How is Illinois Service Occupation Tax calculated when a business (serviceman) transfers tangible personal property—like advertising materials—as part of providing a service, including when a secondary serviceman/subcontractor is involved and when materials are shipped outside Illinois?

Plain-English summary

This Illinois General Information Letter answers a taxpayer's question about an out-of-state client with an Illinois office that buys advertising materials from an out-of-state printer, ships some of them to an Illinois direct-mail fulfillment house, and has that fulfillment house mail the materials to recipients both inside and outside Illinois. The taxpayer asked whether the cost of materials ultimately mailed to recipients outside Illinois is subject to Illinois sales tax, and also asked for a copy of an old 2001 letter ruling.

Rather than answering the specific fact pattern directly (which would require a Private Letter Ruling), the Department used the GIL to explain the general framework: Retailers' Occupation Tax and Use Tax (Illinois's "sales tax") don't apply to sales of service. Instead, businesses that sell services — called "servicemen" — are taxed under the separate Service Occupation Tax Act on the tangible personal property (like the advertising materials) they transfer as part of performing that service.

The letter explains that servicemen can calculate their tax base four different ways: (1) the separately stated selling price of the property transferred, (2) 50% of the entire bill to the customer if the price isn't separately stated, (3) cost price, if they are a registered "de minimis" serviceman (aggregate cost of transferred property is under 35% of gross receipts from service, or 75% for pharmacists and graphic arts/printing businesses), or (4) Use Tax on cost price, if they are an unregistered de minimis serviceman. It also covers how tax works when a "secondary serviceman" (a subcontractor) is involved, and how local service occupation taxes are sited when a home-rule municipality is involved. Finally, the Department noted it could not provide the requested 2001 letter because letters over 10 years old are removed from its website, pointing instead to two more recent published letters (ST-22-0001-PLR and ST-20-0009-PLR).

What this means for you

Businesses that provide services and transfer materials (servicemen)

If your business is in the business of selling services — printing, advertising, fulfillment, or similar — and you transfer tangible personal property to your customer as part of that service, you are generally taxed under the Service Occupation Tax Act rather than regular Retailers' Occupation (sales) Tax. You need to pick one of the four tax-base methods described in the letter (separately stated price, 50% of the bill, cost price as a registered de minimis serviceman, or Use Tax on cost price as an unregistered de minimis serviceman) and apply it consistently, including providing Certificates of Resale to your suppliers where the method calls for it.

Businesses using subcontractors (multi-service transactions)

If you subcontract part of a service job to another business (a "secondary serviceman"), the letter explains how the primary serviceman's cost price is determined — either the secondary serviceman's separately stated selling price, or, if not separately stated, a presumed 50% of the secondary serviceman's total charge. Whether tax applies once or potentially twice in the chain depends on whether each party is registered and/or de minimis, so it's worth reviewing 86 Ill. Adm. Code 140.145 with a tax professional before setting up subcontracting arrangements.

Accountants and tax professionals

This GIL is a useful plain-language refresher on the mechanics of 86 Ill. Adm. Code Part 140 and Part 160 (Service Use Tax), including the de minimis thresholds (35%, or 75% for pharmacists and graphic arts production) and the local-tax situsing rule at 86 Ill. Adm. Code 280.115. Note that the Department declined to rule on the taxpayer's specific facts (whether materials mailed outside Illinois escape tax) — that kind of fact-specific question requires a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, not a GIL.

Common questions

Q: What is the difference between Retailers' Occupation Tax and Service Occupation Tax?
A: Retailers' Occupation Tax (and its counterpart Use Tax) applies to persons selling tangible personal property for use or consumption. Service Occupation Tax applies instead to "servicemen" — businesses selling services — on the tangible personal property they transfer as an incident to that service. The two are separate tax regimes that generally don't overlap for the same transaction.

Q: How do I know if I qualify as a "de minimis" serviceman?
A: You may qualify as de minimis if your annual aggregate cost price of tangible personal property transferred incident to sales of service is less than 35% of your annual gross receipts from service transactions (75% for pharmacists and businesses engaged in graphic arts production). See 86 Ill. Adm. Code 140.101(f).

Q: What happens when I subcontract service work to another business?
A: Under 86 Ill. Adm. Code 140.145, the tax treatment depends on whether the primary serviceman and the secondary serviceman (subcontractor) are each registered and/or de minimis. If both are registered, Certificates of Resale flow between them and the primary serviceman incurs Service Occupation Tax on the ultimate sale to the customer. Different combinations of registered/unregistered and de minimis/non-de minimis status can change where and how many times tax is incurred.

