The Illinois Department of Revenue recently has released several private letter rulings (PLRs) and general information letters (GILs) which provide taxpayers with guidance on a variety of sales and use tax issues.1 The rulings address the tax treatment of medical diagnostic equipment, a school's sales of books and supplies to its students, costs for transporting items between a taxpayer's facilities, and the rolling stock exemption.

Medical Diagnostic Equipment

The Department held in a PLR that diagnostic equipment does not qualify as a medical appliance that is entitled to receive a lower sales tax rate.2 Under Illinois law, products that qualify as medical appliances are subject to a reduced state sales tax rate of 1 percent plus any applicable local taxes.3 Items that do not qualify for this lower rate are taxed at the general merchandise rate of 6.25 percent plus applicable local taxes. A medical appliance is defined by regulation as an item that directly substitutes for a malfunctioning part of the human body such as artificial limbs, dental prostheses and orthodontic braces, crutches and orthopedic braces, wheelchairs, heart pacemakers and dialysis machines.4 Corrective medical appliances such as hearing aids, eyeglasses and contact lenses also qualify for the lower state rate. However, diagnostic equipment is not deemed to be a medical appliance.5

In this PLR, the taxpayer developed and marketed a lab-on-a-chip system that enables eye care practitioners to improve their standard of care by objectively and quantitatively testing for dry eye disease. The taxpayer proposed that its test product consisting of a single-use, individually packaged, non-sterile, polycarbonate microchip that was designed to work with this system should be subject to the reduced sales tax rate. The Department determined that the test product was part of diagnostic equipment that was not a medical appliance taxed at a lower rate. Thus, the test product would be taxed at the general merchandise rate of 6.25 percent plus any applicable local taxes.

School's Sales of Books and Supplies to Students

The Department clarified in a GIL that schools incur sales tax liability when they engage in selling school books or supplies at retail to their students.6 A high school annually purchased books that it required its students to read and did not pay sales tax on the purchases. During the semester, the school sold the books to the students at cost plus the sales tax that was to be remitted to the state, plus a small amount of profit resulting from rounding up the total price. The Department explained that if a school purchases books with the intent of selling them to its students, the school can purchase them tax-free for resale provided the school gives its supplier a retail certificate.7 A regulation provides that exclusively charitable, religious and educational organizations that have an exemption identification number are subject to tax for retail sales except for (i) sales to members, (ii) noncompetitive sales, and (iii) occasional dinners and similar activities.8 Under the first exemption, sales by a school to its students are exempt if the sales are primarily for the purpose of the selling organization. Because the selling of school books and supplies by schools at retail to students is not "primarily for the purpose of" the school which does the selling, the school incurs sales tax liability.

Costs for Transporting Items Between Taxpayer's Facilities

In a GIL, the Department explained that for deliveries made from one of a company's facilities to another of its facilities for the purpose of consolidating a customer's order (termed as a "consolidated freight charge" by the taxpayer), the cost of delivery between the facilities is included in the sales tax base.9 Under Illinois law, the sales tax is based on the consideration received for a sale and the retailer's cost of doing business is not deductible.10 The costs of doing business are included in the tax base even if they are separately stated on the bill to the customer. In this case, the delivery is a transportation cost that is treated exclusively as a retailer's nondeductible cost of doing business.

Rolling Stock Exemption

The Department issued a GIL that explains the operation of the rolling stock exemption that is available to prevent the taxation of interstate commerce.11 Under Illinois law, "the rolling stock exemption applies to rolling stock used by an interstate carrier for hire, even just between points in Illinois, if the rolling stock transports, for hire, persons whose journeys or property whose shipments originate or terminate outside Illinois."12 The exemption applies when during a 12-month period the rolling stock has carried persons or property for hire in interstate commerce for more than 50 percent of its total trips or more than 50 percent of its total miles for that period.13 A statute provides that "[f]or purposes of determining qualifying trips or miles, motor vehicles that carry persons or property for hire, even just between points in Illinois, will be considered used for hire in interstate commerce if the motor vehicle transports persons whose journeys or property whose shipments originate or terminate outside Illinois."14 A carrier may use intrastate trips to qualify for the rolling stock exemption if the carrier can document that the journey of the passenger or shipment of the property either originated or terminated outside Illinois.15

In this case, bread products were shipped from an out-of-state location to a grocery store company's distribution center located in Illinois. The inbound bread products were unloaded and reloaded aboard semi-trailers pulled by tractors leased by a transportation company and bound for store locations in Illinois and several surrounding states. The transportation company's vehicles were used more than 50 percent in interstate commerce and qualified for the rolling stock exemption under the trips test, even though more than 50 percent of the miles traveled by the vehicles were in Illinois. Based on these facts, the Department determined that the single-state trips in Illinois qualified for the exemption, provided that the transportation company could document that the products originated or terminated outside Illinois, and the products were shipped to a location in Illinois by a carrier for hire.


The rulings discussed above provide some clarity to a variety of Illinois sales and use tax issues. In particular, the first ruling is the latest in a long line of Department rulings that analyzes whether a particular product should be characterized as a "medical appliance" subject to the preferential 1 percent state tax rate. While the taxpayer requesting the ruling went into substantial detail as to the nature of the product, the taxpayer was not able to show that the product consisted of anything more than a method of testing for the medical condition of dry eye disease. Therefore, the Department summarily determined that the product was a medical diagnostic tool taxable at the full 6.25 percent state tax rate. Had the product served as a substitute for the part of the eye that develops tears and remained in the eye to serve that function, the product might have been subject to the preferential 1 percent state tax rate.

