Vedder Thinking | Articles Illinois Has Amended its Regulations to Clarify the Taxation of Shipping and Handling Charges
As republished on April 20, 2016 by The National Law Review.
Effective April 1, 2016, the Illinois Department of Revenue (the "Department") has amended its "shipping and handling" regulations1 to conform to the Illinois Supreme Court's decision in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009)2 and to clarify its prior shipping and handling regulations.
Significant revisions to the shipping and handling regulations include the following:
Applicability of the Amended Regulation
The Department has incorporated a "safe harbor" into the amended regulation for tax periods falling between November 19, 2009 (the date of the Kean decision) and April 1, 2016, for those taxpayers that have computed their Illinois sales tax on shipping fees in conformity with either the Department's prior regulation or the newly amended regulation. Taxpayers complying with either version of the regulation during this period shall be considered to have properly charged Illinois sales tax on shipping fees they receive.
Further, the new rules on taxation of shipping fees are to apply equally to retailers subject to sales tax, retailers collecting use tax on behalf of their customers and to persons self-assessing use tax.
Taxability of Shipping and Handling Charges
The amended regulations make it clear that shipping fees are subject to sales tax if there is an "inseparable link" between the sale and the shipping incurred by the customer. An inseparable link exists if (1) the shipping fees are not separately stated from the cost of the goods purchased or (2) if the shipping fees are separately stated, but the seller either (a) does not offer the customer the option of picking up the goods or (b) does not offer the customer a free shipping option.
If the cost of shipping is separately stated and if the customer is offered the option of pickup or free shipping, then the shipping charges are not subject to Illinois sales tax.3 Please note, the retailer's store identified for pickup does not have to be in Illinois.
Below are two examples the Department provides in its amended regulation:
Example 1. An Illinois customer makes an Internet purchase from a retailer who also has brick-and-mortar stores. A customer selects property from a retailer's website, clicks the "add to shopping cart" button and proceeds to "check out." The online retailer adds the price of the items in the shopping cart, for a total price of $200. The online retailer then prompts the customer to click on the box corresponding to the method by which the customer prefers to obtain the merchandise (e.g., USPS or other common ground carrier for $12.99, two-day delivery for $18.50, Next Day Air for $33.50, or the option to pick up the property for no extra charge at the retailer's store). The customer clicks on the ground carrier box for delivery to the purchaser's home. The retailer then calculates the total price of the order ($200 + $12.99 = $212.99). The cost of the property and the cost of shipping are separately identified on the invoice when the property is delivered. Because the delivery charge is separately identified on the purchaser's invoice, and the purchaser had the option to pick up the property rather than having it shipped, there is no inseparable link between the purchase of the property and the outgoing transportation and delivery charges. Therefore, the delivery is a service separate and distinct from the sale of the items and the shipping fees received by the retailer are not part of the retailer’s gross receipts subject to Illinois sales tax. The taxable amount is $200.00.
Example 2. An Illinois customer makes an Internet purchase from a retailer without a brick-and-mortar store. Assume the same facts as Example 1, except the customer is not given the option of picking up the item. Because the tangible personal property could not be sold to the customer without including delivery, there is an inseparable link between the purchase and the delivery, and the charges for delivery are included in taxable gross receipts. The taxable amount is $212.99.4
The amended regulations also clarify the taxation of shipping fees on "mixed transactions," i.e., sales that include both taxable and nontaxable sales and/or sales that are taxed at different tax rates.5 In general, if the shipping fees are taxable but separately stated for each item purchased, then the tax on shipping may be calculated separately for each listed item on the customer's invoice. Using this method, the tax rate for delivery charges will be separately calculated at the high rate on high-rate items, the low rate on low-rate items and as exempt on items that are exempt from sales tax.
When an invoice contains a lump sum shipping fee for separately listed items, taxpayers are to apply the Department's "lump sum rule" to determine the appropriate tax for the shipping fees. Under the lump sum rule, the selling price of the items dictate whether the shipping fee is taxable or not taxable or, if taxable, if taxed at the high or low tax rate. For example, if the selling price of the items exempt from sales tax is greater than the selling price of the items which are taxable, then the lump sum shipping fee for all items purchased will be exempt from sales tax.
The Department has provided a number of examples illustrating taxation of shipping fees and mixed transactions. To view additional examples and the full text of the Department's newly amended shipping regulation §130.415, click here.
For more information about the amended shipping and handling regulation and what the changes could mean for your business, please contact David P. Dorner at +1 (312) 609 7764 or your Vedder Price attorney.
1 See Ill. Admin. Code tit. 86, §§ 130.410; 130.415.
2 In Kean, the Illinois Supreme Court considered whether shipping fees charged to an online customer are subject to Illinois sales tax if the customer cannot complete the purchase without incurring shipping charges. The Court held shipping fees are subject to sales tax where the purchaser cannot complete the sale without also buying delivery.
3 However, if the selling price of the tangible personal property purchased increases or decreases depending on the method of delivery chosen by the customer, then the shipping fees will be subject to Illinois sales tax to the extent such fees exceed the seller's actual cost of delivery.
4 Had the retailer offered the customer a free shipping option, then the shipping charges would not have been subject to sales tax because the customer would have had the choice of obtaining the item without paying a delivery charge. See Ill. Admin. Code tit. 86, § 130.415(b)(1)(D)(iv).
5 Illinois taxes some items, such as food, drugs and medical appliances, at a lower sales tax rate.