How might the option for store pick up on an online sale save you some sales tax, even if you don’t choose that option? In the State of Illinois, it could determine whether you owe tax on shipping charges.
As a general rule, shipping charges are considered part of the selling price of tangible personal property, and therefore included in the tax base. However, many states exempt shipping charges when they are separately stated and, in the case of Illinois, separately contracted for. But how do you separately contract for shipping charges when buying products online?
Illinois’ current regulations state that delivery charges are agreed upon separately so long as the seller requires a separate charge for delivery and the charge reflects the actual cost of such shipping. This may be evidenced by documentation which demonstrates that the purchaser had the option of taking delivery at the seller’s location for the agreed asking price of the goods, or having delivery made by the seller for the agreed purchase price, plus an ascertainable delivery charge. But in today’s era of remote purchases from vendors across the country, purchasers may find such an “option” confusing. Is store pick up really an option when the store is two thousand miles away? That’s what the Department of Revenue may clarify with new regulations.
In November, 2009, the Supreme Court of Illinois ruled on the taxability of delivery charges in Kean v. Wal-Mart. In that case the plaintiff, Nancy Kean, purchased a trampoline from Wal-Mart’s online store. She argued that the delivery charges were not taxable because upon completion of her purchase, she chose from three shipping options, each of which included charges and required delivery to an address of her choosing. The plaintiff argued that such a choice constituted an agreement for an ascertainable delivery charge, separate from the selling price of the item, rendering the delivery charges non-taxable. The court, however, concluded that although Kean had multiple options for delivery of the trampoline, she could not in fact receive the trampoline without actually having it delivered. The requirement that the product be delivered to her created an inseparable link between purchase and delivery. That inseparable link made the delivery charge part of the sale, and therefore subject to sales tax.
The draft regulations seek to clear up some of the ambiguities from the Kean decision. First and foremost, they include a safe harbor which exempts shipping charges whenever the seller offers the option to pick up the property regardless of whether it is actually delivered or picked up. A series of examples further clarifies how tax is applied to delivery charges. One example illustrates how a customer pick up option would render the charges non-taxable even when the location of pick-up is out of state. Another involves a scenario, also non-taxable, where the customer can arrange pick up from a third party carrier, or use the third party carrier with whom the seller contracts. Again, the option to receive property without an additional charge by the seller is all that matters. Note that the customer can still choose to have the product delivered for a charge. The key is that the option to avoid delivery charges would render actual delivery charges non-taxable, even when the customer chooses delivery.
So the next time you buy something from an online retailer, look for that store pick up option. It could save you some sales tax.
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Other recent “Illinois (IL)” posts by William Seitz, ESQ:
- Business Use Tax in Illinois and Other States: Part 1 - The Basics
- IL Software Taxability Rules Complex - But Can Provide Refund Opportunities
- Chicago Lease Tax Amnesty Option: Deadline Approaches!
- Illinois Clarifies Tax on Shipping: You Can Save if Pick-up Option Offered
- The “411” on the “LTT”: Chicago’s Expanded Lease Transaction Tax