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Are Shipping Charges Taxable in Illinois?

  • Feb 17, 2017 | Suzanne Kearns

In the world of sales tax, the Illinois Department of Revenue (DOR) likes to keep retailers guessing more than most, especially when it comes to collecting sales tax on shipping charges. The matter is complicated right from the start because the state doesn’t even call the tax on personal tangible products “sales tax,” but refers to it as Retailers Occupation Tax (ROT).

The matter was further complicated when an Illinois Supreme Court ruling seemed to contradict the Illinois DOR on the issue. However, since that ruling, known as Kean v. Wal-Mart, the DOR has amended its rules to align with the Supreme Court’s ruling.

What follows are the new rules, effective April 1, 2016, for whether or not retailers should collect ROT for shipping charges in Illinois.

How Does the Illinois DOR Define Shipping Charges?

Delivery and transportation charges are defined as “charges for freight, express, mail, truck or other carrier, conveyance or delivery expenses, and shipping and handling.” In other words, it is the method a seller transfers the possession and control of a product to the buyer.

When Should Retailers Charge ROT on Shipping Charges?

If there is no way for the customer to get the product unless you ship it to them, and the shipping charge is included in the sales price, you are required to collect ROT on all taxable items that you sell. This is an important distinction for internet retailers who don’t have a brick-and-mortar store or any other way for purchasers to pick up their products.

But the new rules do allow for some exceptions for those internet retailers who offer consumers a way to pick up their products:

  • If an out-of-state internet retailer offers consumers the opportunity to pick up the item at a location in the selling state. For example, a Texas retailer that offers Illinois buyers the option to pick up their products at a Texas location is not required to collect ROT on the sale.
  • The internet seller is located in Illinois and also has a brick-and-mortar location. If the seller gives the buyer the option of picking up the property from the seller’s store, no ROT should be collected on the sale.
  • If a seller offers unqualified free shipping to purchasers, but also offers upgraded shipping options such as faster delivery, the seller should not collect ROT on the sale, even if the purchaser chooses to pay for faster shipping, because they still had the option of free shipping. On the other hand, if the seller offers qualified shipping, such as shipping only for purchases over a certain amount, and the seller doesn’t meet the qualifications, the seller must collect ROT.
  • If a customer arranges for the product to be picked up by a third party, the seller should not collect ROT on the sale.

When the Shipment Includes both Taxable and Nontaxable Products

If you ship a package that contains both taxable and nontaxable items, the Illinois DOR asks that you determine the taxability of the items in one of two ways.

  • You can include the shipping charge as one lump sum. According the DOR, "When an invoice contains a lump sum delivery charge for separately listed items, the lump sum delivery charge will not be taxable if the selling price of the items for which delivery is nontaxable is greater than the selling price of the items for which delivery is taxable."
  • You can also allocate the shipping charges to the taxable and nontaxable items as long as those charges are itemized. For example, if you ship $50 of fresh corn, and a $100 corn grinder, you would only collect the tax on the itemized shipping costs for the taxable corn grinder.

As an internet seller, you’ll most likely be required to collect ROT on your sales to Illinois customers unless you meet one of the stringent exceptions listed above.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns