IL Sales Tax 101 Shipping States

Shipping in Illinois: Taxable or Not?

by Mark Faggiano

Shipping Taxable Illinois

Update: In April 2016, Illinois finally issued guidance on shipping taxability. Check out our “Is Shipping Taxable in Illinois? (Final Answer!)” post for the latest updates.

A funny thing happened after I wrote a blog post a couple of months back with a state-by-state summary on taxability of shipping. Online sellers in Illinois started to comment that what I posted was wrong – shipping is taxable in Illinois. One seller even said that his business was undergoing an audit that proved otherwise. Here’s what the reader said in his comment, verbatim:

“…we are currently undergoing an audit, and the Walmart case is very specific, and is being referenced by the auditor. Imagine our surprise when we found out that IDOR’s guidance is wrong and is not what is used by their auditors! Paraphrasing the judge in the Walmart case – ‘It doesn’t matter if IDOR says shipping is not taxable. Shipping is taxable.’ I will email the case to you if I can locate your email address.”

That comment doesn’t sound like something someone would randomly say, so I decided to dig a little deeper to figure out what the heck is going on in The Prairie State.

Sales Tax on Shipping in Illinois: Yes or No?

(In April 2016 Illinois finally put out a definitive answer to the shipping taxability question. Check out our Check out our “Is Shipping Taxable in Illinois? (Final Answer!)” post for the latest updates.)

The first thing I did was call the Illinois Department of Revenue and ask them to make sure. The person on the phone confirmed my original research. Shipping charges are not taxable if separately stated on the bill of sale (or invoice).

Then I went to Title 86 Part 130 Section 130.415 Transportation and Delivery Charges (PDF). It confirms what I had found previously, shipping charges are not taxable if stated separately.  Here’s a screenshot from the document:

shipping taxable ILBut if you notice, there’s a curious statement in there that says

If the seller and the buyer agree upon…

What the heck does that mean?

Next, I studied the Walmart case that the commenter mentioned. The decision by the Illinois Supreme Court in this case affirmed that Walmart was correct in charging sales tax on the shipping price of a mini-trampoline ordered by a buyer in Illinois. But wait, that seems to contradict everything I’ve found out.

Armed with new questions, I called the Illinois DOR back. Perhaps not surprisingly, I received a different answer – this one more of a middle path.

A knowledgeable customer service representative referred me back to the above document on their website, but further explained that all Illinois eCommerce sellers transacting with Illinois buyers must consider two important factors when determining whether shipping and handling is taxable:

1.) Actual Shipping & Handling Charges vs. the Amount you Collect from the Customer – For example, let’s say you charge $4.99 for shipping from all customers, no matter what, but the shipping & handling only actually costs you $3.02. If you make a profit off of shipping & handling, then that shipping charge is taxable. My impression was that the intent of this policy is less about taxing profit and more about giving online buyers options when it came to shipping and handling.

What does this really mean for sellers? According to the customer service representative from Illinois DOR, the Walmart case our commenter mentioned comes back into play here. With Walmart, the buyer does not get to agree upon her shipping price, therefore it isn’t a separate contract and the cost of shipping and handling is taxable. (Click here for an additional legal interpretation of the WalMart sales tax on shipping case in Illinois.) For other sellers, as long as you include shipping and handling as a separate cost from the purchase price, then that cost isn’t taxable under Illinois law. The rep further stated that this “contract” – signed documentation by both parties – can be digital and part of your terms of doing business with Illinois customers.

2.) Offering Multiple Shipping Options – The DOR customer service rep also mentioned that one way to cover yourself in this instance is to give the customer the option to pick up their purchase at your place of business, thus giving them a choice about whether or not to pay the shipping & handling fee. I checked, and it doesn’t matter if you live on opposite ends of the state, just as long as the choice is there. Again, this seems to speak to the “intent” of the law, giving the customer a choice about whether or not to pay the shipping & handling fee, and proving that that fee isn’t part of the price.

To back that up, here’s a communication from the Illinois Department of Revenue to our commenter who was being audited:

The choice of how a shipping charge is to be billed doesn’t mean that the shipping charges are separately contracted for.

When an item is purchased on-line and the customer must pay for shipping in order to receive the purchased item, Illinois courts have held that the shipping charge is part of the selling price and is taxable. In Kean v. Wal-Mart Stores, Inc., Illinois Appellate Court, First District, No. 1-07-1341, 387 Ill. App.3d 262, 899 N.E.2d 416, 326 Ill. Dec. 199, November 21, 2008. Affirming Illinois Circuit Court, Cook County, No. 06 CH 21735 the following was determined:

“A retailer’s imposition of Illinois sales tax on shipping charges for goods purchased through its Web site did not violate Illinois law because the shipping charges were held to be part of the total selling price of the items purchased. There was an inseparable link between the sale of goods and the associated shipping charges because customers could not purchase items at the Internet site without selecting a shipping option and agreeing to pay for shipping.”

Whether shipping and handling charges may be deducted by retailers in calculating Retailers’ Occupation Tax liability depends not upon the separate billing of such shipping and handling charges but upon whether the charges are included in the selling prices of the property or are contracted for separately by purchasers and retailers. [86 IAC 130.415 Transportation and Delivery Charges (d)] The best evidence that shipping and handling or delivery charges were agreed to separately and apart from selling prices, are separate and distinct contracts for freight or shipping. Alternatively, documentation in the sellers’ records that purchasers had options of taking delivery of the property at sellers’ locations, for the agreed purchase prices, or having delivery made by sellers for the agreed purchase prices plus ascertainable delivery charges, may suffice.

Long story short, the Illinois DOR ruled in this seller’s case that a purchase on the internet implies a shipping charge, which means that the shipping charge isn’t separate from the purchase and therefore is subject to tax. Of course, that last paragraph once again leaves open the prospect that online sellers can separate contract for shipping with their customers.

And in Conclusion…

To sum it up, I spoke to a couple of customer service representatives, studied the judgment in the Walmart Case, and read the published documents on the Illinois DOR’s website about shipping and handling, and I still can’t come to a firm conclusion about whether or not Illinois online sellers should charge sales tax on shipping for purchases from Illinois buyers.

My last call to DOR customer service led me to suspect that Illinois online sellers can avoid collecting sales tax on shipping by offering an in-person pick up option, or proving that they and the buyer have a separate agreement for the cost of shipping & handling, but the waters were much too muddy to come to a conclusion without the help of a CPA, tax attorney or a whole team of both.

Update as of August 2015: Lawyers now seem to be trading on the confusion caused by Illinois’ clear lack of guidance on shipping taxability. See this article about lawsuits against wineries who didn’t charge sales tax on shipping charges.

So, let’s hear your thoughts. Have you received a different answer about sales tax on Illinois shipping charges from the Illinois DOR or Illinois state auditors? Have you taken special pains to create a “separate contract” for shipping with your buyers? Let us know in the comments.

April 2016: Check out our “Is Shipping Taxable in Illinois? (Final Answer!)” post for the latest updates – and Illinois’ final answer – on this issue.

  • oofa

    What is the difference here?

    With Walmart, the buyer does not get to agree upon her shipping price, therefore it isn’t a separate contract and the cost of shipping and handling is taxable. For other sellers, as long as you include shipping and handling as a separate cost from the purchase price, then that cost isn’t taxable under Illinois law.

    I am sure wal-mart had the trampoline at x and the shipping at y

    • Mark Faggiano

      That’s a tricky one and one of the big reasons we kept contacting the Illinois DOR. I can’t give you specific advice about what to do in your case, but I can only refer you back to the conversation with their customer service representative and my other reading of the laws and precedents. She specifically said that with Wal-Mart the customer did not get a choice in their shipping (their price, their carrier, etc.), therefore it was a-okay for shipping to be included in the amount taxable for sales tax. Then she said that if online sellers are clear – even electronically – about giving their customers a choice between paying for shipping (i.e. using the online seller’s method of shipping) or letting the customer pick the merchandise up, then you do not have to charge sales tax on shipping. I know this is a tricky one. We’re keeping an eye on it for further notes from the Illinois DOR, law rewrites or legal challenges.

    • taxjar

      That’s a tricky one and one of the big reasons we kept contacting the Illinois DOR. I can’t give you specific advice about what to do in your case, but I can only refer you back to the conversation with their customer service representative my reading of the laws and precedents.

