When are shipping, storage, and other fulfillment-contract line items subject to Illinois sales tax on a sale of tangible personal property?

Plain-English summary

An advertising-specialties company sells customized apparel, accessories, and promotional items, and for some customers also runs a fulfillment operation: those customers' end users order merchandise, and the company pulls, packages, and ships it out, billing for line items like a Set-Up Fee, Storage Fees, Fulfillment Fees, Outbound Shipping, an Account Management Fee, and order inserts/adhesives. The company asked the Illinois Department of Revenue which of these charges are subject to Retailers' Occupation ("sales") Tax, and whether things like a customer-loyalty "gift" program or delivery-vs-pickup options change the answer.

The Department didn't give item-by-item yes/no answers, but it laid out the governing framework:

• Sales tax applies only where tangible personal property is transferred. If a charge relates purely to a service with no transfer of goods, neither Retailers' Occupation Tax/Use Tax nor Service Occupation Tax/Service Use Tax applies.
• Delivery and other service charges are taxable when an "inseparable link" exists between them and the sale of goods, following Kean v. Wal-Mart Stores, Inc. An inseparable link exists if the charge isn't separately stated, or if it is separately stated but the customer has no real option to buy the goods without paying it.
• Costs of doing business — including set-up, application, rush/minimum charges — are generally part of taxable gross receipts, even if separately stated on the bill, because no deductions are allowed for the retailer's own costs.
• Pure storage/warehousing services are generally not taxable unless the warehouseman also sells tangible property (like boxes or packing tape) to the customer.
• Gifts trigger Use Tax on the donor, not sales tax on the recipient. If a business gives merchandise away for free (as in the loyalty-program scenario described), the business itself owes Use Tax on its own cost of the property as the "donor."
• Sales for resale can be made tax-free only if the purchaser furnishes an active Illinois resale/registration number and certifies the purchase is for resale.

What this means for you

Fulfillment and drop-ship businesses

If you bill separate line items for storage, handling, or shipping alongside a sale of goods, check whether the customer can actually decline the service charge and still buy the property. If not (or if the charge isn't separately stated at all), the charge rides along with the sale as taxable gross receipts, per 86 Ill. Adm. Code 130.415(b)(1)(B)(i)-(iii). Set-up and account-management fees tied to a sale are treated as costs of doing business and are generally taxable regardless of how they're labeled on the invoice.

Businesses running loyalty or gift programs

Where merchandise is given to an end user as a gift with no payment collected from that end user, the transaction isn't a retail sale to that person — instead, the business giving away the property is the "donor" and owes Use Tax on its own cost price of the gifted goods under 86 Ill. Adm. Code 150.305(c). Simply labeling shipping "part of a gift" doesn't remove tax exposure; it shifts who owes it and on what base.

Warehousing and storage providers

Charges for pure storage, packing, and shipping services (with no transfer of tangible property to the customer) generally fall outside Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax under 86 Ill. Adm. Code 130.2170. But if the warehouseman also sells physical items like cartons or tape to the customer, tax applies to those sales.

Accountants and tax professionals

The core test is the "inseparable link" doctrine from Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009), codified at 86 Ill. Adm. Code 130.415(b)(1)(B). Remember that under 86 Ill. Adm. Code 130.410, no deductions from gross receipts are allowed for costs of doing business even when separately stated, and that a serviceman transferring tangible property incident to a service has four possible ways to compute liability under 86 Ill. Adm. Code 140.106.

Common questions

Q: Is outbound shipping always taxable when I sell goods?
A: Not always — it depends on whether an inseparable link exists. If the shipping charge is not separately stated, or is separately stated but the customer has no genuine option to buy the goods without paying it, the shipping charge is part of taxable gross receipts. If the customer truly can buy the goods without the shipping charge, it is not taxable.

Q: Does it matter if the end user receives the item as a gift through a loyalty program?
A: It changes who owes tax, not whether tax is owed. If the company giving the gift away is providing the tangible property free of charge, a donor/donee situation exists and the donor owes Use Tax on its own cost price of the property — the recipient isn't taxed on a "sale" that didn't happen at a price.

Q: Are storage and fulfillment fees taxable the same way as shipping?
A: Storage and fulfillment services by themselves (with no goods sold to the customer) are generally treated as services and fall outside sales tax, per the rules on warehousemen. But if the fulfillment provider also sells tangible items — like packing materials — to the customer, those sales are taxable, and set-up/account-management fees tied to an underlying sale of goods are generally treated as taxable costs of doing business.

Q: Can a fulfillment company buy its packaging materials tax-free?
A: Only if it's buying them for resale (i.e., reselling the packaging to the customer) and the purchaser furnishes a valid resale certificate under 86 Ill. Adm. Code 130.1405. If the company buys packaging materials to use or consume itself, that purchase cannot be made tax-free as a "resale."

Q: Is this letter binding on the Department for other similar businesses?
A: No. This is a General Information Letter, not a Private Letter Ruling. A GIL merely directs the taxpayer to relevant regulations and is not a statement of Department policy and not binding on the Department, unlike a PLR issued under 2 Ill. Adm. Code 1200.110.

