Do charitable organizations owe Illinois sales tax when they sell snacks to the students they serve?

Plain-English summary

A tax-exempt 501(c)(3) charity ran an after-school tutoring program for junior-high and high-school students and sold them snacks — pizza rolls, corn dogs, soft pretzels, cereal bowls, fruit, yogurt parfaits, and waffles — when they came in for programming. The organization asked the Illinois Department of Revenue (IDOR) for a private letter ruling confirming it did not owe Retailers' Occupation Tax (Illinois sales tax) on those snack sales, arguing it qualified for two of the nonprofit exceptions in 86 Ill. Adm. Code 130.2005: "Sales to Members" and "Noncompetitive Sales."

IDOR first declined to issue a private letter ruling at all, exercising its discretion under 2 Ill. Adm. Code 1200.110(a)(4), and responded instead with this non-binding General Information Letter (GIL).

On the merits, IDOR's answer was not what the organization was hoping for. Organizations holding an Illinois exemption ("E") number are still generally subject to sales tax on their own retail sales, subject to three narrow exceptions. For the noncompetitive-sales exception to apply, every requirement of 130.2005(a)(3) must be met — including that the "dominant motive" of the purchase must be making a donation to the charity, not simply acquiring the food (130.2005(a)(3)(E)), and that the sale must not be competitive with surrounding businesses (130.2005(a)(3)(A)). Based on the facts as described, IDOR found it "appears" the students' dominant motive was acquiring the food, not donating, and it "appears" the snack sales would be competitive with surrounding businesses. Because both of those findings cut against the exemption, the noncompetitive-sales exception did not apply — meaning the snack sales appear to be taxable after all.

What this means for you

Nonprofits running snack/concession sales

If your organization sells food or snacks to the people it serves — even at cost, even for a good cause — do not assume it is automatically tax-exempt just because your organization holds an Illinois E number. The narrow exceptions in 86 Ill. Adm. Code 130.2005 require every element to be satisfied. If buyers are paying primarily to get the food (rather than as a token gesture accompanying a real donation), and if your prices/items compete with nearby businesses, the noncompetitive-sales exception will not save you, and the sales are likely taxable.

Accountants advising exempt organizations

When a client's exempt organization sells goods to its own members, students, or beneficiaries, walk through all of 130.2005(a)(3)'s requirements individually — dominant motive as donation (130.2005(a)(3)(E)) and non-competitiveness with surrounding businesses (130.2005(a)(3)(A)) are both necessary, and both failed here. Also flag for clients that IDOR can and does decline to issue a binding PLR under 2 Ill. Adm. Code 1200.110(a)(4) and answer with a non-binding GIL instead, so a client relying on this kind of letter should not treat it as a guarantee against a future audit assessment.

Common questions

Q: Did the organization get the ruling it wanted?
A: No. It asked for confirmation that its snack sales were tax-exempt, but IDOR's GIL indicates the sales appear taxable because the facts did not satisfy the noncompetitive-sales exception.

Q: Why didn't the "noncompetitive sales" exemption apply?
A: Two reasons. IDOR found it appears the students were buying the snacks to get the food, not to make a donation (which the rule requires), and it appears the snack sales would compete with surrounding businesses — both of which disqualify the exemption under 86 Ill. Adm. Code 130.2005(a)(3).

Q: Is having a tax-exempt ("E") number enough to avoid sales tax on an organization's own sales?
A: No. Organizations with an E number are still generally subject to Retailers' Occupation Tax on their own retail sales, except for three narrow situations: Sales to Members, Noncompetitive Sales, and Occasional Dinners and Similar Activities, each under 86 Ill. Adm. Code 130.2005.

Q: Why is this a GIL instead of a private letter ruling, and does that matter?
A: IDOR has discretion to decline private letter ruling requests under 2 Ill. Adm. Code 1200.110(a)(4), and it did so here. A GIL, issued under 2 Ill. Adm. Code 1200.120, only points to relevant rules and is not binding on the Department — so this letter does not carry the same legal weight a PLR would have.

