. | assume
yes since they are making the purchases directly.

(2) In the cases where the institutions and/or financial aid programs are tax exempt and
students purchase textbooks via financial aid vouchers do we need to collect and
remit sales tax? Your representative told me that we are not obligated to collect and
remit any sales tax since we are billing tax exempt institutions.

| would appreciate if you could send me back a written response at:

NAME
ADDRESS

If you have any questions please feel free to call me at XXX-XXX-XXXX EXT XX.
DEPARTMENT’S RESPONSE:

Determinations regarding nexus are very fact specific and cannot be addressed in the context
of a General Information Letter. However, we can provide you with basic guidelines that may be used
to determine whether a seller would be considered “an Illinois retailer’ subject to Retailers’
Occupation Tax liability or "a retailer maintaining a place of business in Illinois" subject to Use Tax
collection duties from their Illinois customers.

An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. The Illinois
Retailer is then liable for Retailers’ Occupation Tax on gross receipts from sales and must collect the
corresponding Use Tax incurred by the purchasers. Our regulations were recently amended in
response to the Illinois Supreme Court’s decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.
The regulations specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois.

Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 III. Adm. Code 150.201. This
type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill. Adm.
Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the retailer's
Illinois customers even though the retailer does not incur any Retailers' Occupation Tax liability.

The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical
building. Under Illinois law, it also includes the presence of any agent or representative of the seller.
The representative need not be a sales representative. Any type of physical presence in the State of
Illinois, including the vendor’s delivery and installation of his product on a repetitive basis, will trigger
Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410,
(1996).

Another type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.

Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:

A. The retailer sells the same or substantially similar line of products as the person located in
this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and

B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).

These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.
2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), a
“click-thru nexus provision” enacted in 2011. However, new provisions became effective January 1,
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v.
Hamer, 998 N.E. 2d 54 (2013).

Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or
other consideration based upon the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing to the potential customers a
promotional code or other mechanism that allows the retailer to track purchases referred by such
persons.

Examples of mechanisms that allow the retailer to track purchases referred by such persons
include but are not limited to the use of a link on the person's Internet website, promotional codes
distributed through the person's hand-delivered or mailed material, and promotional codes distributed
by the person through radio or other broadcast media. These provisions apply only if the cumulative
gross receipts from sales of tangible personal property by the retailer to customers who are referred
to the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4
quarterly periods ending on the last day of March, June, September, and December. A retailer
meeting these requirements shall be presumed to be maintaining a place of business in Illinois but
may rebut this presumption by submitting proof that the referrals or other activities pursued within this
State by such persons were not sufficient to meet the nexus standards of the United States
Constitution during the preceding 4 quarterly periods. See ILCS 105/2(1.1).

Your letter mentions that you have a salesperson and account manager in Illinois. Based on
this information it would appear that you are required to be registered and collect Use Tax.
However, although this may be the case, the activities you describe in your letter may trigger
Retailers’ Occupation Tax liability, including local taxes. Without more detailed information, we are
unable to make this determination. We suggest you refer to our regulations on sourcing. See, for
example, 86 Ill. Adm. Code 693.115(d)(3). For sales over the internet, the Department will presume
that the retailer's predominant selling activities take place outside of this State. Therefore, no local
taxes will apply, and such a sale would be subject to the Illinois Use Tax Act. In such cases, the

retailer should collect and remit the general merchandise rate of 6.25% unless there is clear and
convincing evidence the retailer's predominant and most important selling activities take place in this
State. Clear and convincing evidence sufficient to overcome the presumption provided for in this
subsection (d)(3) includes, but is not limited to, the following circumstances:

A) the tangible personal property that is sold is in an inventory in the possession of the
retailer located within a jurisdiction in Illinois at the time of its sale (or is subsequently produced
by the retailer in the jurisdiction), in which case the retailer is engaged in the business of
selling in the jurisdiction where the property is located at the time of the sale with respect to
that sale;

B) the customer takes possession of the tangible personal property at a place of
business owned or leased by the retailer in the State, in which case the retailer is engaged in
the business of selling in the jurisdiction where the customer takes possession of the property
with respect to that sale.

A retailer maintaining a place of business in Illinois must collect tax from users in accordance
with the Retailers’ Occupation Tax Act and the Use Tax Act by adding the tax to the selling price of
tangible personal property, when sold for use. See 86 Ill. Adm. 150.401. The retailer may not pay
the tax that is owed in lieu of collecting it from the consumer.

In your letter, you also ask about purchases made by students who attend tax exempt
institutions. Tangible personal property may only be purchased tax free when the sale is made
directly to the exempt organization, which possesses a valid and active exemption identification
number (E-number). Based on the facts provided in your letter, it is not clear whether you are selling
to schools, but in the event that you are selling books to a school, the school should provide a resale
certificate when it purchases the books if the school will subsequently resell such books.

Your letter mentions that your website also sells digital textbooks. The Department does not
consider the viewing and downloading of text and similar data over the Internet such as downloaded
books, musical recordings, newspapers or magazines to be the transfer of tangible personal property.
These types of transactions represent the transfer of intangibles and are thus not subject to Retailers’
Occupation and Use Tax. However, downloads of canned software, as defined more fully in 86 Ill.
Adm. Code 130.1935, are subject to Retailers’ Occupation and Use Tax. See 86 Ill. Adm. Code 130.
2105(a)(3). The electronic download of a book is not subject to Retailers’ Occupation Tax, Use Tax,
Service Occupation Tax or Service Use Tax liability in this State regardless of whether it is rented or
sold.

Your letter also mentions that students may rent textbooks via your website. Please be aware
that Illinois taxes rentals differently than many other states. When schools rent books to students,
and the transactions are structured so that they constitute "true leases," then no Retailers' Occupation
Tax liability is incurred on the rental receipts. Under Illinois law, "true leases" and "leases" that are
actually conditional sales contracts are treated differently for Retailers’ Occupation and Use Tax
purposes.

True leases generally have no buy out provisions at the close of the leases. If buy out
provisions do exist, they must be fair market value buy out options in order to maintain the character

of the true leases. Lessors of tangible personal property under true leases in Illinois are deemed end
users of the leased property and they incur Use Tax liability on their cost price of such property. As
noted above, no tax liability applies to rental receipts under true leases. The only exception is
automobiles rented for one year or less, which are subject to the Automobile Renting Occupation Tax.

Under 86 Ill. Adm. Code 130.2010(a), persons who purport to "lease" the use of property, but
in fact sell such tangible personal property to nominal "lessees," are considered to be making
conditional sales whose total receipts are subject to Retailers' Occupation Tax. Such would be the
case when the agreements contain one dollar or other nominal purchase options.

| 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,

Cara Bishop
Associate Counsel

CB:kd