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Illinois Clarifies Tax on Shipping: You Can Save if Pick-up Option Offered

author photo of William Seitz

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.

Questions? Please see below for contact options.

Note: William (Bill) Seitz) is no longer moderating comments for this post. However, his True Partners Consulting associate (Christina Edson) welcomes your questions and/or consultation requests. Learn more about Christina Edson or True Partners Consulting (or submit a question or consultation request) through the linked Firm Profile page.

Other recent “Illinois (IL)” posts by William Seitz, ESQ:

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Comments

4 Responses to Illinois Clarifies Tax on Shipping: You Can Save if Pick-up Option Offered

  • Posted by Susan on May 26, 2016 12:59pm:

    We are a Michigan Company with an Illinois tax license with no physical presence in IL. Can you tell me how/why, in laymans terms, IL has us collecting only Use tax from our customers and not sales tax. Who is responsible for the other amounts due? I am getting questions from the customers and are not sure how to answer the question.

    • Posted by William on May 26, 2016 1:25pm:

      Hi Susan,

      Thanks for your question. If you're accepting orders and shipping from Michigan, then only use tax is due on the transaction, so you should only be collecting tax at 6.25%. Your customers are not obligated to pay the sales tax rate, which varies based on location. Those rates are only applicable when the sale is intrastate, i.e., both the purchaser and seller are located in Illinois. Illinois is a little unique in this regard, as most states with varying local rates have the same rate for sales tax and for use tax, and it is based on the purchaser's location.

      It's mostly a by-product of Illinois' sourcing rules. The application of local sales tax rates on sales to Illinois residents is based on the seller's place of business. So if the seller is located in Springfield, and I live in Naperville, I pay the Springfield rate, even if they ship it directly to me in Naperville. Since you have no place of business in Illinois, there's no local tax to consider, so only the state rate is applicable. You should let your customers know that because the transaction is subject to use tax, and not sales tax (there's a difference!), they should only pay 6.25% on their purchases from you.

      Hope this helps,
      Bill

  • Posted by Diane on April 2, 2016 10:13am:

    I am an interior decorator located in Michigan. I sold some furniture to a client in Illinois. I have an Illinois sales tax license, but I do not have any type of physical presence in that state. The furniture was shipped from CA to a receiving warehouse in Illinois and then picked up by my client. Do I have to charge her Illinois sales tax, Michigan sales tax, or no sales tax at all? The freight company was completely separate from the furniture manufacturer. Do I also have to charge her sales tax on the freight charge and receiving warehouse charges too ( they are separate companies and both are separate from the furniture manufacturer).

    • Posted by Author photo of William Seitzwilliamseitz on April 4, 2016 1:50pm:

      HI Diane, thanks for your questions. Short answers: No tax due to Michigan; You should collect Illinois tax and remit it to the state; Whether the shipping is taxable depends. Longer answers are below.

      The purchase of the property is actually subject to use tax, which is very similar to sales tax, so much so that most people just assume it’s all sales tax. The key point is that the property is taxed where it’s put into use, and in this case that’s Illinois. So the next question is who is responsible for paying the tax to the state, you or your customer. If you’re registered in Illinois, then the state requires you to collect the tax on its behalf, even if you don’t have a physical presence. Note as well that physical presence for purposes of nexus means more than having an office or showroom in the state. If you travel to Illinois to perform services or solicit sales, you will create nexus with Illinois. If you’re registered with Illinois and have a tax ID number, you should collect and remit the tax.

      As for shipping, it really depends on whether there was an "inseparable link" between the purchase and your client's receipt of the property. The rules around shipping taxability were just recently clarified, but the ultimate question is whether your client could avoid shipping charges entirely, which is to say, could they have picked up the property directly from the manufacturer themselves instead of having it shipped? If the option exists, there is no inseparable link, and the shipping charges aren't taxable. Note that the practicality of your client going to California to pick up the goods does not matter, so long as the option existed. Offering free pick up is like saying the proverbial magic words, rendering any subsequent shipping charges non-taxable.

      These answers are based on the information you provided, but if you have any additional information that might clarify the situation, feel free to respond or to reach out to me directly.

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