Does an out-of-state online retailer owe Illinois Retailers' Occupation Tax (ROT) or Use Tax on sales fulfilled from its subsidiary's Illinois stores or from unrelated third-party inventory in Illinois?

Plain-English summary

The Illinois Department of Revenue addressed a common e-commerce fulfillment question: when an out-of-state retailer sells to Illinois customers over the internet, but the order actually ships from Illinois-based inventory that the retailer doesn't itself own or hold, which tax applies -- state-and-local Retailers' Occupation Tax (ROT) or the flat state Use Tax?

The taxpayer was an out-of-state retailer that sold tangible personal property to Illinois customers through its website. It had no warehouse of its own in Illinois, but a wholly owned subsidiary operated brick-and-mortar stores there, and some online orders were fulfilled either from that subsidiary's Illinois store inventory or from unrelated third parties' inventory located in Illinois. All order-acceptance and payment-processing activity happened at the retailer's out-of-state headquarters.

The Department's answer: both fulfillment scenarios are subject to Illinois Use Tax only, not ROT. Illinois sourcing rules (built around the Illinois Supreme Court's decision in Hartney Fuel Oil Co. v. Hamer) presume that internet sales are sourced outside Illinois unless the retailer itself possesses the inventory in an Illinois jurisdiction at the time of sale (or subsequently produces it there). Because Illinois treats a subsidiary and unrelated third parties as legally separate "persons" from the retailer, inventory in their possession doesn't count as inventory in the retailer's possession -- so the presumption of out-of-state selling activity stood, and only Use Tax applied.

What this means for you

Online and multichannel retailers

If you sell through a website to Illinois customers and fulfill some orders using inventory owned or held by a related entity (like a subsidiary's retail stores) or by an unrelated third party located in Illinois, this GIL supports treating those sales as subject to Use Tax rather than local ROT -- as long as you, the retailer, don't personally possess that inventory in Illinois at the time of sale. Keep clear records distinguishing which entity actually possesses fulfillment inventory and where.

Businesses with in-state subsidiaries or drop-ship arrangements

The Department's reasoning hinges on treating affiliated but separately incorporated entities as distinct "persons" for sales and use tax purposes. If your fulfillment model relies on a subsidiary's stores, a marketplace, or a third-party warehouse, document the corporate separateness and the actual possession chain -- the Department noted it could reconsider the outcome if it turned out the retailer was, in practice, free to direct or control that inventory in a way that amounted to possession.

Accountants and tax professionals

This GIL illustrates how the Internet-sales presumption in 86 Ill. Adm. Code 270.115(d)(3) interacts with the "clear and convincing evidence" rebuttal standard: possession of in-Illinois inventory by the retailer itself (or production there) is the key fact that can flip a sale from Use Tax to ROT sourcing. Note that a GIL is non-binding guidance, not a precedent-setting ruling -- useful for understanding the Department's analytical approach, but not something a different taxpayer can rely on the way it could rely on a PLR issued to it.

Common questions

Q: Why does it matter whether the tax is Use Tax versus ROT?
A: ROT is a state-and-local tax imposed on the retailer's business of selling, sourced to the jurisdiction where the retailer is "engaged in the business of selling," which can include additional local-government tax layers. Use Tax is a flat state-level tax on the privilege of using property purchased at retail. Getting the sourcing determination right affects which local jurisdictions (if any) are owed tax on top of the state rate.

Q: Does selling through a website automatically mean only Use Tax applies?
A: Not automatically -- it creates a rebuttable presumption. Under 86 Ill. Adm. Code 270.115(d)(3), Internet sales are presumed to involve predominantly out-of-state selling activity, and thus are presumed subject to Use Tax only. That presumption can be overcome with clear and convincing evidence, most notably that the retailer itself possesses (or produces) the sold inventory in an Illinois jurisdiction at the time of sale.

