Illinois Provides Sales Tax Guidance for Try-Before-You-Buy Subscriptions

October 28, 2021

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By: Tina M. Chunn, SALT Senior Manager

At a glance

  • The main takeaway: Subscription models such as “try before you buy” are growing in popularity yet raise complex sales and use tax issues.
  • Why it matters to you: Understanding the sales and use tax consequences of your business model is crucial to avoid unnecessary tax liabilities.
  • Next steps: Aprio’s State and Local Tax (SALT) team is experienced with analyzing various business models to identify tax obligations and can make sure you remain in compliance.

Schedule a free consultation today to learn more!

The full story:

Businesses offering “try before you buy” subscriptions have become more popular over the last few years, but they can present some complex sales and use tax issues that must be addressed. On July 27, 2021, the Illinois Department of Revenue (DOR) issued General Information Letter ST-21-0025-GIL, in which it addressed various sales and use tax issues pertaining to the taxpayer’s try-before-you-buy subscription business.

The taxpayer – located out-of-state – provides a month-to-month subscription program for a subscription fee to allow customers to try the merchandise before determining which items they will purchase. The subscription is automatically renewable with each payment, but can be canceled at any time. Upon receiving the merchandise, the customer tries the item, and then decides to either keep and purchase the items or to return it and try additional items. All merchandise is initially stored and shipped from a location outside Illinois.

The ruling addressed several specific issues as summarized below:

Issue #1 – Does the taxpayer owe sales tax on its subscription receipts?

Illinois sales tax (technically called the Retailer’s Occupation Tax) is levied on persons engaged in Illinois in selling tangible personal property at retail to purchasers for use or consumption.[1] A retail sale occurs when ownership or title to tangible personal property is transferred to a purchaser for use or consumption (i.e., not for resale).[2]

In this case, the DOR ruled that the subscription receipts are generally not subject to sales tax since there is no transfer of ownership or title, and thus, there is no retail sale. The DOR also concluded that the subscription receipts are not taxable under the state’s “Rental Purchase Agreement Occupation and Use Tax,” which became effective on January 1, 2018. This tax was intended to apply to more traditional rent-to-own agreements.

However, the ruling does not explain what would happen when the customer ultimately decides to purchase the merchandise. At that point there is a retail sale, but there is no guidance on how to determine the price subject to sales tax.

Issue #2 – Does the taxpayer owe use tax owed when the merchandise is made available to its customers?

Generally, a business owes use tax when it uses tangible personal property in the state. The term “use” means “the exercise by any person of any right or power over tangible personal property incident to the ownership of that property.”[3] However, Illinois (as is the case in many states) provides an exception to use commonly referred to as the demonstration use exemption, allowing a business that has purchased property for resale to use the item for demonstration purposes without creating a use tax obligation.  While the ruling does not explicitly state that the exception applies, it is likely that allowing a customer to try a product before deciding to purchase it would qualify as a demonstration.

Issue #3 – When a customer purchases an item, is the Company required to collect the state and local sales tax?

A retailer physically doing business in Illinois is required to collect state and local sales tax on their retail sales fulfilled from inventory located in Illinois at the time of the sale. Prior to January 1, 2021, a remote retailer that met the state’s economic nexus thresholds was required to collect the state’s 6.25 percent use tax (there is no local component). However, beginning January 1, 2021, a remote retailer that meets the state’s economic nexus thresholds is now required to collect state and local sales tax in order to level the playing field between brick-and-mortar and remote sellers.

Notably, in this case, the DOR concludes that the taxpayer is not a remote retailer because it has inventory located in Illinois as a result of its subscription business model (i.e., customers in Illinois are trying out inventory that the taxpayer owns). Therefore, the taxpayer is required to collect state and local sales tax based on the location of the inventory at the time of retail sale.[4]

The bottom line

Aprio’s SALT Team is experienced with analyzing various business models to identify what specific taxes may apply. We can work with you to identify your specific sales tax nexus and tax obligations so that you remain in compliance and do not incur unexpected liability and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT Senior Manager, at or Jeff Glickman, Partner-in-Charge of Aprio’s SALT practice, at for more information.

This article was featured in the October SALT newsletter.

[1] 35 ILCS 120/2.

[2] 35 ILCS 120/1.

[3] 35 ILCS 105/2.

[4] Illinois has some complicated rules that have recently been amended that explain what taxes need to be collected depending on factors such as whether the seller is a remote retailer or marketplace facilitator and the location of the inventory that fulfills the sale.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.