Does an Illinois school lose its sales-tax exemption on cafeteria meals if it outsources cafeteria operations to an outside food service company instead of using its own employees?

Plain-English summary

This GIL addresses a question raised by school districts and their food-service contractors: does a K-12 school's sales-tax exemption on cafeteria meals survive if the school outsources cafeteria operations to an outside food service company, rather than running the cafeteria with its own employees?

Under 86 Ill. Adm. Code 130.2005(b)(4)(A), a school does not incur Retailers' Occupation Tax on its cafeteria sales as long as the dining facility operates on the school's premises and is limited to selling to the school's own students and employees. The requester described typical outsourcing arrangements in detail: the school retains ownership and control of the cafeteria space and equipment, sets menus and prices, requires the outside company to use the school's own tax-exemption number to buy ingredients tax-free, and requires sale proceeds (including free/reduced-price meal funds) to settle into dedicated accounts held in the school's name. The outside company supplies staff and prepares the food, but the cafeteria remains closed to the public and is presented as part of the school, not as a branded restaurant.

The Department's response confirmed that this outsourcing does not change the tax result. The exemption in Section 130.2005(b)(4)(A) does not restrict its applicability based on how the school operates its cafeteria, whether through its own employees or through a contracted company. The Department also clarified the scope of its 2019 Compliance Alert CA-2020-1: that Alert's rule that "food vendors making sales of meals directly to students must charge tax on the full amount of the sales" is aimed at third-party vendors selling their own previously-prepared meals to students, not at food service companies operating a school's own cafeteria on the school's behalf.

What this means for you

School districts and school business officials

If your district contracts out cafeteria operations, this GIL confirms that doing so does not, by itself, create new Retailers' Occupation Tax liability, as long as the cafeteria stays on school premises, sales are limited to your own students and staff, and the space is not opened up to the general public. If any of those conditions changes (for example, the cafeteria is opened to outside diners), the exemption is lost for sales made while that condition exists.

Food service management companies

Because you are acting as the school's agent to purchase ingredients (using the school's E-number/tax-exemption number) and to operate the cafeteria and its point-of-sale system, your operation of the cafeteria on the school's behalf does not itself trigger Retailers' Occupation Tax, so long as the arrangement stays within the bounds described in the ruling (school-owned premises, school-set menus/pricing, proceeds settling to school accounts, no public access). This is distinct from vended-meal contracts, catered special events, or classroom food purchases from outside restaurants, none of which this letter addresses.

Accountants and tax professionals advising schools or food-service contractors

The Department's analysis rests on two independent legal theories argued by the requester: (1) the outsourced cafeteria still falls within the letter of 86 Ill. Adm. Code 130.2005(b)(4)(A) because the same criteria (school premises, sales limited to students/staff) are met regardless of who operates the cafeteria, and (2) the food service company is acting as the school's disclosed agent under 86 Ill. Adm. Code 130.1915, so any tax liability runs to the school as principal. The Department's response focuses on the first theory and confirms the regulation is not conditioned on who staffs the cafeteria.

Common questions

Q: Does hiring an outside company to run a school cafeteria create new sales tax liability?
A: No. The Department ruled that 86 Ill. Adm. Code 130.2005(b)(4)(A)'s exemption for school cafeteria sales does not depend on whether the school uses its own employees or an outside food service company, as long as the cafeteria is on school premises and limited to students and staff.

Q: What happens if the cafeteria is opened to people other than students and staff?
A: The regulation states that "[i]n any instance in which the dining facility is opened up for the use of other persons, all sales that are made at such facility while that condition continues to prevail are taxable." Opening the cafeteria to the general public, even temporarily, makes sales during that period taxable.

Q: Does this ruling cover food vendors that sell ready-made meals directly to students, such as "Pizza Friday" vendors?
A: No. The Department distinguished those arrangements, which are addressed by Compliance Alert CA-2020-1: a third-party vendor selling previously-prepared meals to the school (which the school then resells to students) does not incur tax, but a vendor selling meals directly to students must charge tax on the full sales amount. This GIL is about companies operating the school's own cafeteria as its agent, not about outside vendors selling their own meals to students.

