When a customer returns merchandise, how should an Illinois retailer report the refunded sales tax on Form ST-1/ST-2, and can the amended return show a negative number?

Plain-English summary

A retailer under Illinois Department of Revenue audit asked how to correctly report returned merchandise on Form ST-1/ST-2 (Sales and Use Tax and E911 Surcharge Return) and the amended Forms ST-1X/ST-2X, after getting four different, conflicting instructions from auditors and customer service about whether negative numbers were allowed.

The Department's answer: when a customer returns merchandise, the retailer should refund all the sales tax it collected on that sale. If the retailer can document that it returned all the tax paid on the original purchase, it may deduct the corresponding gross receipts on the return for the period in which the refund was given. If it did not refund all the tax, it can deduct only the gross receipts matching the tax actually refunded — any tax not returned to the customer counts as an over-collection that must either be paid over to the Department or refunded to the customer (35 ILCS 120/2-40).

Critically, Illinois sellers are not allowed to file a sales tax return showing a negative balance for any taxing jurisdiction. So if refunds for returned merchandise in a given reporting period exceed the retailer's gross receipts for that jurisdiction in that same period, the retailer cannot just net it out on the current return — it must instead file an amended return for the period in which the original sale occurred.

What this means for you

Retailers with return/refund policies

If your business has a return window (the taxpayer here had a three-month policy), don't try to reflect a refund as a negative-number entry on the current period's Form ST-1/ST-2 or ST-1X/ST-2X. Instead, trace the refund back to the period of the original sale and amend that period's return to reduce the gross receipts (and tax) originally reported, once you can document that the customer was refunded the tax.

Accountants and tax professionals preparing amended returns

The ruling clarifies that Forms ST-1X and ST-2X are meant to correct the originating period's figures, not to book negative adjustments in a later period. If refunds in a reporting period exceed that jurisdiction's gross receipts for the period, amend the original sale's period rather than showing a negative balance.

Businesses currently under ILDOR audit

This GIL is a useful reference if you, like the requester, receive inconsistent verbal or informal guidance from different Department staff on handling returned-merchandise adjustments — it points to the governing rule (86 Ill. Adm. Code 130.401(b)) and the statutory prohibition on refunding/crediting over-collected tax outside proper channels (35 ILCS 120/2-40).

Common questions

Q: Do I have to refund sales tax to a customer who returns merchandise?
A: Yes. Under 86 Ill. Adm. Code 130.401(b), when a customer returns merchandise the retailer should refund all the sales tax collected on that sale, whether the underlying refund is full or partial.

Q: Can I deduct the full original sale amount if I only partially refund the customer?
A: No. You may only deduct the gross receipts that correspond to the amount of tax actually refunded to the customer. Any tax you collected but did not return to the customer is an over-collection that must be remitted to the Department or refunded to the customer under 35 ILCS 120/2-40.

Q: Can I show a negative number on Form ST-1/ST-2 or ST-1X/ST-2X to account for returned merchandise?
A: No. Sellers are prohibited from filing sales tax returns with a negative balance for any taxing jurisdiction. If refunds for a period exceed that period's gross receipts for a jurisdiction, you must file an amended return for the period in which the original sale took place instead.

Q: Is a General Information Letter like this binding on the Department?
A: No. A GIL merely directs a taxpayer to relevant regulations or other sources of information; it is not a statement of Department policy and is not binding, per 2 Ill. Adm. Code 1200.120. Only a Private Letter Ruling, requested under the procedures in 2 Ill. Adm. Code 1200.110, is binding, and then only for the requesting taxpayer.

Q: What's the difference between the Retailers' Occupation Tax and Use Tax mentioned in the ruling?
A: The Retailers' Occupation Tax (86 Ill. Adm. Code 130.101) is imposed on the retailer's gross receipts from Illinois retail sales. Use Tax (35 ILCS 105/3; 86 Ill. Adm. Code 150.101) is imposed on the purchaser for using tangible personal property bought at retail; on in-state purchases, the retailer collects the Use Tax from the purchaser and keeps it to offset its own Retailers' Occupation Tax liability. Together these make up what's commonly called Illinois "sales tax."

Citations and references

• 86 Ill. Adm. Code 130.401(b) (refund of tax to customer on returned merchandise; deduction of gross receipts)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on gross receipts from retail sales)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 35 ILCS 120/2-40 (over-collected tax must be remitted to the Department or refunded to the customer)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters are not binding on the Department)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0008-gil.pdf

Original ruling text

ST-22-0008 05/17/2022 MISCELLANEOUS
This letter concerns returns of merchandise. See 86 Ill. Adm. Code 130.401(b).
(This is a GIL.)
May 17, 2022
NAME
ADDRESS
Dear NAME:
This letter is in response to your letter dated March 22, 2022, 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:

Letter ruling request regarding correctly completing a Form ST1/ST-2 Sales and Use Tax and E911 Surcharge Return and Forms
ST1-X/ST-2X Amended Sales and Use Tax and E911 Surcharge
Return with regard to negative numbers.

Dear Legal Counsel:
I am writing on behalf of taxpayer COMPANY ("COMPANY"), Account ID:

- ####, EIN # ##-#######. COMPANY is currently under audit with

the Illinois Department of Revenue ("ILDOR"). The company has
received four separate instructions on how to properly reflect negative
numbers on Form ST-1/ST-2 Sales and Use Tax and E911Surcharge
Return ("Form ST- 1/ST-2") and Form ST-1X/ST-2X Amended Sales and
Use Tax and E911 Surcharge Return ("ST- 1X/ST-2X) and therefore, I am
requesting a letter ruling regarding the correct method to complete a
Form ST-1/ST-2 and Form ST1-X/ST-2X with regard to negative numbers.
In discussions with our auditors last year, we were informed that ILDOR
would be extending the audit period to include returns from JanuarySeptember 2021, for which COMPANY would be required to submit

COMPANY/NAME
Page 2
May 17, 2022
Forms ST-1X and ST-2X. Because COMPANY is a retailer which has a
three month return policy for merchandise, when customers return
merchandise, a negative number appears in our books which we then
reconcile. After reviewing the instructions for the Forms ST-1/ST-2 and
Forms ST-1X/ST-2X, the instructions are silent on how to accurately
reflect negative numbers on the forms. Our auditors instructed over the
phone and confirmed via email that while ILDOR does not allow negative
numbers on Forms ST-1 and ST-2, COMPANY should complete Forms
ST-1X and ST-2X with negative numbers need be, designated with a
negative symbol ( -) in front of the number in columns 4a and 4b of Form
ST-2X. Because of our three month return policy, our auditor also
informed us to file additional Form ST-1X/ST-2X for periods in which the
sale occurred, showing that there was a return of merchandise for that
month. COMPANY acted on its auditors' instructions and on February
17, 2022, the company submitted nine months of amended returns for
January - September 2021, using negative numbers on Forms ST-2X on
lines 4a and 4b where needed to indicate that a return of
merchandise occurred in that jurisdiction.
Upon receipt of our amended returns by ILDOR later in the month, I
spoke to a Revenue Tax Specialist III handling our account, who
informed me that, “We cannot accept negative figures on an original
or amended Sales and Use tax return (ST-1 & ST-1-X). In order to
receive credit for a returned merchandise, the period which the
sale(s) was originally reported on must be amended with the
corrected figures for the month. The receipts/tax will need to be
adjusted to the updated sales figures after the returned merchandise
was processed." I informed her of the instructions that we received
from our auditors and that her answer begged the question of how
ILDOR would reconcile the adjusted Form ST-1X since it was
adjusted but the Form ST-2X was not and therefore, the Form ST2X totals would not match the totals reflected on the Form ST-1X.
I later called ILDOR customer service, who gave me a third
instruction on how to complete Forms ST-1X and ST-2X. ILDOR
customer service informed me that in effect the Forms ST-1X/ST- 2X
"republish" the original Forms ST-1/ST-2 which are stamped as,
"Information Only" by the department once an amended form is
received. Customer service echoed the Tax Specialist's instructions
about negative numbers however, stated that the entire Form ST-2X
would need to be completed, even in jurisdictions in which no
changes/amendments occurred. This would in effect reconcile the
totals in the Form ST-2X and match the totals reflected on the Form
ST-1X.

COMPANY/NAME
Page 3
May 17, 2022
I informed our Tax Revenue Specialist Ill regarding Customer
Services' response she stated, "We do encourage the entire ST2X
return to be filed on an amended, however if we receive an ST2X for
just the locations that are being amended we will process the return
if enough information is provided. If more information is needed from
the taxpayer to complete the amended return, we will contact the
taxpayer. The totals on the ST1X will be different once adjustments
are made for the negative figures on the ST2X."
In addition, another customer service representative informed me of
a fourth method to reflect returned merchandise on Form ST-1 is on
Schedule A- Deductions, Section 1: Taxes and miscellaneous
deductions, Line 16 Other (including cash refunds, newspapers and
magazines, etc.) Identify below, by noting "returned
merchandise," and total of returns for the month. While this
appears to be a less laborious method to handle returns than
republishing the entire Form ST-2 with a Form ST-2X (which can
total up to 50 pages in a single month for COMPANY), it does not
however accurately capture that a return of merchandise in January
may have been for an item sold in October of the previous year. In
addition, if the purpose of "leveling the playing field," is that each
jurisdiction gets its fair share of tax monies from remote vendors,
simply burying all totaled returned merchandise for the month on
Line 16, jurisdictions will be deprived of their share of tax monies.
Please provide me with your ruling as to how to correctly handle
this issue where the instructions to Form ST-1/ST-2 and Form ST1X/ST-2X are silent on how to correctly reflect negative numbers due
to returned merchandise.
If you have any questions or require and further information, please
do not hesitate to contact me via the contact information provided
below.
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. See 86 Ill. Adm. Code 130.101. The tax is measured by the seller's
gross receipts from retail sales made in the course of such business. "Gross receipts"
means the total selling price or the amount of such sales. The retailer must pay
Retailers' Occupation Tax to the Department based upon its gross receipts, or actual
amount received, from the sale of the tangible personal property. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property

COMPANY/NAME
Page 4
May 17, 2022
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales.
When a customer returns merchandise to the retailer, the retailer should refund
all the sales tax to the customer. 86 Ill. Adm. Code 130.401(b). This would apply in
cases where a full refund is provided or only a partial refund is provided. Except as
provided in the paragraph below, if a company can document that it returned all the tax
to the customer that was paid on the initial purchase, it may deduct all the gross
receipts from the original sale on its return for the period in which the refund was
provided. See 86 Ill. Adm. Code 130.401(b). If it fails to return all the tax to the
customer that was paid on the initial purchase, it may only deduct the amount of gross
receipts that correspond to the amount of tax that was refunded. The remainder of the
tax that was not returned to the customer represents an over collection of tax. Illinois
law requires that all over collections of tax must either be turned over to the Department
or refunded to the customer. See 35 ILCS 120/2-40.
When the amounts refunded for returned merchandise being reported for a
specific return period exceed the taxpayer’s gross receipts for the taxing jurisdiction at
issue for that reporting period, a negative balance on the return would result for that
taxing jurisdiction. Sellers are prohibited from filing sales tax returns with negative
balances for any taxing jurisdiction. If this situation occurs, the taxpayer must file an
amended return for the period in which the original sale or sales took place.
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:rkn