Citations and references

Statutes and rules:

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 140.101; 160.101 (Service Occupation Tax and Service Use Tax)
• 86 Ill. Adm. Code 140.106 (serviceman's four methods of computing tax liability)
• 86 Ill. Adm. Code 130.415(b)(1)(B)(i)-(iii) (delivery/service charges and the "inseparable link" test)
• Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009)
• 86 Ill. Adm. Code 130.410 (no deductions from gross receipts for costs of doing business)
• 86 Ill. Adm. Code 130.2170 (warehousemen)
• 86 Ill. Adm. Code 130.1401; 130.1405 (sale for resale; Certificate of Resale)
• 86 Ill. Adm. Code 150.305(c) (donor's Use Tax on gifted property)
• 2 Ill. Adm. Code 1200.110 (Private Letter Rulings); 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: Illinois sales tax letter rulings, 2025
• Original PDF: ST 25-0037-GIL

Original ruling text

ST 25-0037-GIL 07/08/2025 GROSS RECEIPTS
If an “inseparable link” exists between the sale of tangible personal property and
related service charges, including delivery charges, the related service charges are
part of the gross receipts subject to the Retailers’ Occupation Tax. See 86 Ill. Adm.
Code 130.415(b)(1)(B)(i). (This is a GIL.)
July 8, 2025
NAME
ADDRESS
EMAIL
Dear NAME:
This letter is in response to your letter dated May 5, 2025, 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
https://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:
I am submitting this General Inquiry Letter in an attempt to request
clarification regarding the application of Illinois sales tax to specific line items
in fulfillment contracts used with our customers. I will attempt to explain
below, plus give details about our business.
Our business is in the advertising specialties industry. Our business sells
customized, embellished apparel, accessories, and promotional items to
schools and businesses. We also offer, for select customers, a fulfillment and
shipping service. With this service, customers order customized products
from our company and then store these items at our facility. They are billed for
storage fees and maintenance fees, and various other line items as outlined
below. Then, as THEIR customers order and need merchandise, we receive

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July 8, 2025
these orders and pull from the shelf, package, and ship out to end users. We
have several customers that use this fulfillment service. The scope of each
program is a bit different, and we receive orders a bit differently with each one.
With some, orders are ALWAYS shipped. With other programs, there is a
combination of delivery and shipments. The same fulfillment contract is used
for all customers, and a sample program fulfillment contract is listed at the
end of this letter. My questions surround the taxability of the various line items
on this contract.
My questions are as follows:
1.) For each of the line items in this contract (Set-Up Fee, Storage Fees,
Fulfillment Fees, Outbound Shipping, Account Management Fee, Order
inserts, and order adhesives) which line items should have sales taxes
assessed and collected?
2.) Does the taxation of sales tax on the "outbound shipping" line item in our
contract (see sample contract at the end of this letter) have any variables
that would/could change its taxability?
3.) A.) Regarding the potential taxability of the outbound shipping line item,
we have one particular contract in which the end user (our customer's
customers) receive [sic] these items as a GIFT from our customer as part
of a customer loyalty program. Does this fact change the taxability of my
outbound shipping amounts to my customer?
B.) In this same program as stated in A.) above, ALL end users receive their
items through shipment. Our facility normally does offer customers the
option of picking up merchandise at our facility. However, for this program,
the end user does not have an option to pick up their orders. Does this
change the taxability of this line item in any way?
C.) In a separate contract, managers of a company order merchandise on
a monthly basis. These orders are pulled, packaged by manager, with
some being delivered by our company to their local sales office, and others
shipped to other locations. Does this change the taxability of this line item
in any way?
4.) I pose these questions because a customer is currently disputing some
sales tax we've assessed them on this contract.
Customer concerns:

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July 8, 2025
Our customer contends that shipping fees related to fulfillment services are
classified as a service and are therefore not subject to tax. No sale of tangible
items occur [sic] in these fulfillment services. All items are gifts. (As is [sic]
relates to outbound shipping line item of our contract.)
Our customer also contends that tangible packaging materials provided in the
performance of services do not comprise a significant percentage of service
fees and are therefore "de minimus." [sic] (As they relate to Fulfillment Fee
line item of our contract.)
Do these valid points change the taxability of this in any way?
I am asking for clarification on questions 1-4 above. Please note that my
questions above each have several parts to them. Any information you can
provide would be greatly appreciated, as I do want to do what's right for the
State of Illinois, my business, and my customer. Please feel free to contact
me if additional details are needed.
Thank you for your time and attention to this matter.
DEPARTMENT’S RESPONSE:
Sales at Retail vs. Sales of Service
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 35 ILCS 120/2; 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 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. If the purchases occur outside Illinois,
purchasers must self-assess their Use Tax liability and remit it directly to the Department.
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. See 86 Ill. Adm. Code
140.101. If no tangible personal property is being transferred to the customers, then neither