      She specifically said that with Wal-Mart the customer did not get a choice in their shipping (their price, their carrier, etc.), therefore it was a-okay for shipping to be included in the amount taxable for sales tax. Then she said that if online sellers are clear – even electronically – about giving their customers a choice between paying for shipping (i.e. using the online seller’s method of shipping) or letting the customer pick the merchandise up, then you do not have to charge sales tax on shipping.

      I know this is a tricky one. We’re keeping an eye on it for further notes from the Illinois DOR, law rewrites or legal challenges. We’d be interested to know if you’ve heard a different story.

      • 4DES

        Curious if an online seller offer multiple carriers, say FedEx and USPS shipping options, but not local pickup. Could we reasonable presume that allows an “option” for the buyer and would justify not collecting sales tax on the separate shipping fee of the selected carrier/method?

  • GL2000

    Judge finds to the contrary.
    http://tax.illinois.gov/LegalInformation/Hearings/st/ST13-14.pdf

    Stating shipping charges separately on internet listings should be sufficient to satisfy a separate contract clause, but is not necessary. Certainly if alternative methods are specified for shipping, the user’s choice can be considered agreement for that order.

    In the case where free shipping is indicated, e-commerce sellers cannot backout the shipping charges for tax purposes.

    The IL State Tax Grab Dept tried to formally change the rules, but backed out of that proposal in Jun 2013.
    http://www.revenue.state.il.us/News/UpdateShippingandHandlingCharges.htm

  • I would be careful assuming anything in Illinois and give them a call to try to get a judgment. We got some conflicting answers each time we called them, and the info in this blog post is what we came away with after talking to them multiple times and studying the law and regulations. I’m sorry we can’t be of more help on this, but Illinois is extremely tricky.

  • Dom

    Here’s a twist. I work for a company out of state. We have physical presence in Illinois (an employee who works from home), and are set up for sales and use tax. We sell to both end users and distributors. Our contracts specifically list shipping as an added cost to the item, if the customer does not have an account with UPS or FedEx, they will be charged our rate (we make a small profit on the shipping — but only to cover expenses for boxes, packaging material, insurance, etc.). If a distributor were to buy goods for resale, would they be taxed on the charges for shipping? We are giving them a choice of using their own account or being charged; as well as the detail that this item is being sold for resale. Just looking for feedback from the community. I can check in with the DOR and get multiple responses, but looking to see what everyone else thinks.

  • Illinois is one of those states where you’ll get several answers from the DOR and you want to try to get them to give you an answer in writing. While I can’t answer your questions (it’s a definite puzzler) I can point you to our list of sales tax experts who can. I hope they can help! http://www.taxjar.com/sales-tax-accountant-directory/

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  • Tired of Extra Taxes

    I think this is crappy. I live in a state where sales tax are not charged on shipping, but when I ordered online from Pampered Chef, I was charged for shipping and then charged a food tax on something that wasn’t even edible. I don’t think this is a fair option. I don’t mind paying sales tax on the items I receive, but I shouldn’t have to pay taxes for the shipping especially when shipping can run anywhere from $8 – $30. It’s absolutely ridiculous.

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  • Heather

    We are a distributor. Our corporate office is in MO but we have a location in IL so we collect tax in IL. I sold an item to a customer in IL who is taxable. They supplied their UPS account # and the order shipped on their account. BUT BUT BUT, the manufacturer who shipped the item directly to my customer (keep in mind, we’re just the distributor) charged a $2.50 handling fee. This charge is not negotiable. When I invoice my customer, there is a separate line item for this $2.50 handling fee. Going by what is said above, part of me thinks since this handling fee is non negotiable, then it’s taxable (like the Walmart case), but we are not profiting from this fee and we do not mark up this fee, we simply pass along exactly what the manufacturer charges, so is the handling fee taxable? I don’t know. We have a separate line item but this seems very hairy.. I may just have to pick up the phone unless you have some insight. TIA.

    • Hi Heather,

      I’m sorry to say it, but because you’re in Illinois I’d recommend giving them state department of revenue a call AND asking for that in writing. While it won’t make much of a difference in the long run (the tax is just going to be a few cents and states are generally happy with you for trying your best to comply), it’s best to talk to Illinois in this case. Just be warned that we’ve heard different stories every time we called them – hence why I recommend getting this in writing.

      You can find the quickest way to talk to a person in IL about sales tax in this post: https://blog.taxjar.com/state-sales-tax-phone-numbers/

      I really hope this at least points you in the right direction!

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