Who owed Illinois Use Tax when custom countertops were sold and installed as part of one construction contract?

Plain-English summary

The contractor buying custom countertops for permanent installation was the end user and owed Use Tax on its cost. The retail shopping club sold an installed-countertop package and used a third-party supplier to measure, fabricate, and install it.

A combined sale-and-installation contract for property permanently incorporated into a structure was a construction contract even if installation was separately stated. Countertops, built-in cabinets, sinks, water heaters, and similar built-in items were examples.

The customer incurred no Use Tax, and the contractor had no authority to collect its Use Tax as “sales tax.” The contractor could raise its price or contract for reimbursement of its tax cost. If the subcontractor purchased and installed the materials as the construction contractor, the subcontractor owed tax; if the general contractor bought the property and hired installation, the general contractor owed it.

What this means for you

Identify who purchases the materials and whether they become part of the real estate. State any tax-cost reimbursement accurately rather than labeling it customer sales tax.

Common questions

Q: Did the homeowner owe Use Tax on the installed countertops?
A: No under the construction-contract rule described.

Q: Could the contractor recover its tax cost in the contract price?
A: Yes, but not by representing the amount as sales tax collected from the customer.

Q: Was separately contracted installation treated the same?
A: No. An over-the-counter property sale with separate installation followed the retail-sale rules.

Subject

Construction Contractors

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0109.pdf

Original ruling text

ST 10-0109-GIL 12/10/2010 CONSTRUCTION CONTRACTORS
When a construction contractor permanently affixes tangible personal property to real property,
the contractor is deemed the end user of that tangible personal property. As the end user, the
contractor incurs Use Tax on the cost price of that tangible personal property. See 86 Ill. Adm.
Code 130.1940 and 86 Ill. Adm. Code 130.2075. (This is a GIL.)

December 10, 2010

Dear Xxxxx:
This letter is in response to your letter dated May 24, 2010, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“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 on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
This letter is being written to request a private letter ruling pursuant to the Department’s
regulation at 2III. [sic] Adm. Code 1200.110, for our CLIENT. Our firm represents the
taxpayer in tax issues. We have enclosed the proper power of attorney permitting you
to discuss this matter with us.
The pertinent information related to our client (Applicant) is as follows:
Name: CLIENT
Address:
Type of tax at issue: sales/use tax
Facts:
Applicant is an Illinois retail shopping club that sells home products to its members at
discounted prices. Applicant sells engineered granite countertops to its members. The
sales price includes installation. Applicant orders the countertops from a third-party
supplier. The supplier makes all of the proper measurements and cutting required and
then installs the countertops. The countertops are never in possession of the Applicant,
as the supplier orders the materials and then takes them directly to the member’s home
for installation. The supplier does not charge the Applicant sales tax. The Applicant
does not charge its members sales tax on the purchase.

Issue:
Should Applicant remit use tax on the amount they are billed by the supplier? Who is
the end user?
We kindly request a private letter ruling as to whether or not the Applicant is responsible
for paying use tax on the amount billed by the supplier, or whether, the supplier who is
also performing the installation, is responsible for paying sales/use tax on the materials.
To the best of the knowledge of both the taxpayer and our firm, the Department has not
previously ruled on the same or a similar issue for the taxpayer or a predecessor. The
taxpayer, nor our firm, has previously submitted the same or a similar issue to the
Department and then later withdrew it before a letter ruling was issued. This issue, as it
regards the Applicant, is not presently under audit or litigation by the Department.
Neither the taxpayer, nor our firm, is aware of any authorities contrary to our views, nor
were we able to locate any such authority.
Should you have any questions, or need any further information, please contact this
writer.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject to the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
The Department declines to issue a Private Letter Ruling since its regulations are dispositive of the
subject of your request. Although we are not providing you with a Private Letter Ruling, we hope the
following general information will be of assistance.
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales” tax in Illinois. If the purchases
occur in Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase. The
retailers are then allowed to retain the amount of Use Tax paid to reimburse themselves for their
Retailers' Occupation Tax liability incurred on those sales.
If a customer purchases tangible personal property over-the counter without installation, for
example an appliance or counter tops, then the retailer owes Retailers' Occupation Tax and must
collect the corresponding Use Tax from the customer. If a customer purchases appliances or counter
tops over-the-counter and separately contracts for installation of the appliances or cabinets, then the
retailer owes Retailers' Occupation Tax and must collect the corresponding Use Tax from the
customer on the sale of the appliances or cabinets. The separately contracted for installation of the

appliances or cabinets is a separate service and no Retailers’ Occupation Tax is incurred by the
customer on the installation charges. See 86 Ill. Adm. Code 130.450.
A contract that provides for both the sale and installation of tangible personal property that is
permanently affixed or incorporated into a structure is considered a construction contract (whether or
not the cost of installation is separately stated in the contract). Obvious examples of the type of
tangible personal property that is permanently affixed or incorporated into a structure are bathtubs,
sinks, lavatories, cabinets built into the structure, counter tops, water heaters and water softeners.
Stoves and refrigerators that are not free standing and are built into the structure are some additional
examples. The tax liabilities regarding construction contractors in Illinois may be found at 86 Ill. Adm.
Code 130.1940 and 130.2075 on the Department’s Internet website. The term construction
contractor includes general contractors, subcontractors, and specialized contractors such as
landscape contractors. In Illinois, construction contractors are deemed end users of tangible personal
property purchased for incorporation into real property. As end users of such tangible personal
property, these contractors incur Use Tax liability for such purchases based upon their cost price of
the tangible personal property. See 86 Ill. Adm. Code 130.1940 and 86 Ill. Adm. Code 130.2075.
Therefore, any tangible personal property that a construction contractor purchases that will be
permanently affixed to or incorporated into real property in this State will be subject to Use Tax. If
such contractors did not pay the Use Tax liability to their suppliers, those contractors must self assess
their Use Tax liability and pay it directly to the Department. If the contractors have already paid a tax
in another state regarding the purchase or use of such property, they will be entitled to a credit
against their Illinois Use Tax liability to the extent that they have paid tax that was properly due to
another state. See 86 Ill. Adm. Code 150.310.
It is important to note that since construction contractors are the end users of the materials that
they permanently affix to real estate, their customers incur no Use Tax liability and the construction
contractors have no legal authority to collect the Use Tax from their customers. However, many
construction contractors pass on the amount of their Use Tax liabilities to customers in the form of
higher prices or by including provisions in their contracts that require customers to “reimburse” the
construction contractor for his or her tax liability. Please note that this reimbursement cannot be
billed to a customer as “sales tax,” but can be listed on a bill as a reimbursement of tax. The choice
of whether a construction contractor requires a tax reimbursement from the customer or merely raises
his or her price is a business decision on the construction contractor’s part.
If subcontractors are utilized and are acting as construction contractors, the transaction
between the general contractors and the subcontractors is not a taxable transaction. The
subcontractors incur Use Tax liability on any tangible personal property that they purchase for
incorporation into real estate. If, however, general contractors make purchases of tangible personal
property and then contract to have subcontractors do the installation of that tangible personal
property, the general contractors incur Use Tax liability on that tangible personal property.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk