Which nursing-home meal supplies qualified for Medicare or Medicaid flow-through exemption treatment under Illinois service-tax rules?

Plain-English summary

A requester argued that nursing-home dietary supplies and equipment used to provide federally required meals should share Medicare and Medicaid exemption treatment.

IDOR rejected a blanket process-wide exemption. Preparing food for patients generally was not manufacturing. Nonreusable cups, plates, utensils, napkins, placemats, containers, and wrapping transferred to patients with food could be purchased for resale with a resale certificate. Items used or consumed by the facility rather than transferred to the patient were taxable business inputs.

For hospitals and nursing homes acting as servicemen, the Medicare or Medicaid exemption applied proportionally to the part of the tax base paid by those programs, with an active exemption number and documentation. The calculation depended on whether the serviceman used separately stated property price, 50% of the bill, registered de minimis cost, or unregistered de minimis Use Tax.

IDOR identified steam-table pans, pitchers, and pan racks as items used to serve meals rather than transferred to patients. Plastic wrap, cleaners, soaps, and dish towels were examples of costs used to prepare meals. Those items did not receive exemption merely because the facility used them while serving Medicare or Medicaid patients.

What this means for you

Healthcare food-service operations should classify supplies by actual transfer to the patient, identify who paid for the transferred property, preserve E-number documentation, and apply the exemption through the facility's selected serviceman method.

Common questions

Did food preparation qualify as manufacturing? Generally no.

Could disposable meal items be bought for resale? Yes, when nonreusable and transferred to patients as part of the food service, with a resale certificate.

Were reusable kitchen and service items exempt? No, not merely because they supported Medicare or Medicaid meals.

Citations and references

• 86 Ill. Adm. Code 130.330(d)(4)(I), 130.2070, 130.2005, and 130.2007.
• 86 Ill. Adm. Code 140.101, 140.106, and 140.109.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0031-gil.pdf

Original ruling text

ST 16-0031 GIL 07/29/16

SERVICE OCCCUPATION TAX

This letter discusses the methods for calculating Service Occupation Tax on sales made to
Medicare and Medicaid. See 86 Ill. Adm. Code 140.108. (This is a GIL.)
July 29, 2016

Dear Xxxxx:
This letter is in response to your letter dated May 10, 2016, in which you requested
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:
“Attached is a request for a General Information Letter. We were referred to you from
the Technical Services area.
Upon review of this submission, if you have any questions, please feel free to call me.
In 2010, the State of Illinois issued a General Information Letter No. ST 10-0098 in
which the State published a discussion of the application of the Medicare/Medicaid
exemption to de mimimus servicemen’s purchases of food and consumables for
patients in the healthcare industry. The de minimus servicemen in the healthcare
industry who service Medicare/Medicaid patients are obligated to provide meals to their
residents under federal law. The servicemen, in providing these meals, must purchase
food, dietary supplies, and equipment. In the GIL, the State concluded that food and
consumables are exempt under the concept of a flow through exemption from the
federal government.
The sources of revenue to the servicemen are the dollars that the federal government
sends to the servicemen for the care of specific patients. This is the only funding that
the servicemen receive for Medicare and Medicaid patients. The servicemen are
required to prepare Cost reports to the federal government that delineates all expenses
incurred.

In the portion of the GIL covering consumables, the list of items is short. However, in
informal discussions with the Department of Revenue, the Department has
communicated that the list is not exhaustive. While we believe that all dietary supplies
and non-capitalized equipment should be covered by the Medicare/Medicaid exemption,
this situation has made it difficult to determine which items in the dietary supply area
should be covered by the Medicare/Medicaid exemption. These are items that are
essential to the preparation and provision of the meals.
Issue:
What dietary supplies and equipment used in preparing meals is [sic] entitled to the flow
through exemption?
Discussion of Law:
There are many portions of the law which govern the Medicare/Medicaid area. The
following is a discussion of several of these areas.
I.

U.S. Supremacy Clause – The U.S. Constitution and early cases, such as
McCulloch vs. Maryland, validate that states and local governments are
prohibited from taxing the federal government. The servicemen are
required by the Federal Government to furnish meals to the Medicare and
Medicaid patients. The items required to provide the meals should be
exempt.

