How does Illinois tax a turnkey door-hanger marketing service that designs, prints, verifies, and distributes printed pieces?

Plain-English summary

An unidentified company proposed a turnkey door-hanger campaign: marketing and creative work, third-party printing, shipment to a distribution center, delivery by independent contractors, and employee verification. Customers paid a fixed per-thousand price and never possessed the printed pieces; residents received them for free.

IDOR responded with general serviceman rules rather than deciding each proposed billing format. A service business transferring tangible personal property can calculate liability using one of four methods:

1. tax the separately stated selling price of the property;
2. use 50% of the full customer bill, never below the property's cost;
3. if registered and de minimis, pay Service Occupation Tax on cost; or
4. if unregistered and de minimis, pay Use Tax on cost as the end user.

The de minimis test generally required transferred-property cost below 35% of annual service receipts, or 75% for graphic-arts production. The rules also address subcontracted services: depending on registration and billing, the primary serviceman's cost can be the separately stated property price or presumed to be 50% of the secondary serviceman's charge.

Delivery-charge taxability depended on which serviceman method applied. A reseller also needed a valid Certificate of Resale, with the information listed in the letter; IDOR identified Form CRT-61 as its standard form.

What this means for you

For a design-print-distribute bundle, billing labels alone do not determine the answer. First classify the business as a serviceman and select the applicable tax-base method; then apply the multi-service, delivery, and resale-certificate rules.

Common questions

Did the GIL say the full lump-sum door-hanger charge was taxable? No. It provided the general four-method framework rather than a transaction-specific ruling.

Can a serviceman buy printed pieces for resale? Under the first three methods described, resale treatment can apply with a valid Certificate of Resale; an unregistered de minimis serviceman instead pays Use Tax as end user.

Are delivery charges always taxable? No. The letter says their treatment depends on the method used to calculate the serviceman's liability.

Citations and references

• 86 Ill. Adm. Code 130.101, 150.101, 140.101(f), 140.108, 140.301, and 130.1405.
• 2 Ill. Adm. Code 1200.110 and 1200.120.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0003-gil.pdf

Original ruling text

ST 17-0003-GIL 02/03/2017

SERVICE OCCUPATION TAX

Under the Service Occupation Tax, servicemen are taxed on tangible personal property
transferred incident to a sale of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)

February 3, 2017

RE: Tax advice related to Door Hanger Advertising and Door to Door Delivery
Dear Xxxxx:
This letter is in response to your letter dated September 15, 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:
On behalf of my client, an unidentified taxpayer, we respectfully request tax advice
related to their sales and distribution of door hangers within your state. We are
currently working with the client to develop sales and use tax processes to properly
administer your states sales and use tax. The taxpayer is not currently operating in
your state, as such; they do not currently have any pending administrative matters
before your tax agency.
As background, the taxpayer provides turnkey front-door marketing services including
developing marketing strategies, creative services, targeting & analytics, print services,
distribution and delivery verification. The taxpayer’s customers include local and
national businesses in a variety of industries. Generally, the customers provide finished
artwork digitally and a marketing piece is developed by the taxpayer. The finished
artwork is then sent to a third party printer for printing. The printed material (door
hangers) are then shipped by the printer directly to an independent distribution center
where independent contractors pick up the product and distribute it to the residential
addresses within a targeted geographic area.

ST 17-0003-GIL
Page 2

The residents (third party recipients) receive the door hanger at no cost and they
become the owner of the printed material. The taxpayer’s customers do not obtain
possession of the door hangers during any point of the printing or distribution
processes. The taxpayer’s employees perform audit verification services during the
distribution process to confirm and validate distribution by the independent contractors.
Generally, the taxpayer contracts with customer for a fixed price per thousand of
distributed door hangers. The contracted price includes the development of the printed
material, the actual printing cost, audit verification services and the distribution cost for
the independent carrier to distribute the printed materials to customers. The customer
is billed upon final distribution of the product. In addition, the customer is billed for any
shipping cost from the printer to the distribution center. We respectfully request tax
advice related to the taxability of our products and services in your state. We would
also like to confirm if the taxability changes, if we contract or bill our customers
differently. Please assume that our client will have nexus in your state when making
this determination.
Assuming the taxpayer bills lump-sum amounts for the delivered door hangers:

1. Is the sale of printed materials (door hangers) for a delivered price subject to
   sales or use tax in your state?
   a. If yes, are any deductions allowed for the below charges included in
   the billed amount:
   i.
   Creative development
   ii.
   Independent contractor - distribution charges
   iii. Audit services – delivery verification
   Assuming the taxpayer bills customers for separately amounts for the above items,
   does the taxability change?
2. Below is a list of the potential separate charges:
   a. Printed material (door hangers)
   b. Creative development
   c. Independent contractor distribution charges
   d. Audit Services – delivery verification
   e. Freight or shipping charges
   Depending on the answers to question 1 and 2 above, can the taxpayer’s [sic] purchase
   the following items for resale?
   a. Printed materials (door hangers)
   b. Independent contractor – distribution fees
   Thank you in advance for your assistance with properly administering your states sales
   and use tax. If you have any questions or need any clarification on any of the above
   facts or questions, please do not hesitate to contact me at ###.
   DEPARTMENT’S RESPONSE:
   Sales Tax

ST 17-0003-GIL
Page 3

The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property at retail to purchasers for use or consumption. See
86 Ill. Adm. Code 130.101. In Illinois, a Use Tax is also 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.
Service Occupation Tax
Custom work performed for customers would be considered a sale of service. As such, under
Illinois law, businesses that engage in a service occupation are deemed servicemen. 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 servicemen, depending upon which tax base they
choose to calculate their liability. 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 cost price if
they are registered de minimis servicemen; or (4) Use Tax on 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 sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible
personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
sales of service. They are required to collect the corresponding Service Use Tax from their
customers.
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. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit tax to the Department
by filing returns and do not pay tax to their suppliers. They provide suppliers with Certificates of
Resale for the tangible personal property transferred to service customers.
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.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of
theservicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by

ST 17-0003-GIL
Page 4

paying Use Tax to their suppliers. If their suppliers are 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.
Multi-service situations exist where a primary serviceman subcontracts work to a secondary
serviceman. In multi-service situations, a primary serviceman’s cost price is determined either by the
separately stated selling price of the tangible personal property transferred from a secondary
serviceman, or if the secondary serviceman does not separately state the cost of goods, it is
presumed that the primary serviceman’s cost price is 50% of the secondary serviceman’s total
charge. See 86 Ill. Adm. Code 140.301(a).
When both primary servicemen and secondary servicemen are registered, primary servicemen
provide secondary servicemen with a Certificate of Resale. A primary serviceman would then incur
Service Occupation Tax based upon the separately stated selling price of the property, 50% of the bill
to the service customers or as outlined in method three described above. Upon selling their product,
servicemen are required to collect the corresponding Service Use Tax from their customers. Please
note that if an unregistered de minimis serviceman subcontracts service work to another unregistered
de minimis secondary serviceman, the primary serviceman does not incur a Use Tax liability if the
secondary serviceman (i) has paid or will pay Use Tax on his or her cost price of any tangible
personal property transferred to the primary serviceman and (ii) certifies that fact in writing to the
primary serviceman. This certification option is only available in multi-service situations when both the
primary and secondary servicemen are unregistered and de minimis. If the primary serviceman is
registered and the secondary serviceman is unregistered it will not work.
Delivery Charges
Whether amounts charged by a serviceman to his customers in order to secure delivery of the
tangible personal property to its customers are taxable depends upon the method used by the
serviceman to calculate his tax liability. See 86 Ill. Adm. 140.301(b).
Resale Certificate
A retailer, as a seller required to collect Illinois tax, must either charge and collect tax or
document appropriate exemptions when making deliveries in Illinois. In order to document the fact
that its sale is a sale for resale, a retailer is obligated by Illinois to obtain a valid Certificate of Resale
from the purchaser. See 86 Ill. Adm. Code 130.1405. A Certificate of Resale is a statement signed
by the purchaser that the property purchased by him or her is purchased for purposes of resale. In
addition to the statement that the property is being purchased for resale, a Certificate of Resale must
contain:
1)
2)
3)
4)
5)

The seller's name and address;
The purchaser's name and address;
A description of the items being purchased for resale;
Purchaser's signature, or the signature of an authorized employee or agent of the
purchaser, and date of signing; and
Registration Number, Resale Number, or a statement that the purchaser is an out-ofState purchaser who will sell only to purchasers located outside the State of Illinois.

ST 17-0003-GIL
Page 5

The Department provides a standard form for documenting sales for resale (Form CRT-61 Certificate
of Resale). This form can be obtained from the Department’s website.
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,

Debra M. Boggess
Associate Counsel
DMB:bkl