Q: Did the Department answer whether materials mailed outside Illinois are taxable?
A: Not specifically — this is a GIL, which only directs the taxpayer to the relevant regulations; it explicitly is not a statement of Department policy and is not binding. A taxpayer wanting a binding answer on that specific fact pattern would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Q: Can I still get a copy of old Letter Ruling ST 01-0003-GIL?
A: No — the Department stated that letters over 10 years old are removed from its website. It pointed the taxpayer instead to two more recent letters addressing similar issues: ST-22-0001-PLR (Jan. 6, 2022) and ST-20-0009-PLR (Dec. 10, 2020).

Citations and references

Regulations:

• 86 Ill. Adm. Code Part 140 (Service Occupation Tax Regulations)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 140.101, 140.101(f) (Service Occupation Tax base; de minimis serviceman test)
• 86 Ill. Adm. Code 140.108 (Use Tax liability for unregistered de minimis servicemen)
• 86 Ill. Adm. Code 140.109 (Service Use Tax base for registered de minimis servicemen)
• 86 Ill. Adm. Code 140.145 (multi-service transactions; primary/secondary servicemen)
• 86 Ill. Adm. Code 140.301(a) (primary serviceman's cost price determination)
• 86 Ill. Adm. Code 160.101, 160.115 (Service Use Tax rate and base)
• 86 Ill. Adm. Code 280.115 (local service occupation tax situsing)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Related letter rulings referenced in this GIL:

• ST 01-0003-GIL (Jan. 5, 2001) — no longer posted (over 10 years old)
• ST-22-0001-PLR (Jan. 6, 2022)
• ST-20-0009-PLR (Dec. 10, 2020)

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/st22-0010-gil.pdf

Original ruling text

ST-22-0010 06/07/2022 SERVICE OCCUPATION TAX
The Service Occupation Tax is a tax imposed upon servicemen engaged in the business
of making sales of service in this State based on the tangible personal property transferred
incident to sales of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)
June 7, 2022
NAME
ADDRESS
Dear. NAME:
This letter is in response to your letter dated June 23, 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 have a client based in STATE, with an office in the State of Illinois. They
make frequent purchases of advertising materials from a STATE printer that are
shipped in part to a direct mail fulfillment house in Illinois. They are currently
paying Illinois sales tax on the quantity shipped to the Illinois fulfillment house.
The Illinois fulfillment house receives the printed bulk advertising materials and
then ships the materials to many persons. both in the State of Illinois and outside
the State of Illinois, based upon a mailing list provided by the STATE based
purchaser.
Are [sic] the cost of the advertising materials shipped outside the State of Illinois
subject to Illinois sales tax?
Also, could you please provide a copy of Letter Ruling 01-0003- GIL? It came up
in a search but does not appear to be posted anywhere on the Illinois Department of
Revenue website.

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Thank you for your assistance. If you have any questions, or need additional
information, please contact me.
DEPARTMENT’S RESPONSE:
Retailer’s Occupation Tax
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. 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.
Service Occupation Tax
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under the
Service Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on
tangible personal property transferred as an incident to sales of service. 86 Ill. Adm. Code
140.101. The transfer of tangible personal property to service customers may result in either
Service Occupation Tax liability or Use Tax liability for servicemen, depending upon which tax
base they choose to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) Service Occupation Tax
Act on the separately stated selling price; (2) Service Occupation Tax Act on 50% of the entire
bill; (3) Service Occupation Tax on their cost price if they are registered de minimis servicemen;
or (4) Use Tax on their cost price if the servicemen are de minimis and are not otherwise
required to be registered under Section 2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price
of the tangible personal property transferred. If servicemen do not wish to separately state the
selling price of the tangible personal property transferred, those servicemen must use the second
method where they will use 50% of the entire bill to their service customers as the tax base.
Both of the above methods provide that in no event may the tax base be less than the cost price
of the tangible personal property transferred. Under these methods, servicemen are required to
provide their suppliers with Certificates of Resale when purchasing the tangible personal
property to be transferred as a part of sales of service. They are required to collect the
corresponding Service Use Tax from their customers.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen
may qualify as de minimis if they determine that their annual aggregate cost price of tangible
personal property transferred incident to sales of service is less than 35% of their annual gross