II.

Illinois Department of Revenue General Information Letter No. ST 100098, the Illinois Department of Revenue issued its ruling on food and
consumables stating that the servicemen step into the shoes of the federal
government and are entitled to the government exemption as it relates to
food and consumables for Medicare and Medicaid patients.

III.

The Omnibus Budget Reconciliation Act -- OBRA
The Federal Government has issued many rules relating to the care of
individuals covered by Medicare and Medicaid. The government sends
out team [sic] of auditors to check on whether or not these rules are being
followed. Failure to handle food properly or follow cleanliness standards is
an infraction of these rules. Healthcare facilities can be shut down to not
following the rules.

IV.

Process as a whole; plant as a whole; manufacturing exemption
When manufacturing was robust in the State of Illinois, the industry
lobbied for exemptions relating to items purchased for the use in
manufacturing. The State would audit this issue and would adopt a
narrow construction of the exemption. Manufacturers challenged the
State’s interpretation and were successful in securing a broad exemption
based on the theory of process or plant as a whole. Basically, what this
means is that whatever it takes to produce a particular manufactured item
should be exempt.
The service industry has expanded tremendously in the United States.
The service industry has its own set of exemptions. In this particular

situation, the nursing home servicemen are providing goods and services
to Medicare and Medicaid patients. In providing meals to the patients, the
servicemen do not just provide raw food; they also provide and use dietary
supplies to be able to serve a proper meal to the patient. The process as
a whole should be exempt, and a narrow construction of food only is
inconsistent with what happened in the manufacturing industry.
Finally, some of the dietary supplies that are purchased are small items
such as blenders which are used to prepare meals. Just as companies
such as McDonald’s [sic] have been able to use the manufacturing
exemption for the production of meals, the servicemen should be able to
invoke this exemption as well as the exemption noted above.
V.

U.S. Department of Health and Human Service -- Cost reports -- the
servicemen have to submit Cost reports to the federal government
showing what item were purchased by category. We reviewed selected
Cost reports and the detail supporting the Cost reports. Dietary supplies
were specifically reported to the federal government.
The U.S.
Department of Health and Human Services is the agency that manages
Medicare and Medicaid.

VI.

Calculations relating to Medicare/Medicaid patients
Gross receipts of servicemen were analyzed to determine what was
received from the federal government vs. other sources. The percentage
of the Medicare/Medicaid revenues over total revenues multiplied by the
tax relating to dietary supplies should be exempt under Illinois law.

For the various reasons stated above, we are requesting clarification of items in the
dietary supply area in the form of an additional General Information Letter.”
By email dated June 23, 2016, you provided a list of items commonly used in the dietary
supply area: tin foil; Saran Wrap; wax paper; plastic forks, knives and spoons; forks, knives
and spoons; serving spoons; paper napkins; paper place mats; plates and bowls; foam cups
and lids; paper cups and lids; plastic cups; domes (covers for food); tray cards; paper table
clothes; steam table pans; pitchers; plastic soufflé cups and lids; plastic bags; cleaners and
soaps; rubber gloves; hand sanitizers; urn filters; oven mitts; thermometers; knives; can liners;
aprons; sponges; bleach; hair nets; brooms; pan racks; spatulas; and dish towels.
DEPARTMENT’S RESPONSE:
In general, the Retailers' Occupation Tax does not apply to sales of machinery and equipment
used primarily in the manufacturing or assembling of tangible personal property for wholesale or retail
sale or lease. The use of machinery or equipment in the preparation of food and beverages by a
retailer for retail sales, i.e., restaurants, food service establishments, etc., is an activity that is
generally not considered to be manufacturing. See 86 Ill. Adm. Code 130.330(d)(4)(I).
Non-reusable tangible personal property sold to food and beverage vendors, including persons
engaged in the business of operating restaurants, cafeterias or drive-ins, is a sale for resale when
such property is transferred to customers in the ordinary course of business as part of the sale of food
or beverages and is used to deliver, package or consume food or beverages, regardless of where
consumption of the food or beverage occurs. Receipts from sales for resale are not subject to the
Retailers’ Occupation Tax. See Section 130.2070(b)(3). The supplier of such items must be