Q: Does this GIL also cover vended meal contracts, special catered events, or classroom food purchases?
A: No. The requester specifically excluded vended-meal contracts (where meals are prepared off-site and delivered), special catered events separate from regular cafeteria service, and classroom purchases from outside restaurants. The GIL addresses only the outsourcing of ongoing cafeteria operations.

Q: Is this letter legally binding on the Department?
A: No. This is a General Information Letter, not a Private Letter Ruling. Under 2 Ill. Adm. Code 1200.120, a GIL merely directs the reader to relevant regulations and other authority; it is not a statement of Department policy and is not binding on the Department.

Citations and references

• 86 Ill. Adm. Code 130.2005(b)(4)(A) — a school does not incur Retailers' Occupation Tax on operating a cafeteria or dining facility on school premises limited to students and employees; sales become taxable if the facility is opened to other persons.
• 86 Ill. Adm. Code 130.101; 86 Ill. Adm. Code 150.101 — general imposition of Retailers' Occupation (sales) Tax and Use Tax in Illinois.
• 86 Ill. Adm. Code 130.2007 — exemption identification numbers ("E-numbers") for exclusively religious, educational, or charitable organizations.
• 86 Ill. Adm. Code 130.2005(a)(2)-(a)(4) — limited retail selling (sales to members, noncompetitive sales, occasional dinners/fundraisers) that exempt organizations may conduct without incurring Retailers' Occupation Tax liability.
• 86 Ill. Adm. Code 130.1915 — sales made by an agent on behalf of a disclosed principal are taxable to the principal, not the agent, if the agent discloses the principal's name/address and keeps records accordingly.
• 2 Ill. Adm. Code 1200.110; 2 Ill. Adm. Code 1200.120 — procedures for Private Letter Rulings versus the non-binding, informational nature of General Information Letters.
• Compliance Alert CA-2020-1 (October 2019) — "Food Vendors Neglecting to Collect Illinois Sales Tax on Sales of Ready-Made Meals for School Lunch Programs," distinguishing vendor sales to schools (for resale to students) from vendor sales directly to students.
• Letter No. ST-90-0601-PLR (1990) — a private food service retailer operating a school cafeteria via meal coupons was not subject to sales tax so long as sales were limited to students and staff.
• Letter No. ST 2001-0096-GIL (2001) — school yearbook sales made through a publisher acting as the school's disclosed agent could be made tax-exempt.
• Subway Restaurants of Bloomington Normal, Inc. v. Topinka, 751 N.E.2d 203 (4th Dist. 2001) — a campus Subway franchise was liable for Retailers' Occupation Tax because it was not the university's agent, was not limited to serving students/staff, and its restaurants were open to the public.

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/st21-0048-gil.pdf

Original ruling text

ST 21-0048 11/23/2021 EXEMPT ORGANIZATIONS
This letter discusses the sales tax liabilities of dining facilities operated by schools.
See 86 Ill. Adm. Code 130.2005. (This is a GIL.)
November 23, 2021
Dear NAME:
This letter is in response to your letter dated October 11, 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:
We are writing to request a General Information Letter addressing the
application of sales tax to school cafeterias in elementary, middle, and high
schools. We understand that you are the correct person to whom we should
address this request, but ask that you forward this request as necessary if
we are mistaken.
We represent a number of public school districts, cooperatives, and other
public and private entities and vendors who provide elementary and
secondary education and related services for school-aged children
throughout the state. We are not aware of any current litigation or audit
involving the questions below, but there is a recent Compliance Alert from
the Department that is raising considerable questions in the field.
In October 2019, the Department issued Compliance Alert No. CA-2020-1
concerning the sale of food on school premises. The Compliance Alert
reflects what we understand to be two general rules: on one hand, “a school
does not incur sales tax liability on its operation of a cafeteria or other dining
facility if it is conducted on the school’s premises and is confined to sales to
the students and employees of the school”; and on the other hand, “food
vendors that sell meals to students and not the school incur sales tax liability
on meals purchased by the students.” The Compliance Alert identifies
some specific nuances and details within these rules (for example, rules