Q: Does inventory held by a subsidiary or an unrelated third party in Illinois count as the retailer's own possession?
A: No, according to this GIL. Illinois defines "retailer" and "person" so that related and unrelated entities are treated as separate persons for sales and use tax purposes. Inventory owned and possessed by a subsidiary's stores or by an unrelated third party in Illinois is not treated as inventory in the possession of the retailer, so it does not rebut the Internet-sales presumption.

Q: What if the retailer effectively controls or can freely draw from that outside inventory?
A: The Department flagged this as an open question on these facts -- the taxpayer didn't specify the arrangements it had with its subsidiary and third parties. The Department noted that without more information, it couldn't say with certainty the retailer lacked possession if it was "free to fulfill orders from these warehouses," and that such information could provide the clear and convincing evidence needed to overcome the presumption in a given case.

Q: Is a General Information Letter legally binding?
A: No. A GIL merely points a taxpayer to relevant regulations and sources of information; it is not a statement of Department policy and is not binding on the Department, unlike a Private Letter Ruling (PLR), which is binding as to the specific taxpayer and facts presented.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 270.115(b)(7) (predominant out-of-state selling activity -> Use Tax governs)
• 86 Ill. Adm. Code 270.115(d)(3) (Internet-sales sourcing presumption and rebuttal standard)
• 86 Ill. Adm. Code 220.115 (composite-of-activities sourcing standard for ROT)
• 35 ILCS 120/2(a); 86 Ill. Adm. Code 130.101 (ROT imposition)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101(a) (Use Tax imposition)
• 35 ILCS 105/3-45; 86 Ill. Adm. Code 150.401(a) (retailer's Use Tax collection obligation)
• 35 ILCS 105/8 (no double remittance of ROT and collected Use Tax on same transaction)
• 35 ILCS 105/2; 86 Ill. Adm. Code 150.201 (definitions of "retailer" and "person")

Case law:

• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (sourcing standard requiring fact-specific inquiry into the composite of selling activities)
• Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316 (1943) (origin of the "composite of activities" test)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0035-gil.pdf

Original ruling text

ST-21-0035 09/09/2021 USE TAX
If a retailer engages in some selling activities in a taxing jurisdiction in this State,
but that retailer's predominant selling activities are outside the State, the retailer's
obligation to collect and remit taxes on Illinois sales is governed by the Illinois
Use Tax Act. See 86 Ill. Adm. Code 270.115(b)(7). (This is a GIL.)
September 9, 2021
Dear NAME:
This letter is in response to your letter dated March 30, 2021, 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:
Re: Request for Written Advice Regarding Application and
Sourcing of Illinois Sales and Use Tax
To Whom It May Concern:
Please accept this memorandum as a request for a General
Information Letter regarding the application of Illinois Retailers'
Occupation Tax ("ROT'') and Use Tax to the below described fact
pattern.
I.

BACKGROUND

Taxpayer is a retailer headquartered outside of Illinois that makes sales
of tangible personal property to Illinois customers through its website.
A wholly owned subsidiary of Taxpayer operates brick and mortar retail
locations in Illinois. Taxpayer does not own a warehouse or EFulfillment Center ("EFC") in Illinois but does own some inventory
located in third-party warehouses in Illinois. For Illinois sales and use
tax purposes, Taxpayer is considered an out-of-state retailer with
physical presence in Illinois.

COMPANY/NAME
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August 31, 2021
Taxpayer's e-commerce selling activities, including order acceptance
and payment processing, are conducted at Taxpayer's headquarters
location outside of Illinois. Taxpayer's online sales to Illinois customers
may be fulfilled using the following types of inventory:

1. Taxpayer-owned inventory located in Taxpayer's EFCs outside of
   Illinois (this represents the majority of transactions);
2. Taxpayer-owned inventory located
   locations inside and outside of Illinois;

in

third-party

warehouse

3. Taxpayer's subsidiary-owned inventory located in one of the
   subsidiary 's brick and mortar retail store locations inside and
   outside of Illinois; or
4. Unrelated third party-owned inventory located at unrelated third-party
   locations inside and outside of Illinois.
   All fulfillment determinations are made after the order is accepted and
   the purchaser's form of payment is authorized by Taxpayer. In all
   fulfillment scenarios, goods are delivered to the purchaser's location
   using a common carrier and title passes to the purchaser upon delivery
   at the purchaser's location. If an order is fulfilled using subsidiary store
   inventory or unrelated third-party inventory, the goods are shipped
   directly from the subsidiary's store or the third-party location to the
   customer.
   Accordingly, Taxpayer's online sales may be subject to either the Illinois
   Use Tax or Illinois ROT based on the fulfillment model for each sale.
   II.