presented with a Certificate of Resale by the purchaser in order for the transaction to be nontaxable.
By way of example, items sold for resale include, but are not limited to, paper and plastic cups,
plates, baskets, boxes, sleeves, buckets or other containers, utensils, straws, placemats, napkins,
doggie bags and wrapping or packaging materials that cannot be reused by the food or beverage
vendor and which are transferred to customers as part of the sale of food or beverages.
Food vendors purchasing items used or consumed in conducting their business and which are
not transferred to the customer fully incur Use Tax as the end users of the items sold. Such items
include, but are not limited to, paper products, serving trays, serving dishes, utensils or condiment
bottles. The supplier’s receipts from the sale of items for use or consumption are subject to the
Retailers’ Occupation Tax. See 130.2070(b)(3) and (c)(1).
The tax treatment of sales of tangible personal property to hospitals or nursing homes may be
effected by whether the hospital or nursing home is organized and operated exclusively for charitable,
religious or education purposes. Corporations, societies, institutions, associations and foundations
that make application to the Department and are determined to be organized and operated for
exclusively charitable, religious or educational purposes are exempt from Use Tax when purchasing
tangible personal property for use or consumption in the furtherance of organizational purposes. A
supplier’s receipts from the sale of tangible personal property to a purchaser for use or consumption
who has been determined by the Department to be organized and operated exclusively for charitable,
religious or educational purposes is not subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code
130.2005 and 130.2007. A home for the aged that is not organized or operated as a business
enterprise with a view to profit and which otherwise qualifies as a charitable institution is also
considered an exempt buyer. See 130.2005(k)(1).
The Department issues tax exemption identification numbers (“E” number) to organizations
determined to be organized for exclusively religious, educational or charitable purposes. A valid E
number must be presented to the supplier in order for receipts from sales of tangible personal
property to such organizations for use or consumption to be exempt from Retailers’ Occupation Tax.
With respect to sales to hospitals and nursing homes, they are generally considered service providers
and are subject to either the Service Occupation Tax or the Use Tax depending upon whether the
facility chooses to register under the Service Occupation Tax Act.
Under the Service Occupation Tax Act, servicemen are taxed on tangible personal property
transferred as an incident to their sales of service. 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 serviceman’s entire bill; (3) Service Occupation Tax on his or her cost price if he or
she is a registered de minimis serviceman; or (4) Use Tax on his or her cost price if he or she is an
unregistered de minimis serviceman. See 86 Ill. Adm. Code 140.101.
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 (the second method described above). 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 do not have the option of determining
whether they are de minimis on 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 not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act. 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 because they, not their customers, incur
the tax liability. Those servicemen are also not liable for Service Occupation Tax. See 86 Ill. Adm.
Code 140.109. Although liability rests with a serviceman, the Department has determined that a de
minimis serviceman incurring a Use Tax liability may claim exemptions predicated upon either the
exempt status of his or her customer or upon exemptions claimed by his or her customer based on
nontaxable uses of the tangible personal property transferred by the serviceman.
A customer's status as an exempt entity may "flow through" to an unregistered de minimis
serviceman. The Department has determined that such a serviceman is relieved of his or her Use
Tax liability when making sales of service to customers who have obtained exemption identification
numbers ("E" numbers) from the Department. The customer must provide its "E" number to the de
minimis serviceman in order to relieve the de minimis serviceman of Use Tax liability on the purchase
of tangible personal property being transferred to that customer. In the situation where there are both
taxable and exempt purchases, the serviceman will notify the supplier the percentage of purchases
that are exempt. The serviceman utilizing this flow through may either present the customer's "E"
number to his or her supplier in advance when making the purchase of tangible personal property that
will be transferred to the customer or, if tax was paid to the supplier, present it to his or her supplier
along with a request that the supplier submit a claim for credit to the Department. If the de minimis
serviceman, however, has previously self-assessed the Use Tax on that item to the Department, then
the de minimis serviceman may file a claim for credit.
As stated above, 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 E
number. Accordingly, under the first method, if a registered serviceman separately states the selling
price of the tangible personal property transferred incident to a sale of service and Medicare or
Medicaid does not pay the entire amount of the bill, then only that portion of the bill paid by Medicare
or Medicaid would be tax exempt. For example, the entire bill is $300, the separately stated tangible
personal property is $100, and Medicare or Medicaid pays 80% of the bill. Medicare or Medicaid is
considered to have paid $80 of the $100 charge for the separately sated tangible personal property
and the remaining $20 is paid by another person or entity. Thus, the $20 paid by the other person or
entity would be taxable.
Similarly, using the second method where the serviceman calculates its tax liability based on
50% of the entire bill, only that portion paid directly by Medicare or Medicaid would be tax exempt.
For example, the entire bill is $200, and Medicare or Medicaid pays 80% of the bill. Medicare or
Medicaid is considered to have paid $80 of the $100 tax base with $20 paid by another person or