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allowing Parent-Teacher Organizations to hold one or two dinners per year),
but this request does not concern those details.
We are writing, instead, to inquire about the outsourcing of cafeteria
operations – that is, K-12 schools hiring food service companies to operate
school cafeterias on the schools’ behalf. As we explain below, in these
situations the school cafeterias are still being operated in almost exactly the
same manner in which they would be operated by the school itself. We do
not believe that any of the differences in operations impact the nature of the
transactions being made, and so we do not believe that these outsourcing
arrangements should not trigger any new sales tax liability (whether for
schools, or for students or staff, or even for food service companies that
might pass those costs along).
I.
Factual Background: The Outsourcing of School Cafeteria
Operations
We will discuss typical outsourcing arrangements below, but for purposes
of this request please assume that the schools themselves would not incur
any sales tax liability if the schools were operating their cafeterias with their
own forces – in the words of the Compliance Alert, these situations would
fall squarely into the rule that “a school does not incur sales tax liability on
its operation of a cafeteria or other dining facility if it is conducted on the
school’s premises and is confined to sales to the students and employees
of the school.”
The only difference here is outsourcing the operation of the cafeteria. While
outsourcing is a multi-faceted arrangement, we believe that it does not
change the fundamental nature of the transaction inside the school and that
the outside food service companies are acting as agents of the schools
themselves. If a school does not incur sales tax liability when it uses its
own employees to operate the school’s cafeteria on the school’s premises
for the school’s students and staff, the school should not trigger sales tax
liability when it hires an outside food service company to operate that same
cafeteria on the same premises for the same students and staff.
Ownership, Dominion, and Control of Cafeteria. Schools retain full and
complete ownership of their cafeterias, including all permanent fixtures and
kitchen equipment. The cafeterias are located within the school building,
and the schools are responsible for maintaining the cafeterias. The schools
provide and maintain all building systems (the physical plant itself, heat, air
conditioning, security, etc.), utilities (water, electric, natural gas,
ethernet/data, etc.), and furnishings necessary to operate the cafeteria.
The outside companies do not rent, lease, or otherwise have any ownership
interest in the cafeteria. They might bring some personal equipment

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(warmers, chillers, utensils, etc.), but they do not have any ownership
interest in the cafeteria or permanent fixtures. They are generally
responsible for cleaning the kitchen, and for repairing any damage above
normal wear and tear, but they are not otherwise responsible for maintaining
the cafeteria itself.
The cafeteria operations follow the school calendar, as their only purpose
is to serve students and staff during school. The cafeterias are located
within the school building, and are accessed from within the school; they
might have emergency exits or loading dock access, but at meal times
students and staff access the cafeteria through internal doors that are
accessed from internal hallways inside secure school buildings – in other
words, the cafeterias are not accessible by the general public. The schools
are responsible for securing the premises at night and on weekends; the
outside companies often have copies of keys to the cafeteria, but the
schools control how and when the outside companies may access these
facilities.
School rules and policies apply within the cafeteria at all times; school
administrators have full access to all parts of the cafeteria at all times; and
teachers and other school staff are present at all times necessary to
supervise students during meal periods. Students and staff in the cafeteria
are subject to the same codes of conduct, disciplinary rules, and other
policies that otherwise apply throughout the rest of the school.
Finally, the schools remain responsible for students and staff while they are
using the cafeteria. For students, breakfast and/or lunch periods are part
of their assigned school day, and the schools remain responsible for their
supervision, safety, and wellbeing. School staff in the cafeteria are typically
on duty supervising students or purchasing meals for themselves during a
meal break.
Sales to Students and Staff. The school cafeterias are limited to students
and staff of the school. The cafeterias are not open to the public.
The sales transactions themselves are typically executed using a point-ofsale (POS) system that is provided and maintained by the school, though
commonly the staff at the register are employees of the outside company.
The sales include free and reduced meals through the National School
Lunch Program administered by the U.S. Department of Agriculture and the
Illinois State Board of Education, as well as Illinois’ School Breakfast and
Lunch Program. 1

1

See 105 ILCS 125/4, 126/15 and 126/20; 23 Ill. Admin. Code 305.10.

