Can an unlicensed motor fuel distributor sell fuel tax-free to the federal government while its Illinois distributor license is still pending?

Plain-English summary

The Illinois Department of Revenue addressed a company that sold motor fuel to the federal government (or a federal instrumentality, such as a military branch) before it had actually received its Illinois motor fuel distributor license. The company had applied for its license in October 2017 but, due to processing delays, did not receive it until March 6, 2018. During that gap, it sold gasoline and special fuel tax-free to the federal government, paying Illinois motor fuel excise tax to its own supplier while not collecting it from its federal customer. Once licensed, the company asked the Department for a ruling so it could seek a refund of the tax it had paid.

The Department explained that Illinois law requires anyone acting as a distributor of motor fuel in the state to first obtain a distributor license (35 ILCS 505/3; 86 Ill. Adm. Code 500.201(a)). Separately, the law allows a licensed distributor to make tax-free sales of motor fuel to the federal government or its instrumentalities (35 ILCS 505/6; 86 Ill. Adm. Code 500.210(c)). Putting those two rules together, the Department concluded there is no basis under the Motor Fuel Tax Law for someone who is not yet a licensed distributor or supplier to make tax-free sales — even to the federal government.

Applying that to the facts presented, because the company was not licensed as a motor fuel distributor at the time it sold fuel to the federal government (before March 6, 2018), those particular sales are not eligible for the federal-government exemption from motor fuel tax. In other words, the timing of licensure controls: the same sale that would be exempt once the seller is licensed is not exempt if made beforehand.

This is a General Information Letter (GIL), not a Private Letter Ruling. It directs the requester to the relevant statute and rule rather than issuing a binding determination, and it is not Department policy that other taxpayers can rely on.

What this means for you

Motor fuel distributors and suppliers

If you sell motor fuel to the federal government or a federal instrumentality and want to rely on the tax-free sale exemption, you must hold your Illinois distributor (or supplier) license at the time of the sale. Selling before your license is issued — even while your application is pending — means the exemption does not apply to those sales, regardless of who the buyer was.

Businesses awaiting license approval

If your distributor license application is delayed, be aware that sales you make in the interim are treated as sales by an unlicensed person for motor fuel tax purposes. This ruling indicates the Department will not treat licensing as retroactive to the sales made before the license was actually issued, which affects whether you can recover motor fuel tax you already paid upstream.

Accountants and tax professionals

When evaluating a client's claim to the federal-government sales exemption under 35 ILCS 505/6 and 86 Ill. Adm. Code 500.210(c), confirm the distributor or supplier license was in effect on the date of each sale, not just at the time of the refund request. This GIL shows the Department looking at licensure status sale-by-sale rather than at the taxpayer's current status.

Common questions

Q: Does selling motor fuel to the federal government automatically make the sale tax-free in Illinois?
A: No. The exemption in 35 ILCS 505/6 and 86 Ill. Adm. Code 500.210(c) is available only to a licensed distributor. The identity of the buyer alone does not create the exemption.

Q: The company eventually got its distributor license — does that cover the earlier sales?
A: Based on this GIL, no. The Department found that sales made "during a period when you were not licensed as a distributor or supplier are not eligible for the exemption," even though the company later became licensed.

Q: Can the company get a refund of the motor fuel tax it paid to its supplier during the unlicensed period?
A: The letter does not grant a refund. It concludes the sales during that period do not qualify for the federal-government exemption, which undercuts the basis for the refund request described in the taxpayer's letter.

Q: Is this GIL binding on the Department for other taxpayers?
A: No. A GIL only directs a taxpayer to relevant regulations and other information; it is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120). It differs from a Private Letter Ruling, which is binding on the Department as to the specific requesting taxpayer (2 Ill. Adm. Code 1200.110).

Q: What license is actually required to sell motor fuel as a distributor in Illinois?
A: Section 3 of the Motor Fuel Tax Law (35 ILCS 505/3) and 86 Ill. Adm. Code 500.201(a) require a person to secure a distributor license from the Department before acting as a distributor of motor fuel in Illinois.

Citations and references

Statutes and rules:

• 35 ILCS 505/3 (distributor license required before acting as a motor fuel distributor)
• 86 Ill. Adm. Code 500.201(a) (distributor licensing rule)
• 35 ILCS 505/6 (tax-free sales of motor fuel to the federal government or its instrumentalities)
• 86 Ill. Adm. Code 500.210(c) (rule implementing the federal government sales exemption)
• 2 Ill. Adm. Code 1200.110 (procedures for Private Letter Rulings)
• 2 Ill. Adm. Code 1200.120 (procedures for General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0041-gil.pdf

Original ruling text

ST 20-0041 12/10/ 2020 MOTOR FUEL TAX (REDACTION REVISED 4/8/2021)
A licensed distributor of motor fuel in Illinois may make tax free sales of motor fuel
when the sale is made to the federal government or its instrumentalities. See 35 ILCS
505/6 and 86 Ill. Adm. Code 500.210(c). (This is a GIL.)

December 10, 2020
Dear Xxxx:
This letter is in response to your letter, in which you requested information. We
apologize for the delay in responding. 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 to request a private letter ruling in regard to state excise taxes for
fuel sold to the federal U.S. Government during Feb-March 2018, in which we
paid COMPANY, AMOUNT of IL excise tax, however sold the fuel to the
federal government for use via the FEDERAL ENTITY or military branches
exempt of these taxes.
In October, 2017 we began the process to be a licensed wholesale fuel distributor
in the state of IL. Due to processing delays we did not obtain it until March 6,
2018. During the interim, we sold AMOUNT gallons of gasoline and special fuel
tax-free to the federal government. We were told that since we were not licensed
at the time, they could not be reported on schedules B and SB, but rather we will
need to request a ruling for this matter for a refund to be issued. I’ve enclosed our
supplier invoices for the fuel showing tax paid, as well as our customer invoices
excluding those taxes, totaling AMOUNT.
DEPARTMENT’S RESPONSE:

Section 3 of the Motor Fuel Tax Law provides that no person shall act as a distributor of
motor fuel within this State without first securing a license to act as a distributor of motor fuel
from the Department. See 35 ILCS 505/3 and 86 Ill. Adm. Code 500.201(a). A licensed
distributor of motor fuel in Illinois may make tax free sales of motor fuel when the sale is made
to the federal government or its instrumentalities. See 35 ILCS 505/6 and 86 Ill. Adm. Code
500.210(c). There is no basis, however, under the Motor Fuel Tax Law for a person who is not
licensed as a distributor or supplier to make tax free sales of motor fuel. Based on the
information provided, at the time you made sales of motor fuel to the federal government, you
were not licensed as a motor fuel distributor or supplier under the Motor Fuel Tax Law. As a
result, any sales of motor fuel to the federal government made during a period when you were
not licensed as a distributor or supplier are not eligible for the exemption from motor fuel tax.
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,
Samuel J. Moore
Associate Counsel
SJM:bkl