entity. The $80 paid by Medicare or Medicaid would not be taxable, but the $20 paid by the other
person or entity would be taxable.
Under the third method, a registered de minimis serviceman is authorized to pay Service
Occupation Tax (which includes local taxes) based upon his or her cost price of the tangible personal
property transferred incident to the sale of service. Thus, if Medicare or Medicaid paid 80% of the
entire bill, then 80% of the serviceman’s cost price of the tangible personal property transferred would
not be taxable. However, the remaining 20% of the cost price of the tangible personal transferred
incident to the sale of service would be taxable.
However, if an unregistered de minimis serviceman elects to pay Use Tax on the tangible
personal property transferred incident to a sale of service, he may claim exemptions based upon
either the exempt status of his or her customer or upon exemptions claimed by his or her customer
based on nontaxable uses of the tangible personal property transferred. For example, the
serviceman purchases $350 of tangible personal property from his or her supplier and pays his or her
supplier $21.88 in Use Tax on the purchase. If Medicare or Medicaid pays 80% of the service bill, the
“flow through” allows 80% of the Use Tax paid by the serviceman to be considered exempt from tax.
The serviceman utilizing this flow through may present the customer's "E" number to his or her
supplier along with a request that the supplier submit a claim for credit to the Department for 80% of
the $21.88 in Use Tax paid by the serviceman.
Whether a sale to a hospital or nursing home is considered a sale for resale as explained
above will depend on what method the nursing home uses to calculate its tax liability. If the hospital
or nursing home chooses to remit Service Occupation Tax using any of the first three methods
explained above (i.e., separately stated selling price, 50% of the entire bill to their service customers,
or, as a registered de minimis servicemen, on the cost price of the tangible personal property
transferred), then the hospital or nursing home may present a Certificate of Resale to the supplier and
the transaction will be nontaxable. If, however, under the fourth method the nursing home is a de
minimis servicemen that is not registered with the Department, the nursing home must pay Use Tax
to its supplier on the cost price of the items to be transferred with service. Unregistered de minimis
servicemen cannot claim the transaction as a sale for resale, and therefore, the transaction is taxable
and the supplier must collect the Use Tax.
The General Information Letter you reference, ST 10-0098, explains the treatment of sales of tangible
personal property to Medicare and Medicaid. I would note that the letter states:
“Lastly, it is not clear what you mean when you say “various consumable paper
products” that are consumed 100% by Medicaid recipients. We assume that you are
referring to the purchase of toilet paper, paper towels, and tissue used in your facility. If
those items are paid for by Medicare or Medicaid, then the above information would
apply. If those items are not paid for by Medicare or Medicaid, then the purchase of
those items would be taxable.
Some of the items you describe in your email are consumables that may be paid for by Medicaid and
Medicare. Other items, for example, steam table pans, pitchers and pan racks, to name a few, are
used to serve meals to patients and do not appear to be items that are transferred to patients and
paid for by Medicaid and Medicare. Many of these items are used by the serviceman to prepare
meals for patients and are a cost of doing business, for example, Saran Wrap, cleaners and soaps,
and dish towels. As noted above, food vendors purchasing items used or consumed in conducting
their business and which are not transferred to the customer fully incur Use Tax as the end users of
the items sold. Such items include, but are not limited to, paper products, serving trays, serving

dishes, utensils or condiment bottles. The supplier’s receipts from the sale of items for use or
consumption are subject to the Retailers’ Occupation Tax. See 130.2070(b)(3) and (c)(1).
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
RSW:bkl