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These programs are required by law, and are heavily regulated, but one
legal requirement seems especially pertinent here: even when school
cafeterias are operated by an outside food service company, that outside
company cannot retain funds from selling free and reduced meals to
students. All free and reduced transactions must settle to a dedicated,
nonprofit account that is maintained in the name of the school or School
District. 2 Regardless of who is operating the register, the provision of free
and reduced meals is an immutable duty and obligation of the school itself
to its qualifying students.
Otherwise, students and staff typically purchase meals using cash or a
prepaid debit account linked to their school ID. As is the case with free and
reduced transactions, these cash receipts and prepaid debits are held in a
dedicated bank account that is established and maintained by the outside
company in the name of each school. There are separate bank accounts
for each school, and the monies collected at each school are strictly
segregated from other funds for other schools.
Employment of Cafeteria Staff. The outside food service company
provides staff to prepare and serve meals, to operate the schools’ POS
systems, and to clean the kitchen facilities and equipment. The outside
companies bear all payroll, benefits, and other costs of their employees.
These employees of the outside company are subject to the same
background checks as the schools’ own employees, including a fingerprintbased criminal background check, a check of the Statewide Sex Offender
Database, and a check of the Statewide Murderer and Violent Offender
Against Youth databases, with re-screening every five years. 3 They
generally fall within the definition of “School Personnel” for Covid-19
mitigation purposes, and so they are subject to the same vaccination and
testing requirements as the schools’ own employees. 4 Schools have the
authority to exclude any food service employee whose background check
is unsatisfactory, or who is disruptive, endangering students or staff, or
otherwise violating codes of conduct.
Agency Relationship. The food service contracts typically designate the
outside company as the school’s agent and fiduciary for purchasing goods
and supplies. The food service company uses the school’s own tax
exemption number to purchase meal ingredients, and also serves as the
school’s agent for selling meals, collecting monies, and depositing monies
See 7 Code Federal Regulations (“CFR”) § 210.14; see further 7 CFR Part 2010 (National School Lunch Program), 105
ILCS 126/15 and 7 CFR Part 220 (School Breakfast Program), 105 ILCS 125/05 (Illinois Free Lunch and Breakfast
Program), 105 ILCS 126/20 and 7 CFR Part 225 (Summer Food Service Program), 7 CFR Part 215 (Special Milk Program).
3
See 105 ILCS 5/10-21.9(a), (a-5), (a-6), (f).
4
See Executive Orders 2021-20, -22, -24, and -25.
2

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into accounts held in the school’s name – including, as noted above, free
and reduced meals offered in accordance with the National School Lunch
Program and the Illinois Breakfast and Lunch Program.
The cafeteria itself is still presented to students and staff as part of the
school. The food service company might be identified on employee
nametags, menu listings, or other incidental badging, but the cafeteria is not
“branded” as a franchise, restaurant, or private operation. There is no
signage suggesting otherwise. Any name that is given to the cafeteria (for
example, “FRANCHISE”) is given by the school, not by the food service
company.
Meal Prep. The food service companies prepare meals from scratch, onsite, from ingredients that have been procured tax-free using the schools’
tax-exemption certificates. (The schools are generally exempt from sales
tax on both purchases and sales of personal property, 5 and hold valid
exemption numbers issued by the Department.) Some food items (such as
milk and fruit) do not require cooking or preparation, but otherwise meals
are prepared on-site at the cafeteria and are fresh rather than prepackaged.
The food service companies are not selling their own branded goods or
products.
Menus and Pricing. All menus and pricing must be approved by the
school. Pricing is generally consistent with pricing that would apply in the
absence of outsourcing. Free and reduced prices remain the same,
pursuant to state and federal rules; and cash or debit prices are set at levels
designed to support the cafeteria’s operations. In general the schools
believe the pricing is lower than the schools would otherwise need to charge
for meals of the same quality and variety, in the absence of outsourcing.
II.

Scenarios Not Included in this Request

There are several other common scenarios that we do not intend to include
within the scope of this Request.
First, some schools provide their students with “vended meals.” In a vended
meals contract, the food service company does not provide staff, does not
operate the cafeteria, and does not prepare meals on-site; the outside
company simply purchases or prepares meals off-site, and delivers those
meals to schools, so that school staff can deliver the meals to students.
Vended meal contracts are not part of this Request.