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July 8, 2025
Illinois Retailers’ Occupation Tax nor Use Tax would apply. Likewise, the Service Occupation
Tax and Service Use Tax would also not apply. 86 Ill. Adm. Code 140.101 and 160.101. The
Service Occupation Tax and Service Use Tax are imposed on the transfer of tangible personal
property incident to sales of service. 86 Ill. Adm. Code 140.101 and 160.101. The purchase
of tangible personal property that is transferred to the service customer may result in either
Service Occupation Tax liability or Use Tax liability for the servicemen depending upon
serviceman’s activities. The serviceman’s liability may be calculated in one of four ways:
1)

Separately-stated selling price of tangible personal property transferred
incident to service;

2)

50% of the serviceman’s entire bill;

3)

Service Occupation Tax on the serviceman’s cost price if the serviceman
is a registered de minimis serviceman; or

4)

Use Tax on the serviceman’s cost price if the serviceman is de minimis
and is not otherwise required to be registered under Section 2a of the
Retailers’ Occupation Tax Act. See 86 Ill. Adm. Code 140.106.

Gross Receipts and Delivery Charges
The Department’s regulation regarding transportation and delivery charges can be
found at 86 Ill. Adm. Code 130.415 and incorporates the decision rendered in Kean v. WalMart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009). At issue in Kean was whether shipping
charges for certain Internet purchases of tangible personal property were subject to Illinois
sales tax. The Court found in Kean that an “inseparable link” existed between the sale and
delivery of the merchandise plaintiffs purchased from Wal-Mart’s Internet store. Thus, the
court concluded that the outgoing transportation and delivery charges were part of the gross
receipts subject to the Retailers’ Occupation Tax. 86 Ill. Adm. Code 130.415(b)(1)(B)(i).
If an “inseparable link” exists between the sale of tangible personal property and
related service charges, including delivery charges, the related service charges are part of the
gross receipts subject to the Retailers’ Occupation Tax. See, for example, 86 Ill. Adm. Code
130.415(b)(1)(B)(i). An inseparable link exists when (a) the service charges are not separately
identified to the purchaser on the contract or invoice or (b) the service charges are separately
identified to the purchaser on the contract or invoice, but the retailer does not offer the
purchaser the option to purchase the property without the payment of service charges added
to the selling price of an item (e.g., the retailer does not offer the purchaser the option to
purchase the tangible personal property separately from the related service, or the retailer
does not offer, or the purchaser does not qualify for, a free service option). 86 Ill. Adm. Code
130.415(b)(1)(B)(ii). In contrast, if the purchaser can purchase the tangible personal property

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July 8, 2025
without payment of service charges to the retailer, then an inseparable link does not exist, and
the service charges should not be included in the selling price of the tangible personal
property. 86 Ill. Adm. Code 130.415(b)(1)(B)(ii)-(iii).
In computing Retailers’ Occupation Tax liability, no deductions shall be made by a
taxpayer from gross receipts or selling prices on account of the cost of property sold, the cost
of materials used, labor or service costs, idle time charges, incoming freight or transportation
costs, overhead costs, processing charges, clerk hire or salesmen’s commissions, interest
paid by the seller, or any other expenses whatsoever. Costs of doing business are an element
of the retailer’s gross receipts subject to tax even if separately stated on the bill to the
customer. 86 Ill. Adm. Code 130.410. Set-up, application, and rush and minimum charge
fees generally are costs of doing business and are included when determining retailers’
occupation tax liability.
Physical Storage
The tax liabilities of warehousemen who hold themselves out to the public as being
engaged in the business of moving, storing, packing, and shipping tangible personal property
belonging to other persons are generally engaged in a service transaction. See 86 Ill. Adm.
Code 130.2170. The business of providing security and storage services would generally fall
under this category. Again, if no tangible personal property is transferred to the service
customer, then no Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use
Tax, is incurred. However, in cases in which warehousemen are engaged in the business of
selling, to purchasers for use or consumption, tangible personal property such as cartons,
boxes, and packing tape, they incur retailers’ occupation tax liability.
Sale for Resale
A person who sells tangible personal property to a purchaser who may use or consume
such property within the meaning of the Retailers’ Occupation Tax Act, but who also may
resell such property, must determine, at the time when he sells the property to such
purchaser, whether the purchaser is buying the property “for use or consumption” within the
meaning of the Act or whether the purchaser is buying the property “for resale”. 86 Ill. Adm.
Code 130.1401. A sale of tangible personal property shall be made tax-free on the ground of
being a sale for resale if the purchaser has an active registration number or resale number
from the Department and furnishes that number to the seller in connection with certifying to
the seller that the sale to such purchaser is nontaxable because of being a sale for resale. See
86 Ill. Adm. Code 130.1405 for Certificate of Resale requirements. Purchases for use or
consumption may not be made tax-free for resale. If a retailer purchases an item that the
retailer intends to use or consume, that item may not be purchased tax-free for resale.
Donors of Tangible Personal Property

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If the arrangement between a business and a customer is such that the business
provides tangible personal property to the customer free-of-charge, then a donor/donee
situation may exist. A donor who purchases tangible personal property and gives the tangible
personal property to a donee makes a taxable use of the property when making the gift. 86 Ill.
Adm. Code 150.305(c). A donor owes Use Tax on the donor’s cost price of the tangible
personal property that is transferred.
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,
Kimberly Rossini
Associate Counsel
KAR:slc