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receipts from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis
servicemen is authorized to pay Service Occupation Tax (which includes local taxes) based upon
the cost price of tangible personal property transferred incident to sales of service. Servicemen
that incur Service Occupation Tax collect the Service Use Tax from their customers. They remit
tax to the Department by filing returns and do not pay tax to their suppliers. They provide
suppliers with Certificates of Resale for the tangible personal property transferred to service
customers.
The final method of determining tax liability may be used by de minimis servicemen that
are not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax
liability by paying Use Tax to their suppliers. If their suppliers are not registered to collect and
remit tax, the servicemen must register, self-assess, and remit Use Tax to the Department. The
servicemen are considered to be the end users of the tangible personal property transferred
incident to service. Consequently, they are not authorized to collect a "tax" from their service
customers. See 86 Ill. Adm. Code 140.108.
Multi-Service Transaction – Secondary Servicemen
Multi-service situations exist when a primary serviceman subcontracts work to a
secondary serviceman. See 86 Ill. Adm. Code 140.145. A primary serviceman engages the
services of a secondary serviceman in order to obtain part or all of the products and services
desired by the service customer. The point at which Service Occupation Tax or Use Tax will be
incurred depends upon whether the primary and secondary servicemen are registered or de
minimis. In multi-service situations, a primary serviceman’s cost price is determined either by
the separately stated selling price of the tangible personal property transferred from a secondary
serviceman, or if the secondary serviceman does not separately state the cost of goods, it is
presumed that the primary serviceman’s cost price is 50% of the secondary serviceman’s total
charge. 86 Ill. Adm. Code 140.301(a).
When both primary servicemen and secondary servicemen are registered, primary
servicemen provide secondary servicemen with a Certificate of Resale. A primary serviceman
would then incur Service Occupation Tax based upon the separately stated selling price of the
property or 50% of the bill to the service customers. If the primary serviceman is registered and
de minimis (that is, under the 35% threshold, or 75% for pharmacists and printers), the primary
serviceman may choose to remit Service Occupation Tax to the Department based upon the cost
price of tangible personal property purchased from the secondary serviceman. If the cost price of
the tangible personal property is not separately stated by the secondary serviceman, the cost price
will be deemed to be 50% of the total bill from the secondary serviceman. Upon selling their

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product, such servicemen are required to collect the corresponding Service Use Tax from their
customers. 86 Ill. Code 140.145.
If an unregistered de minimis serviceman subcontracts service work to another
unregistered de minimis secondary serviceman, the primary serviceman does not incur a Use Tax
liability if the secondary serviceman (i) has paid or will pay Use Tax on the cost price of any
tangible personal property transferred to the primary serviceman and (ii) certifies that fact in
writing to the primary serviceman. This certification option is only available in multi-service
situations when both the primary and secondary servicemen are unregistered and de minimis. 86
Ill. Code 140.145.
Transactions involving multiple servicemen work best if both the primary and secondary
servicemen are registered. This will enable both parties to utilize Certificates of Resale. If the
primary serviceman is registered and the secondary serviceman is not registered, it is possible
that tax will be incurred at more than one point during the course of sale of a particular item.
This will occur if the unregistered secondary serviceman has paid Use Tax with respect to an
item of tangible personal property, then transfers that property to a primary serviceman who will,
in turn, incur a Service Occupation Tax liability when transferring the item to the service
customer.
Jurisdictional Issues – Service Occupation Taxes
If the Illinois Service Occupation Tax on a transaction is being remitted to the
Department by the serviceman, the serviceman shall also pay any local service occupation tax to
the Department on the same transaction if such serviceman engages in the business of making
sales of service within a jurisdiction that has adopted a local service occupation tax. If a
purchase order is accepted outside this State but the tangible personal property which is sold
incident to the sale of service is in the inventory of a serviceman located within a home rule
municipality at the time of its sale (or is subsequently produced in the home rule municipality)
then delivered in Illinois to the service customer, the place where the property is located at the
time of the sale (or subsequent production in the municipality) will determine where the seller is
engaged in business for local service occupation tax purposes with respect to such sale. See, for
example, 86 Ill. Adm. Code 280.115.
Service Use Tax
The Service Use Tax is a privilege tax imposed on the privilege of using, in this State,
tangible personal property that is received anywhere as an incident to a purchase of service from
a serviceman. However, if the serviceman would not be taxable under the Service Occupation
Tax Act despite all elements of the sale of service occurring in Illinois, then the tax imposed by
the Service Use Tax Act does not apply to the use of such property in this State. Any evidence
that property was sold by any person for delivery to a person residing in or engaged in business
in this State shall be prima facie evidence that such property was sold for use in this State. The
rate of the Service Use Tax is 6.25% of the serviceman's selling price of the tangible personal

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property transferred by the serviceman as an incident to a sale of service. 86 Ill. Adm. Code
160.101. The Service Use Tax shall be based on the selling price of the tangible personal
property transferred incident to the sale of service if stated separately on the invoice from the
serviceman. If not stated separately, then the tax will be imposed on 50% of the entire billing
from the serviceman. However, the Service Use Tax which is collected by a de minimis
serviceman who incurs Service Occupation Tax on the cost price of tangible personal property
transferred incident to service, as provided at 86 Ill. Adm. Code 140.109, shall be based upon the
cost price of tangible personal property transferred incident to the sales of service. 86 Ill. Adm.
Code 160.115.
ST 01-0003-GIL (Jan. 5, 2001) is over 10 years old. The Department’s website does not
contain letters that are over 10 years old. Please see ST-22-0001-PLR (Jan. 6, 2022) and ST-200009-PLR (Dec. 10, 2020).
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,
Richard S. Wolters
Associate Counsel
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