5

35 ILCS 105/3-5(4); 35 ILCS 120/2-5(11); 86 Ill. Admin. Code 130.120(h).

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Second, sometimes schools hold special catered events separate and apart
from the regular cafeteria operations – such as after-school parent-teacher
events, sporting events, award banquets, and so forth. These catering
functions are not at issue in this Request.
Finally, sometimes classroom teachers hold classroom events in which they
purchase food for students from private restaurants outside the school –
such as pizza parties, FAST FOODS Day, and so forth. These classroom
events are not part of this Request.
III.

Question Presented

We believe that sales of cafeteria meals should receive the same exempt
status regardless of whether the cafeteria is operated by the schools’
employees or by outside companies acting as agent on the schools’ behalf.
Accordingly, we respectfully request guidance with respect to the following
question:
Given the general rule that “a school does not incur sales tax liability on its
operation of a cafeteria or other dining facility if it is conducted on the
school’s premises and is confined to sales to the students and employees
of the school,” does it matter whether the cafeteria is operated by school
employees or by an outside food service company hired by the school?
IV.

Legal Authorities

We believe there are both Department regulations and precedential rulings
that provide meaningful guidance in answering this question.
First is Department Regulation 130.2005, which specifically addresses
school cafeterias: “A school does not incur Retailers Occupation Tax liability
on its operation of a cafeteria or other dining facility which is conducted on
the school’s premises, and which confines its selling to the students and
employees of the school. In any instance in which the dining facility is
opened up for the use of other persons, all sales that are made at such
facility while that condition continues to prevail are taxable.” 6 This
regulation appears to be directly on point for situations in which schools
operate their cafeterias using exclusively their own employees.
Second is a 1990 Private Letter Ruling applying Regulation 130.2005,
concerning a school cafeteria that was operated by a private food service
retailer. 7 Students and staff bought meal coupons to redeem in the
6
7

86 Ill. Admin. Code 130.2005(b)(4)(A).
See Letter No. ST-90-0601-PLR.

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cafeteria; sometimes the coupon books were sold by the school (in which
case the retailer billed the coupon values back to the school), and
sometimes the books were sold directly by the retailer itself (in which case
the retailer kept the proceeds). The Department ruled that the food service
retailer was not subject to sales tax, so long as the cafeterias were limited
to serving students and staff of the school.
Third is Department Regulation 130.1915, which concerns the taxation of
sales made by an agent on behalf of a disclosed principal, and which
provides that those receipts are taxable to the principal to the extent that
the principal is engaged in selling the same type of goods at retail. This rule
specifically requires that the agent clearly disclose the name and address
of the principal to the purchaser before the time of the sale, and that the
name and address of the principal be kept in the agent’s books and
records. 8
Fourth is a 2001 GIL applying Regulation 130.1915 to the publication and
sale of school yearbooks for exempt schools. 9 The publisher was
responsible for taking orders, billing, and collecting funds from students on
behalf of the schools. The Department assumed (without being able to
determine for certain) that the schools were making the sales, in which case
liability for ROT turned upon whether the publisher (as agent) was working
on behalf of a disclosed or undisclosed principal under Regulation
130.1915(b). The Department ruled that “[i]f a third party organization acts
on behalf of a known or disclosed principal, e.g. a school with a valid Illinois
tax exemption identification number, yearbook sales may be made tax
exempt.”
Fifth, a 1999 Office of Administrative Hearings (“OAH”) decision considered
whether a school bus company was liable for user tax on fuel purchases
that were made when driving for an exempt school district. 10 The school
district provided the bus company with its valid exemption certificate in order
to purchase fuel for busses that were being driven on behalf of the school
district. The administrative law judge found that this constituted an agency
relationship between the school district and the bus company, such that the
bus company was entitled to step into the school district’s shoes and enjoy
its User Tax exemption privileges when acting as its expressly authorized
agent.
Finally, in 2001 the Fourth District Appellate Court held that Subway
franchises located on the Illinois State University campus were liable for
ROT because Subway was not acting as ISU’s agent and, even if it were,
86 Ill. Admin. Code 130.1915(a)(2), (b).
See Letter No. ST 2001-0096-GIL
10
Department of Revenue v. “Big Yellow” School Bus Company, MV 99-2 (DOR Hearings, 1/1/1999)
8
9