ISSUE

1. Are Taxpayer's online sales fulfilled from its subsidiary's store
   inventory located in Illinois subject to Illinois Retailers' Occupation
   Taxes or Use Tax?
2. Are Taxpayer’s online sales fulfilled from unrelated third-party
   inventory located in Illinois subject to Illinois Retailers’ Occupation
   Taxes or Use Tax?
   III.

POSITION

1. Taxpayer's online sales fulfilled from its subsidiary's store inventory
   located in Illinois are subject to Illinois Use Tax.

COMPANY/NAME
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2. Taxpayer's online sales fulfilled from unrelated third-party inventory
   located in Illinois are subject to Illinois Use Tax.
   IV.

DISCUSSION

Illinois imposes state and local ROT “upon persons engaged in this
State in the business of selling at retail tangible personal property." 1
Sale at retail means "any transfer of the ownership of or title to tangible
personal property to a purchaser, for the purpose of use or
consumption." 2
Illinois also imposes Use Tax "upon the privilege of using in this State
tangible personal property purchased at retail from a retailer." 3 Retailer
means and includes "every person engaged in the business of making
sales at retail." 4 A retailer has the obligation to collect Use Tax from
the purchaser if the seller maintains a place of business in Illinois. 5
However, retailers that owe ROT on the same transaction are not
required to remit to the state the Use Tax collected from their
customers. 6
The Retailers' Occupation Tax Act (the "Act") provides specific
guidance on determining where a retailer is deemed to be engaged in
the business of selling for Illinois sales and use tax purposes. However,
sales made via the Internet and delivered to a purchaser’s location in
Illinois is not one of the scenarios contemplated in the Act. 7 For selling
scenarios not contemplated in the Act, the Illinois Department of Revenue
(the “Department”) has provided administrative guidance to assist
taxpayers in determining where they are deemed to be engaged in the
business of selling for local ROT purposes. 8 This administrative guidance
is drawn from and closely mirrors historical case law in Illinois.
Because ROT is imposed on the retail business of selling, the
jurisdiction where local tax is due is “the jurisdiction where the seller is
engaged in the business of selling." 9 "The occupation of selling is
comprised of "the composite of many activities.’’’ 10 Thus, establishing
35 ILCS 120/2(a); 86 Ill. Admin. Code 130.101.
35ILCS 120/1.
3
35 ILCS 105/3; 86 Ill. Admin. Code 150.101(a).
4
35 ILCS 105/2; 86 Ill. Admin. Code 150.201.
5
35 ILCS 105/3-45; 86 Ill. Admin. Code 150.401(a).
6
35 ILCS 105/8.
7
35 ILCS 120/2-12.
8
86 Ill. Admin. Code 220.115.
9
86 Ill. Admin. Code 220.115(b)(1); Automatic Voting Marchs. V. Daley, 409 Ill. 438, 447 (1951)
10
86 Ill. Admin. Code 220.115(b)(2); Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321 (1943).
1
2