The GIL concerning the exemption for a school's sale of books to its students is curious in its application of the primary purpose test. The books at issue were required to be read by students for various classes at the school. The Department determined that the sale of the books at retail to the students was not exempt because it was not "primarily for the purpose of" the school which sold the books. However, because the books were required for some of the school's courses, an argument could be made that these books were sold in furtherance of the educational purpose of the school. This GIL appears not to have addressed an important aspect of the manner in which the sales between the school and the students were structured and that failure by the Department to provide advice could cause difficulty in the event the taxpayer is ever audited by the Department.

The school explained that it charges tax to students based on its cost price of the books. By rounding up the total charge, the school earns a small "profit." This practice is problematic, and could result in an audit liability for the school. The school advised: The books are sold at cost plus the sales tax that is to be remitted to the state. A small amount of profit is made due to rounding of the sales price on the sale of these books. For example, if the cost of a book is $4.50, the amount charged to the student would be $4.50 x 1.07 = $4.82 rounded to $5.00.

From the description in the ruling request it is unclear whether the students are provided with a receipt that has a $5.00 flat charge or are provided with a receipt that itemizes the selling price of the book and the tax. In either event, the mechanism used by the school appears to be incorrect. A regulation provides that "[t]he seller will not be entitled to any deduction from total receipts because of having collected Use Tax from the purchaser if the seller, in collecting such tax, does not state it to the purchaser as a separate item from the selling price unless the Department finds that it is not possible, under the facts of the case, for the retailer to collect the tax from the purchaser as a separate item from the selling price and that the retailer is therefore permitted to collect the tax by including it in the selling price of the tangible personal property."16 The Department has a limited exception to this requirement referenced in the regulations that authorize posting a sign that provides that "tax is included" in a price without separately stating the amount of tax,17 but the regulation provides that the sign procedure may not be used "in types of transactions in which such retailer does issue invoices or sales tickets to customers."18 However, a sale of books is the type of transaction in which a retailer issues invoices to customers.

In an audit situation, we have seen Department auditors take the position that if tax is not separately stated on the invoice to the customer, then tax is due on the total gross receipts received from the customer – in the school's example, $5.00 – even though the school may have collected and remitted tax from the customer.

In addition, the ruling also failed to alert the school to the fact that it is likely using an incorrect tax base for the calculation of the amount of tax due. As quoted above, the school calculates tax based on its cost price, and then the combination of cost price and tax is rounded up to give the school a "profit." That "profit" is a portion of the gross receipts of the school and should also be included in the tax base. Failure to include these amounts would represent an underpayment of tax that would be subject to an audit assessment by the Department. A regulation provides in pertinent part that "gross receipts" means "all the consideration actually received by the seller."19

This ruling illustrates why it is necessary for taxpayers to research issues a bit further, rather than solely relying on Department GILs. A taxpayer that relies on the fact that the Department's ruling did not point out the flaws in the school's procedures for charging tax could receive an unfortunate surprise upon audit.

The other rulings both concern transportation issues. The first transportation ruling clarifies that the charges by a company to end-user customers for transporting goods between the company's various facilities as a means of consolidating the product that is transported to the customer are considered to be part of the company's cost of doing business subject to tax. The final ruling explains that the rolling stock exemption may be applicable to a carrier's transportation of goods within a single state if certain conditions are satisfied. Carriers may qualify for the exemption if more than 50 percent of their vehicles' total trips for a 12-month period are used to move cargo with an origin or destination point outside Illinois, even though more than 50 percent of the miles traveled by their vehicles are in the state. Thus, carriers seeking the rolling stock exemption should consider the requirements for meeting this exemption.


1 Note that Department regulations require that the Department issue only two types of letter rulings, PLRs and GILs. PLRs are issued by the Department in response to specific taxpayer inquiries concerning the application of a tax statute or rule to a particular fact situation. A PLR is binding against the Department, but only as to the taxpayer issued the ruling and only to the extent the facts recited in the PLR are correct and complete. GILs do not constitute statements of Department policy that apply, interpret or prescribe the tax laws and are not binding against the Department. See ILL. ADMIN. CODE tit. 2 §§ 1200.110; 1200.120.

2 Private Letter Ruling, ST 14-0005-PLR, Illinois Department of Revenue, Aug. 12, 2014, released Sep. 2014.

3 35 ILL. COMP. STAT. 120/2-5(35-5); ILL. ADMIN. CODE tit. 86 § 130.311.

4 ILL. ADMIN. CODE tit. 86 § 130.311(d).

5 ILL. ADMIN. CODE tit. 86 § 130.311(d)(5).

6 General Information Letter ST 14-0037-GIL, Illinois Department of Revenue, Aug. 5, 2014, released Sep. 2014.

7 For information on retail certificates, see ILL. ADMIN. CODE tit. 86 § 130.1405.

8 ILL. ADMIN. CODE tit. 86 § 130.2005.

9 General Information Letter ST 14-0039-GIL, Illinois Department of Revenue, Aug. 7, 2014, released Sep. 2014.

10 35 ILL. COMP. STAT. 120/1; ILL. ADMIN. CODE tit. 86 § 130.410.

11 General Information Letter ST 14-0046-GIL, Illinois Department of Revenue, Sep. 4, 2014, released Oct. 2014. The rolling stock exemption is provided by 35 ILL. COMP. STAT. 105/3-55(b).

12 35 ILL. COMP. STAT. 105/3-60 (emphasis added).

13 35 ILL. COMP. STAT. 105/3-61(c). This provision was effective July 1, 2004.

14 Id.

15 See ILL. ADMIN. CODE tit. 86 § 130.340(i).

16 ILL. ADMIN. CODE tit. 86 § 150.135(d).

17 ILL. ADMIN. CODE tit. 86 §§ 150.1305; 150.1310.

18 ILL. ADMIN. CODE tit. 86 § 150.1305(b).

19 ILL. ADMIN. CODE tit. 86 § 130.401.

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