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Subway was not making exempt sales. 11 In that case, Subway leased four
locations from the University for the purpose of operating restaurants on
campus. The lease agreements gave ISU some control to review Subway’s
menu and advertising methods, but specifically provided that Subway was
not the University’s agent. The restaurants were open to the public,
although students and staff had the option of paying for meals with
University ID/debit cards. The Appellate Court rejected Subway’s theory
that using an ID/debit system converted Subway into a sales agent; in this
respect, the use of the ID/debit system was the functional equivalent of the
relationship between a retailer and credit card company. The Court also
noted that the restaurants were open to the general public, negating any
application of the special rule for school cafeterias. 12
V.

Legal Analysis

Under the outsourcing scenarios that we have described above, we think
there are two alternative theories that lead to the same conclusion. First,
notwithstanding the introduction of outsourced staff, these school cafeteria
operations still fall within the letter of Regulation 130.2005, and trigger the
special treatment afforded to school cafeterias. Second, even if not, the
outsourced food service companies are acting as the schools’ agents, such
that the sales tax liability is determined by the schools’ status as a taxexempt principal under Regulation 130.1915.
A. Regulation 130.2005.
Cafeteria sales to students and staff receive special treatment under
Regulation 130.2005(b)(4)(A). These sales are related to the schools’
primary educational purpose and are subject to the schools’ strict oversight,
including federal and state requirements pertaining to free and reduced
meals.
In order to meet the criteria set forth in Regulation
130.2005(b)(4)(A), the sales must be made exclusively to students and staff
in school-owned cafeterias that are not open to the general public.
In the outsourcing arrangements described herein, the schools are hiring
outside companies to perform the same cafeteria functions that the schools
would otherwise perform with their own employees. Unlike the Subway
case, the schools are not leasing space to restaurants selling their branded
products, and the cafeterias are not open to the general public. The food
service companies are standing in the schools’ place to perform a
necessary school function, acting as the schools’ purchasing agents and

11
12

Subway Restaurants of Bloomington Normal, Inc. v. Topinka, 751 N.E.2d 203 (4th Dist. 2001).
751 N.E.2d at 208 (citing 86 Ill. Admin. Code 130.2005(a)(2)(A)).

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operating the schools’ own cafeterias on their behalf to serve students and
staff.
These arrangements are similar to the coupon-book arrangements in Letter
No. ST-90-0601-PLR. The Department ruled in that case that it did not
matter how the coupons were sold, only whether the cafeteria was limited
to students and staff, and closed to the general public. So long as those
criteria were satisfied and the school was otherwise tax-exempt, the
Department ruled that the food service retailer was not subject to tax,
regardless of how the coupon book sales were structured.
In all functional respects, the outsourcing of cafeteria operations to outside
food service companies does not change the nature of the transactions
between schools and their students and staff. The schools still have an
obligation to provide meals for students, including (and especially) free and
reduced meals for eligible students; the students and staff still rely upon the
cafeteria as an integral part of the school and the school-day experience.
Ingredients are still procured tax-free on the schools’ behalf, regardless of
who employs the procurement agents; menus and prices are still subject to
school approval, regardless of which employee develops and submits them
for approval; meals are still prepared and served on-site in school-owned
cafeterias, regardless of who employs the cooks and servers; and receipts
from sales still settle to dedicated school accounts, regardless of who
employs the cashiers entering the POS transactions.
The purpose of outsourcing is not to change the function of school cafeteria
operations, but to achieve greater efficiencies, lower costs and superior
food service. For similar reasons, schools regularly take advantage of
outsourcing opportunities for many such services that are not within their
core competencies in education – for example, transportation, maintenance
and custodial, landscaping, even school nurses and specialists such as
speech pathologists. None of these arrangements alter the fundamental
nature of the school’s educational mission or its relationship with its
students. Outsourcing of cafeteria operations is not designed to alter the
fundamental nature of those operations, only to make them better.
Adding sales tax liability to cafeteria operations solely because schools
utilize outsourced services would have a negative impact upon the schools
and their constituencies. No matter whether these taxes are borne by the
schools themselves, passed through to (or from) outside food service
companies, or collected from students and staff at the point of sale, they
would ultimately result in some combination of higher cafeteria prices
charged to students and/or increased costs for schools.