COMPANY/NAME
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where "the taxable business of selling is being carried on requires a
fact-specific inquiry into the composite of activities that comprise the
retailer's business." 11
To aid in this inquiry, the Department has identified various primary
and secondary selling activities, as well as administrative shortcuts
for specific selling scenarios. 12 Two of these administrative shortcuts
are applicable to Taxpayer's business and both suggest the same
sourcing determination.
The first relates to retailers with out-of-state selling activities, but instate inventory. If a retailer's selling activity occurs outside of Illinois,
except that the goods sold are "in an inventory in the possession of the
retailer located within a jurisdiction in Illinois at the time of [their] sales
(or [are] subsequently produced by the retailer in the jurisdiction)," the
retailer will be deemed to be engaged in business where the inventory
is located at the time of sale or when it is subsequently produced by
the retailer. 13
The second administrative shortcut relates to sales made via the
Internet. Regarding these sales, the retailer's selling activity will be
presumed to take place outside of Illinois and such sales will be
subject only to Use Tax. 14 However, this presumption will be
overcome if the goods sold are “in an inventory in the possession of the
retailer located within a jurisdiction in Illinois at the time of [their] sale (or
[are] subsequently produced by the retailer in the jurisdiction).” 15
Importantly, both scenarios use inventory in the possession of the
retailer at the time of sale – or subsequently produced by the retailer

• as the sole determinant of where the retailer is deemed to be
  engaged in selling activity. Illinois defines retailer to include every
  person engaged in the business of making sales at retail. 16 Person
  means and includes any firm, partnership, association, joint stock
  company, joint adventure, or public or private corporation. 17 Illinois
  treats individual entities, even related parties, as separate persons
  for sales and use tax purposes. 18 As such, a plain reading of the
  Department's administrative guidance in the context of general sales
  and use tax treatment provides that inventory in the ownership and
  86 Ill. Admin. Code 220.115(b)(2); Hartney Fuel Oil Co. v. Hamer, 2013 IL115130, paragraph 32 (citing ExCell-O Corp. at 321-22).
  12
  86 Ill. Admin. Code 220.115(c).
  13
  86 Ill. Admin. Code 220.115(d)(2).
  14
  86 Ill. Admin. Code 220.115(d)(3).
  15
  86 Ill. Admin. Code 220/115(d)(3)(A).
  16
  35 ILCS 105/2; 86 Ill. Admin. Code 150.201.
  17
  35 ILCS 105/2; 86 Ill. Admin. Code 150.201.
  18
  See Illinois Private Letter Ruling No. ST 92-0038-PLR (1992).
  11

COMPANY/NAME
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possession of a separate entity - either a related or unrelated partywill not be deemed to be inventory in the possession of the retailer at
the time of sale.
Goods that are not in the possession of the retailer in Illinois at the
time of sale may still be subject to ROT if the goods are subsequently
produced by the retailer in Illinois. 19 "Produce" is not defined by statute
or Illinois administrative guidance. In such cases, terms are given their
ordinary and popularly understood meaning, considering regulation's
purpose. 20 According to Merriam-Webster.com, "produce" means "to
cause to have existence or to happen" or "to give being, form, or
shape to". "Manufacture" is cited as a synonym.21 Further, the
Department's sourcing guidance uses the location where a seller takes
action to procure the goods sold as a secondary selling activity. 22 The
specific use of the term "procure" in the same regulation strongly
suggests that the Department intends its use of the term "produce" to
mean manufacturing and/or something other than procurement.
Because the goods sold by Taxpayer are in existence at the time of
sale, they cannot be subsequently produced by Taxpayer.
Taken in full, a plain reading of the Department's administrative
guidance provides that Taxpayer's sales fulfilled by subsidiary store
owned inventory and unrelated third-party owned inventory located in
Illinois at the time of the sale are subject to Use Tax. Because
Taxpayer's selling activity occurs outside of Illinois and Taxpayer
does not possess the inventory in Illinois at the time of sale or
subsequently produce the goods in Illinois, these sales are not
subject to ROT.
V.

CONCLUSION

Taxpayer's sales fulfilled using inventory owned and possessed by its
subsidiary or unrelated third parties in Illinois at the time of sale are not
subject to ROT. The goods sold to purchasers are not in Taxpayer's
possession at the time of sale nor are they subsequently produced by
Taxpayer. Pursuant to the Department's administrative guidance,
Taxpayer's sales are subject only to Illinois Use Tax.

