Is shipping tax-free in Illinois if it's listed as a separate line item from the price of the item?

Plain-English summary

A consumer bought something online and noticed that the order form listed "shipping" and a "processing fee" as two separate line items, even though the invoice combined them into one amount. There was no way to pick up the item in person — shipping was required. The consumer argued that because the two charges were listed separately on the order form, and Illinois' delivery-charge rule (86 Ill. Adm. Code 130.415) supposedly requires charges to be "combined" before they can be taxed, the processing fee at least should escape tax since it was stated on its own.

The Illinois Department of Revenue (IDOR) disagreed. Illinois sales tax (the Retailers' Occupation Tax) applies to a retailer's gross receipts — all the consideration it receives from the sale. The delivery-charge regulation incorporates the Illinois Supreme Court's decision in Kean v. Wal-Mart Stores, Inc., which taxes shipping and delivery charges whenever an "inseparable link" exists between the sale and the delivery. That link exists if EITHER the charge is not separately identified on the invoice, OR it is separately identified but the seller gives the customer no other way to get the goods (no pickup option, no free-shipping option). Separately listing a charge is not enough on its own to make it nontaxable — the real question is whether the customer could avoid the charge. IDOR also pointed out that under 86 Ill. Adm. Code 130.410, a retailer's own costs of doing business — including "processing charges" — cannot be deducted from gross receipts even if separately stated on the customer's bill, and are taxable if the customer has no option to avoid paying them.

Because this consumer had no pickup option and no way to avoid either the shipping or the processing fee, IDOR concluded that "it appears taxation of the shipping and processing charges was proper" — siding with the retailer's treatment of the charges, not the consumer's argument.

What this means for you

Online/e-commerce retailers

Listing shipping or processing fees as their own line item on an order form does not, by itself, exempt them from Illinois sales tax. What matters is whether you give the customer a real alternative — such as in-store/warehouse pickup or a free-shipping option. If the only way to get the product is to pay the delivery or processing charge, that charge is part of your taxable gross receipts, no matter how it's itemized on the invoice.

Consumers

If you're charged tax on shipping or a "processing fee" for an online order and there was no pickup option or free-shipping alternative, that's consistent with Illinois law even if the fees are broken out as separate line items on your order form or receipt. Separate itemization alone doesn't create a tax exemption.

Accountants and tax professionals

Structure client invoices and disclosures with the two-prong "inseparable link" test in mind (86 Ill. Adm. Code 130.415(b)(1)(B)(i)-(iii)): a delivery-type charge escapes tax only if it is BOTH separately stated AND the purchaser has a genuine option to avoid it (e.g., pickup or free shipping). Also remember 86 Ill. Adm. Code 130.410 independently bars deducting "processing charges" and other costs of doing business from gross receipts, separate statement notwithstanding, unless the customer can avoid the fee.

Common questions

Q: If a seller lists shipping and a processing fee separately on the order form, is the processing fee tax-exempt?
A: Not automatically. Separate statement is only half the test. The fee is taxable unless the customer also had a genuine option to avoid it — for example, by picking up the item in person or choosing free shipping.

Q: What is the "inseparable link" test?
A: From Kean v. Wal-Mart Stores, Inc. and 86 Ill. Adm. Code 130.415(b)(1)(B), an inseparable link (making the charge taxable) exists if the delivery charge is not separately identified on the invoice, OR if it is separately identified but the seller offers no other way to receive the goods without paying it.

Q: Can a retailer avoid tax on a "processing fee" just by calling it a separate cost of doing business?
A: No. 86 Ill. Adm. Code 130.410 says costs of doing business, including processing charges, remain part of taxable gross receipts even when separately stated on the customer's bill, if the customer has no option to avoid paying them.

Q: Is this GIL binding on the Department or other taxpayers?
A: No. A General Information Letter merely points to the relevant regulations and is not a statement of Department policy or binding on IDOR, issued under 2 Ill. Adm. Code 1200.120. It only shows how the Department reasons about similar facts.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.415 (transportation and delivery charges); 86 Ill. Adm. Code 130.415(b)(1)(B)(i)-(iii) (inseparable link test)
• 86 Ill. Adm. Code 130.410 (no deduction for costs of doing business, including processing charges)
• 86 Ill. Adm. Code 130.101 (imposition of Retailers' Occupation Tax on gross receipts)
• 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/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0044-gil.pdf

Original ruling text

ST 18-0044-GIL 12/12/2018 DELIVERY CHARGES
This letter discusses transportation and delivery charges. See 86 Ill. Adm. Code 130.415. (This
is a GIL.)
December 12, 2018
Dear Xxxx
This letter is in response to your letter we received November 1, 2108, 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:
I have enclosed an order form and a copy of the invoice regarding my purchase.
I questioned the taxing of the shipping and a processing fee.
The Dept. of revenue [sic] told me that 130.415 applies. There was no option to pick up
the purchase so the shipping charges could be taxed.
On the order form the shipping and processing fee are listed separately and the
processing fee should not be taxed. For both to be taxed the [sic] must be combined.
They are separate on the order form and listed together on the invoice.
I was advised to write you for a letter ruling.
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 at retail 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. These taxes comprise what is commonly known as "sales" tax in Illinois.
Illinois Retailers' Occupation Tax (sales tax) is imposed upon gross receipts from the sale of
tangible personal property to end-users and gross receipts is defined to mean all the consideration
received by sellers valued in money whether received in money or otherwise, but not including the
value of or credits given for like kind traded-in property.

ST 18-0044-GIL
Page 2
The Department’s regulation regarding transportation and delivery charges can be found at 86
Ill. Adm. Code 130.415 and incorporates the decision rendered 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 in
Kean that an “inseparable link” existed between the sale and delivery of the merchandise plaintiffs
purchased from Wal-Mart’s Internet store. Thus, the court 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 customer can purchase the tangible personal
property without payment of transportation or delivery charges to the retailer, 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).
In computing Retailers' Occupation Tax liability, no deductions shall be made by a taxpayer
from gross receipts or selling prices on account of the cost of property sold, the cost of materials
used, labor or service costs, idle time charges, incoming freight or transportation costs, overhead
costs, processing charges, clerk hire or salesmen's commissions, interest paid by the seller, or any
other expenses whatsoever. Costs of doing business are an element of the retailer's gross receipts
subject to tax even if separately stated on the bill to the customer. See 86 Ill. Adm. Code 130.410.
Generally, fees, charges and surcharges are also costs of doing business subject to the tax. If
the purchaser cannot escape the fee or does not have the option of whether or not to pay the fee, an
inseparable link exists between the purchase of the item and the percentage fee. See Nancy Kean v.
Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).
Based on the limited information in your letter, it appears taxation of the shipping and
processing charges was proper.
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