Q: Is IDOR's conclusion final?
A: The letter is phrased in terms of what "appears" to be the case based on the facts presented, not as a hard final determination, and as a GIL it is not binding on the Department in any event.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0001-gil.pdf

Original ruling text

ST 19-0001-GIL 01/08/2019 EXEMPT ORGANIZATIONS
Exclusively religious, educational, or charitable organizations are allowed to engage in a
very limited amount of retail selling without incurring Retailers' Occupation Tax liability.
See 86 Ill. Adm. Code 130.2005. (This is a GIL.)
January 8, 2019
Dear Xxxx
This letter is in response to your letter received October 22, 2018, 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 am writing to you to request a private letter ruling to exempt our organization,
COMPANY, EIN ###, from requiring to charge and remit Retailers’ Occupation or sales
tax for the sale of snacks to members.
General Information:

1. This Private Letter Ruling (“PLR”) is not requested with regard to hypothetical or
   alternative proposed transactions. This PLR is requested to determine the ROT
   consequences of the actual business practices of COMPANY.
2. COMPANY is not currently engaged in litigation with the Department in regard to this
   or any other tax matter.
3. COMPANY is not currently under audit by the Department in regard to this or any
   other tax matter.
4. The Department has not previously ruled regarding this matter for the COMPANY. In
   addition, the COMPANY has not submitted the same or similar issue to the
   Department.
5. COMPANY requests that certain information be redacted from the PLR prior to
   dissemination to others. COMPANY requests that its name, address, the location of
   its sales office, the name of its representative, all references to Exhibits, and the
   Exhibits themselves be redacted.
   COMPANY is recognized as a 501c3 non-profit and is exempt from federal and state
   taxes as the included letters indicate. We are an exclusively charitable organization and
   will be selling snacks to our registered students, which are junior high and high school

ST 19-0001-GIL
Page 2

students. No sales will be made to anyone other than registered students, Section
130.2005 1A and Section 130.2005 2A. We also qualify for the exemption under
Section 130.2005 3 A because our sales are noncompetitive with current area business
establishments. We took great care to make sure we are not selling similar snack items
that current businesses are selling. The snack booth will be manned with volunteer
members of the organization and all profits will go to the charity.
We plan to sell items such as pizza rolls, corn dogs, soft pretzels, bowls of cereal, fruit,
yogurt parfaits, and waffles to members for after school snacks when they come to the
COMPANY for after school programming and tutoring.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). The Department recently met and determined that it would decline to issue a
Private Letter Ruling in response to your request. We hope, however, the following General
Information Letter will be helpful in addressing your questions.
The 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. 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.
The Illinois Retailers’ Occupation Tax is imposed upon the total gross receipts received by
retailers who make sales of tangible personal property to Illinois end users. Unless the sales are
specifically exempted, such retailers must collect and remit the sales tax. See 86 Ill. Adm. Code
130.101.
While organizations that have received an E number are, as a general matter, subject to
Retailers’ Occupation Tax upon their own sales of tangible personal property, there are three limited
exceptions where such organizations are authorized to engage in a restricted amount of retail selling
activity without incurring Retailers' Occupation Tax liability. The limited exceptions available to not-forprofit organizations described in 86 Ill. Adm. Code 130.2005 include: (1) Sales to Members (see 86 Ill.
Adm. Code 130.2005(a)(2)); (2) Noncompetitive Sales (see 86 Ill. Adm. Code 130.2005(a)(3)); and
(3) Occasional Dinners and Similar Activities (see 86 Ill. Adm. Code 130.2005(a)(4)).
Sales of food by exempt organizations may qualify as exempt noncompetitive sales if they
meet all of the requirements of 86 Ill. Adm. Code 130.2005(a)(3) and if the dominant motive of the
purchase is the making of a donation to the charitable or religious organization which conducts the
sale, rather than the acquisition of property.
Based on the information in your letter, it appears that the dominant motive of the purchase of
the snacks by the students is the acquisition of the food rather than the exchanging of the snacks

ST 19-0001-GIL
Page 3

merely as a token for the making of a donation. 86 Ill. Adm. Code 130.2005(a)(3)(E). In addition, it
appears that sales of the snacks would be competitive with surrounding business establishments. 86
Ill. Adm. Code 130.2005(a)(3)(A).
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:rkn