86 Ill. Admin. Code 220.115(d).
E.g., Chemed Corp., Inc. v. State, 186 Ill.App.3d 402, 411 (1989).
21
Merriam-Webster. (n.d.) Produce. In Merriam-Webster.com dictionary. Retrieved March 19, 2021, from
https://www.merriam-webster.com/dictionary/produce
19
20

22

86 Ill. Admin. Code 220.115(c)(4)(B).

COMPANY/NAME
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We appreciate your consideration of this matter. Please let us know if
you have any questions or require any additional information in order
to issue a General Information Letter.
Sincerely,
DEPARTMENT’S RESPONSE:
In response to the Illinois Supreme Court decision in Hartney Fuel Oil Co. v.
Hamer, 2013 IL 115130, 376 Ill. Dec. 294 (2013), the Illinois Department of Revenue
revised the administrative rules that govern the sourcing of local retailers’ occupation
taxes. See, for example, 86 Ill. Adm. Code 270.115. The rules provide that:
The occupation of selling is comprised of "the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods
to the final consummation of the sale by the passing of title and payment
of the purchase price". Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321
(1943). Thus, establishing where "the taxable business of selling is being
carried on" requires a fact-specific inquiry into the composite of activities
that comprise the retailer’s business. Hartney Fuel Oil Co. v. Hamer, 2013
IL 115130, paragraph 32 (citing Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316,
321-22 (1943)).
86 Ill. Adm. Code 270.115(b)(2). This legal standard applies whether the retailer
is engaged in selling activities in taxing jurisdictions in multiple states, or in
multiple jurisdictions in this State. If a retailer engages in some selling activities in
a taxing jurisdiction in this State, but that retailer’s predominant selling activities
are outside the State, the retailer’s obligation to collect and remit taxes on Illinois
sales is governed by the Illinois Use Tax Act. See 86 Ill. Adm. Code
270.115(b)(7).
Section 270.115(d)(3) of the Department’s regulations contains a
presumption that applies to Internet sales:
Sales over the Internet. When a customer places an order for the
purchase of tangible personal property through a consumer-based retailer
website available without limitation on the world wide web and the retailer
ships the property to the customer in this State, the Department will
presume that the retailer's predominant selling activities take place outside
of this State. Therefore, such a sale will be subject to the Illinois Use Tax
Act unless there is clear and convincing evidence the retailer's
predominant and most important selling activities take place in this State.
Clear and convincing evidence sufficient to overcome the presumption

COMPANY/NAME
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provided for in this subsection (d)(3) includes, but is not limited to, the
following circumstances:
A)

the tangible personal property that is sold is in an inventory in
the possession of the retailer located within a jurisdiction in
Illinois at the time of its sale (or is subsequently produced by
the retailer in the jurisdiction), in which case the retailer is
engaged in the business of selling in the jurisdiction where the
property is located at the time of the sale with respect to the
sale

B)

the customer takes possession of the tangible personal
property at a place of business owned or leased by the retailer
in the State, in which case the retailer is engaged in the
business of selling in the jurisdiction where the customer takes
possession of the property with respect to that sale.

For sales and excise tax purposes, the Department generally treats a parent
company and its subsidiaries and affiliates as separate and distinct companies. The rule
requires that there be clear and convincing evidence sufficient to overcome the
presumption provided for in Section 270.115(d)(3). Such evidence includes, but is not
limited to, when the tangible personal property that is sold is in an inventory in the
possession of the retailer located within a jurisdiction in Illinois at the time of its sale.
The examples provided in paragraphs (A) and (B) are not exclusive. Nor does the rule
require that the taxpayer own the inventory that is used to fulfill an order.
The taxpayer's online sales to Illinois customers may be fulfilled by the
taxpayer using inventory from four different inventories. The taxpayer does not
specify or explain the arrangements it has with its subsidiary and third parties that
permit the taxpayer to fulfill its orders using their inventory located in Illinois.
However, without more information and documentation, the Department cannot say
without reservation that the taxpayer does not have possession of the inventory in
subsidiary or third-party inventories if the taxpayer is free to fulfill orders from these
warehouses. The information and documentation may provide clear and convincing
evidence to overcome the presumption provided in Section 270.115(d)(3).
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,
Alexis K. Overstreet

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Associate Counsel
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