IDOR Proposes to Tax Shipping and Handling Charges

The Illinois Chamber Tax Institute has requested a public hearing on newly proposed Department of Revenue regulations which would make all shipping and handling charges subject to sales tax, effective October 1, 2012. On May 25^th, the Illinois Department of Revenue proposed amendments to Retailers’ Occupation Tax regulations 130.410 and 130.415 and to Service Occupation Tax regulation 140.301 to provide that shipping and handling charges are now considered a part of a retailer’s cost of doing business and subject to sales tax. Current Department regulations provide that shipping and handling charges are generally not subject to tax if they are separately agreed on or separately stated on the invoice to the customer.

The rulemaking is apparently in response to a 2009 Illinois Supreme Court case, Kean v. Wal Mart Stores, Inc. which held that on internet purchases the retailer and the customer could not have entered into a separate agreement for shipping and handling charges (thereby exempting the charges from the tax base under the Department regulations) since customers could not receive an internet order unless and until they had paid for the shipping of the item by whatever method they chose online. The Court found that there was only one actual online transaction taking place and shipping and handling charges were part of that single transaction and necessarily a cost of doing business to the internet retailer. The Department did not seek a change in the law and took no action to amend its own regulations following the Kean case, until today.

The Department’s proposed regulations are much broader in scope than what the Kean case held, however, and would apply to all Illinois retailers–not just internet stores. The proposed rules will go into effect on October 1, 2012, unless modified or withdrawn.

Examples are provided in the proposed rules for specific types of charges. Credit card or debit card charges or fees, idle time charges assessed for cement delivery trucks, automobile dealer document fees assessed and fuel surcharges are all specifically considered a cost of doing business and are subject to sales tax, as are all handling charges.

All outgoing transportation and delivery charges are subject to sales tax whether or not they are separately contracted for or separately stated on the customer’s invoice. This includes shipping and handling charges for all internet sales, mail order sales, and all Illinois-based retailer delivery charges whether by the retailer’s own delivery trucks or by third parties (like USPS, UPS, or Fedex) unless the customer hires the delivery service to pick up the merchandise at the retailer’s location.   

To further complicate matters, special rules are provided for retailers who are selling to exempt organizations or selling exempt or low-tax-rate items. If you are selling to an exempt customer (like a church or charity) then the shipping and handling is not subject to tax. If you are selling wholly exempt products, then the shipping and handling charges are also not taxable. Selling products subject to a low-rate of tax? Then you apply the low-rate to the shipping and handling charges. Selling a combination of exempt/non-exempt items or low-rate/high-rate items? Then you get to determine for each transaction if the selling price of the exempt products exceeds the selling price of the included non-exempt products and if so, then the shipping and handling charges aren’t taxed. If the selling price of the non-exempt items exceeds the selling price of the exempt, then shipping and handling charges are taxed. The same rule holds for low-rate/high rate sales. Retailers will have to determine if the selling price of the high rate items exceeds the selling price of low-rate items for each transaction and, if so, they will be required to assess the high rate of tax to the shipping and handling charges.   

If you have concerns or questions about the proposed regulations or would like to attend or testify at the hearing, please contact Connie Beard at cbeard@ilchamber.org. As always, we will keep you informed.