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For these reasons, we believe that the outsourcing of school cafeteria
operations still falls within the letter, spirit, and policy underlying Regulation
130.2005, and should not result in any new, different, or additional sales tax
liability than the school itself would incur if operating the cafeteria through
its own forces.
B. Regulation 130.1915.
Alternatively, in addition to the special treatment afforded to school
cafeterias, we believe that these outsourcing arrangements fall within the
general principal-agent rules set forth in Regulation 130.1915.
Agents who make sales on behalf of a disclosed principal are not liable for
ROT, which instead falls on the principal. Students and staff who purchase
meals in the school cafeterias are aware that the outside companies are
acting on behalf of their school. The cafeterias are part of the school
building, the students and staff know the name and address of the school
prior to purchase, and the food service companies keep the schools’
information in their books and records, all in compliance with the Regulation.
Regulation 130.1915(a)(2) also requires that a disclosed principal “is
engaged in the business of selling such tangible personal property at retail.”
Schools sell cafeteria meals to their students and staff in the regular course
of school operations.
Schools also have agency relationships with their outsourcing partners that
are sharply different from the leasing relationship in the Subway case. In
the Subway case, ISU specifically prohibited Subway from acting as its
agent, and the Court rejected Subway’s theory that utilizing ISU’s debit
system effectively turned Subway into a sales agent. When K-12 schools
outsource their cafeteria operations, on the other hand, they specifically
designate those food service companies to act as the school’s agent: the
schools provide their tax exemption numbers; the food service companies
use that exemption number to purchase raw ingredients on a tax-free basis;
the food service companies use those ingredients to prepare and serve
meals in the cafeteria; the food service companies operate the point-of-sale
system provided by the schools; and those sale proceeds settle to
dedicated accounts for each school.
In this respect, the food service companies are acting in a similar manner
as the yearbook company in Letter No. ST 2001-0096-GIL and the
transportation company in No. MV 99-2. In those situations, the outside
companies were simply stepping into the shoes of the school to perform
services that the school would otherwise perform through its own forces.
The ordering and purchasing of materials (whether yearbooks, fuel, or meal

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ingredients) to be used by employees of a private company (whether they
are publishing, driving, or preparing meals) does not, and should not, result
in any tax liability that the school itself would not otherwise incur.
Simply put, the schools rely upon food service companies to step into their
shoes to manage an integral part of school operations. This should result
in the same tax treatment that applies when schools use their own
employees to perform the same function.
C. Compliance Alert CA-2020-1.
Finally, as we noted at the outset of this Request, many of the concerns
among schools are based upon Compliance Alert CA-2020-1 issued by the
Department in October 2019.
The title of the Alert, “Food Vendors Neglecting to Collect Illinois Sales Tax
on Sales of Ready-Made Meals for School Lunch Programs” (emphasis
added), appears to suggest that the Alert is focused on off-campus food
businesses that sell pre-packaged, “ready-made” meals to students (e.g.
“Pizza Friday” vendors, food delivery companies such as COMPANY, etc.),
as opposed to meals made in school cafeterias. The body of the Alert tracks
this distinction in some places: under the section heading “Compliance
Problem,” the Alert describes a situation in which “[a] third party vendor
makes bulk sales of prepared meals for students to the school, and the
school then resells the meals to students”; under the section heading
“Solution,” the Alert states “[f]ood vendors making sales of previously
prepared meals to schools that are resold by the schools to their students
do not incur sales tax liability.”
However, in other places, the Alert omits the distinction between previouslymade meals and cafeteria meals. In particular, it states under the “Solution”
that “[f]ood vendors making sales of meals directly to students must charge
tax on the full amount of the sales.” We think this “Solution” is meant to
apply to private businesses selling their own previously-made meals, not to
outside good service companies stepping into the shoes of a school to
operate the school’s cafeteria. A literal reading of the “Solution” appears to
allow either reading, though, which has created concern among schools and
their outsourcing partners.
For all of the reasons set forth above, of course, we believe the resolution
of these concerns should depend upon this very distinction: that “food
vendors” who are selling previously-prepared meals to students as part of
their business of selling to the general public should incur tax liability; but
that food service companies who are acting as the agents of schools, to
operate schools’ own cafeterias on the same terms that the schools would

