Illinois Sales Tax Guide
Chapter 8: Understanding Illinois sales tax rules for shipping & handling
Some states have simple, easy-to-understand rules about sales taxes on shipping and handling. Some states have complex rules about sales taxes on shipping and handling. And then there’s Illinois, where a lawsuit about a very specific and arcane sales tax issue has created uncertainty for years.
Never fear! Illinois is taking steps to clarify the rules, and we demystify the state’s regulations for you below.Is Shipping Taxable in Illinois?
The short answer is: If you have tax nexus in Illinois, you should decide if the shipping and handling charges you pass on to your customer are taxable based on whether shipping was the customer’s only option.
Read on for the long answer…The Kean Lawsuit
In 2006, Nancy Kean sued Wal-Mart for charging sales tax on the shipping portion of an order she had placed from the store. She contended that the company violated Illinois law when it levied sales tax on the shipping charge.
One can see where the confusion came from (though perhaps not the incentive to file a class action lawsuit and take it all the way to the Illinois Supreme Court). The Illinois administrative code governing sales tax (which the state calls Retailers’ Occupation Tax) on shipping and handling seems to contradict itself.
The second paragraph of Section 130.415 says that, if a seller states the charges for delivery to a customer on a separate line and charges no more than the exact amount of the freight, the charge is nontaxable.
However, if you read down a couple more paragraphs, the code states that delivery is not taxable if it is separable from the purchase. This means that delivery is not taxable if the customer had the choice to pick up the item at the seller’s location. If the only option offered to the customer is shipping, the cost is considered inseparable and shipping is taxable.
In 2009, the Illinois Supreme Court came down on the side of the latter paragraph, ruling that Wal-Mart did the right thing when it charged sales tax on shipping because Kean didn’t have an option to pick up the trampoline she ordered. In this case, the court said, shipping was an inseparable part of the sale.So What’s That Mean To Me?
In August 2015, the Illinois Department of Revenue (IDOR) published a proposed change to its Retailers’ Occupation Tax code to reflect the Kean ruling. Although the change has not yet gone into effect, it will be retroactive to November 19, 2009 when and if it is adopted.
All of which is to say you can decide whether to charge sales tax on shipping by looking at whether shipping was the customer’s only option.
For example, if your customer could have picked up the tree frog placemats and matching tablecloth she ordered via your website at your place of business but asked you to ship them instead, shipping is not taxable. If she could only choose a shipping method and didn’t have the option to pick up her order, Illinois’ Retailers’ Occupational Tax applies to the shipping charges.
If you offer delivery to a customer in your own vehicle, the same rule applies: if the customer had the option to pick up the order, your delivery charge is not taxable.Exemptions To the Rules
Shipping and handling charges on tax-exempt orders are exempt from Retailers’ Occupational Taxes. If a package contains both tax-exempt and taxable items, all of the shipping and handling is taxable if most of the goods are taxable (determined by cost). If more than half the cost of the order is for tax-exempt items, the shipping and handling are not taxable.
Illinois levies a reduced Retailer’s Occupational Tax rate of 1 percent plus any applicable local taxes on sales of some foods and medicines, including medical devices. If you ship an order containing both reduced-rate items and full-tax-rate items, sales tax on shipping and handling follows the same principal as with tax-exempt goods: Go with whichever rate applies to more than half the order, by cost.Handle With Care
According to the IDOR, “technically, ‘handling’ is a seller’s cost of doing business and always taxable; however, both the current and proposed amendments (at Section 130.410 (c )(‘Costs of Doing Business Not Deductible’) state that when handling charges are stated in combination with shipping charges, they are taxable as provided in the regulations governing shipping and delivery (in Section 130.415).”
Translation: If you itemize a separate handling charge on your customer invoices, handling is taxable. If you bundle shipping and handling together into one charge, it is subject to Retailers’ Occupational Tax (or not) based on whether shipping is separable from the order.Illinois Distilled
Even though the current administrative code seems to state that sales tax on shipping can be tax-exempt if you itemize it separately, best practice in Illinois is to follow the proposed rules:
- If you offer your customer an option to pick up an item he orders online or have it shipped, you don’t have to charge sales tax on the shipping cost. Ditto for handling, if you lump it together with shipping.
- If you don’t offer a pick up in person option, collect and remit sales tax on the shipping and handling.
That was fun, wasn’t it? If it was just too much fun for you, consider getting a hand from tax compliance software. You don’t have to whack your way through the jungle of state sales tax regulations alone.