When were a retailer's separately identified shipping charges excluded from Illinois sales tax?

Plain-English summary

A retailer had included shipping charges in its taxable Illinois sales and asked whether tax was due.

IDOR explained that delivery charges were taxable when inseparably linked to the sale. That link existed if delivery was not separately identified or the buyer could not receive the goods without paying a delivery charge.

Separately identified delivery was nontaxable when the seller offered pickup, free delivery, or a free-delivery threshold the purchaser met, and the purchaser voluntarily chose a paid option such as expedited shipping while the merchandise price stayed the same. If merchandise price changed with the delivery method, delivery charges above the actual outgoing transportation cost were taxable.

The rule covered outgoing delivery from the seller's control to the buyer's control. Freight used to move goods to a point before final customer delivery was an incoming business cost and could not be deducted from gross receipts even if separately passed through to the customer.

What this means for you

Retailers should document pickup and qualifying free-delivery options and separately identify optional shipping. They should also distinguish final outgoing delivery from incoming freight because separate billing does not remove incoming costs from taxable receipts.

Common questions

Did separate statement alone make shipping nontaxable? No.

What if the customer could pick up the goods? Separately identified delivery chosen instead of pickup could be nontaxable if the product price did not change.

Could incoming freight be deducted? No.

Citations and references

• 35 ILCS 120/2 and 105/3.
• 86 Ill. Adm. Code 130.101, 130.415, and 150.101.
• Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).

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-16-0039-gil.pdf

Original ruling text

ST 16-0039-GIL 08/30/2016

DELIVERY CHARGES

This letter discusses transportation and delivery charges in light of the decision in Kean v. WalMart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009). (This is a GIL.)

August 30, 2016

Dear Xxxxx:
This letter is in response to your letter April 30, 2015, 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:
This letter is in regards to sales tax on shipping charges for our account XXXXXXXX. We file our ST-1 electronically and for our 1st Quarter returns for 20XX we have
included shipping charges of $$$$ into our sales of $$$$, and are remitting sales tax
upon these shipping charges. Enclosed is a copy of our sales to Illinois for the 1 st
Quarter of 20XX for reference.
Due to a pending litigation regarding the assessment of sales tax on shipping
charges, we have decided to err on the side of caution and remit sales tax on shipping
charges since we lack clarity on whether or not the tax is due. We would appreciate it if
the Illinois Department of Revenue could please provide us with information on whether
these taxes are due and how we should proceed in the future.
We appreciate your assistance in promptly resolving this matter.
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 35 ILCS

120/2; 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
35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These taxes comprise what is commonly known as
"sales" tax in Illinois. If the purchases occur in Illinois, the purchasers must pay the Use Tax to the
retailer at the time of purchase. The retailers are then allowed to retain the amount of Use Tax paid
to reimburse themselves for their Retailers' Occupation Tax liability incurred on those sales. If the
purchases occur outside Illinois and the seller is not registered to collect Illinois Use Tax, purchasers
must self assess their Use Tax liability and remit it directly to the Department.
The Department’s regulation regarding transportation and delivery charges, 86 Ill. Adm. Code
130.415, was recently amended in light of the decision in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d
351, 919 N.E.2d 926 (2009). At issue in Kean was whether shipping charges for certain Internet
purchases of tangible personal property were subject to Illinois sales tax. The court found that an
“inseparable link” existed between the sale and delivery of the merchandise plaintiffs purchased from
Wal-Mart’s Internet store. Thus, the court in Kean concluded that the outgoing transportation and
delivery charges were part of the gross receipts subject to the Retailers’ Occupation Tax. 86 Ill. Adm.
Code 130.415(b)(1)(B)(i). An inseparable link exists when (a) the transportation and delivery charges
are not separately identified to the purchaser on the contract or invoice or (b) the transportation and
delivery charges are separately identified to the purchaser on the contract or invoice, but the seller
does not offer the purchaser the option to receive the property in any manner except by the payment
of transportation and delivery charges added to the selling price of an item (e.g., the seller does not
offer the purchaser the option to pick up the tangible personal property or the seller does not offer, or
the purchaser does not qualify for, a free transportation and delivery option). 86 Ill. Adm. Code
130.415(b)(1)(B)(ii). In contrast, if the tangible personal property that the customer agreed to buy can
be sold to the customer without adding a transportation or delivery charge to the selling price of the
item, then an inseparable link does not exist and the delivery charges should not be included in the
selling price of the tangible personal property. 86 Ill. Adm. Code 130.415(b)(1)(B)(ii)-(iii). Kean, 235
Ill. 2d at 375.
If a seller of tangible personal property offers the purchaser free transportation and delivery of
the property, qualified transportation and delivery of the property for which the purchaser qualifies
(e.g., purchases over $25 qualify for free shipping, and the purchaser spends more than $25), or the
option to pick up the property, any separately identified transportation and delivery charges chosen by
the purchaser (e.g., amounts paid for expedited transportation and delivery) will be nontaxable, as
long as the selling price of the tangible personal property neither increases nor decreases depending
on the method chosen by the purchaser to obtain the merchandise. If the selling price of the tangible
personal property increases or decreases depending on the method chosen by the purchaser to
obtain the merchandise, any transportation and delivery charges imposed will be subject to Retailers'
Occupation Tax to the extent those charges exceed the actual cost of outgoing transportation and
delivery. 86 Ill. Adm. Code 130.415(b)(1)(C).
Outgoing transportation and delivery charges are charges for the final transport or delivery of
tangible personal property from the possession and control of the seller to the possession and control
of the purchaser. Costs incurred by the retailer in moving property to some point from which the
property will be delivered or shipped to the customer, or picked up by the customer, are not outgoing
transportation and delivery charges; they are incoming transportation and delivery costs and are part
of the retailer's costs of doing business. Any amounts the retailer charges a customer for moving the
property cannot be deducted from gross receipts from that sale.
86 Ill. Adm. Code

130.415(b)(1)(D)(iii)-(iv) & 130.415(b)(2)(A). Incoming transportation and delivery costs are a
business expense to the retailer and may not be deducted from the gross receipts, even though the
retailer may pass those costs on to its customers by quoting and billing those costs separately from
the price of the tangible personal property sold. 86 Ill. Adm. Code 130.415(b)(2)(B).
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,

Cara Bishop
Associate Counsel
CB:bkl