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themselves, should not incur any different tax liability than if the schools
were operating the cafeterias with their own forces.
VI. Conclusion
For these reasons, we believe – and respectfully submit – that a school’s
decision to use outsourced services for its cafeteria operations should not
have any impact upon the tax treatment of meals sold to students and staff,
as long as the school cafeterias are not otherwise open to the public; and
we respectfully request that the Department confirm our interpretation of
applicable Regulations and Compliance Alert CA-2020-1. If the Department
is inclined to rule differently, though, or if you have any questions or need
any additional clarification, we would very much appreciate an opportunity
to discuss these issues with you before a ruling is issued.
Thank you for your time and consideration to this Request.
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 to purchasers for use or
consumption. The tax is measured by the seller’s gross receipts from such sales made in
the course of such business. 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. Purchases of tangible
personal property are subject to Illinois sales tax unless a purchase qualifies for an
exemption under Illinois tax law. Purchases of tangible personal property are subject to
Illinois sales tax unless a purchase qualifies for an exemption under Illinois law.
Organizations that make application to the Department of Revenue and are
determined to be exclusively religious, educational, or charitable, receive an exemption
identification number (an "E-number”). See 86 Ill. Adm. Code 130.2007. This number
evidences that the Department recognizes the organizations as exempt from incurring
Use Tax when purchasing tangible personal property in furtherance of their organizational
purposes. If an organization does not have an E-number, then its purchases are subject
to tax.
Organizations that have E-numbers are also allowed to engage in a very limited
amount of retail selling without incurring Retailers' Occupation Tax liability. These limited
amounts of selling are described in 86 Ill. Adm. Code 130.2005(a)(2) through (a)(4). An
exempt organization may engage in sales to members, noncompetitive sales, and certain
occasional dinners and similar activities (two fundraisers a year) without incurring
Retailers' Occupation Tax liability. Organizations can use their E-numbers to purchase

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items for such limited exempt sales. However, if organizations engage in ongoing selling
activities (such as Little League concession stands or sales of items in a thrift shop run
by a church), they must also register with the Department as retailers, file returns and
remit tax.
In October of 2019, the Department issued Compliance Alert – Food Vendors
Neglecting to Collect Illinois Sales Tax on Sales of Ready-Made Meals for School Lunch
Programs to address common confusion regarding tax obligations triggered by the
different methods schools, third-party vendors, and parent-teacher organizations (PTOs)
use to make sales of meals to students. This Compliance Alert is intended to clarify that
for sales of meals directly to students to be exempt from Retailers’ Occupation Tax under
Section 130.2005(b)(4)(A), they must be sales made by the school and not made directly
by a third-party vendor or PTO. For example, the Compliance Alert states “[f]ood vendors
making sales of previously prepared meals to schools that are resold by the schools to
their students do not incur sales tax liability.” See Compliance Alert – Food Vendors
Neglecting to Collect Illinois Sales Tax on Sales of Ready-Made Meals for School Lunch
Programs, October 2019. This is because the sale of the prepared meals to the school
with an E-number is not subject to sales tax, and the resale of the prepared meals by the
school directly to its students is not subject to sales tax as long as the criteria of Section
130.2005(b)(4)(A) is met. However, “[f]ood vendors making sales of meals directly to
students must charge tax on the full amount of the sales.” See id.
Special rules apply to dining facilities operated by schools. A school does not incur
Retailers' Occupation Tax liability on its operation of a cafeteria or other dining facility
which is conducted on the school's premises, and which confines its selling to the
students and employees of the school. In any instance in which the dining facility is
opened for the use of other persons, all sales that are made at such facility while that
condition continues to prevail are taxable. See 86 Ill. Adm. Code 130.2005(b)(4)(A).
Nothing in this subsection restricts its applicability based on how the school operates its
cafeteria, whether through contracting with an outside company or using its own
employees.
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
Associate Counsel
AKO