Who owed Illinois tax when an out-of-state facilities manager hired Illinois construction contractors and service providers for retail stores?

Plain-English summary

The party acting as the construction contractor was the end user of materials permanently incorporated into Illinois real estate and owed Use Tax on those materials. The out-of-state facilities manager arranged plumbing, electrical, HVAC, painting, flooring, roofing, and security work for Illinois retail stores, hired local providers, marked up their invoices, and billed the clients.

When local subcontractors themselves acted as construction contractors, the transaction between the general contractor and subcontractors was not taxable. The subcontractors owed Use Tax on materials they bought for incorporation into real estate. If the general contractor bought the materials and hired subcontractors only to install them, the general contractor owed the Use Tax.

The contractor could recover its tax economically through a higher price or a contract reimbursement, but it could not bill the customer as "sales tax." The customer itself incurred no Use Tax on the permanently incorporated materials.

For nonconstruction services, no Service Occupation or Use Tax applied when no tangible personal property was transferred. If property such as reports, CDs, or manuals was transferred, Service Occupation or Use Tax could apply under the four serviceman methods. A primary serviceman hiring a secondary serviceman had to use the multiservice rules in Regulation 140.145. Security-guard service without transferred property was not taxed.

The letter also discussed registration and nexus using the now-noncurrent Quill physical-presence framework. It did not administer or answer Illinois franchise-tax questions.

What this means for you

Facilities managers should define each party's role in the contract and document who purchases materials. Separate construction work from pure services and identify any property transferred with those services. Review current registration and nexus law rather than relying on the letter's historical Quill discussion.

Common questions

Q: Who paid tax when the subcontractor bought and installed construction materials?
A: The subcontractor acting as construction contractor owed Use Tax on its material cost.

Q: Could the contractor charge the client "sales tax" on construction materials?
A: No. It could negotiate reimbursement or a higher price, but the letter says the reimbursement could not be billed as sales tax.

Q: Was security-guard service taxable?
A: Not when no tangible personal property was transferred with the service.

Subject

Construction Contractors

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0024.pdf

Original ruling text

ST 11-0024-GIL 04/01/2011 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.)

April 1, 2011

Dear Sir or Madam:
This letter is in response to your letter received in this office on February 22, 2011, 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:
Even though our business is located in STATE, we are also doing business in your
state. We desire to comply with the NEXUS rules and regulations where as [sic] it
applies to: Sales Tax, Use Tax and or Franchise Tax in your state. Believing that we
are likely required to apply for registration for any or all of the above, please accept this
as the description of business operations:
We provide services for many Multi-Location Retail Clients under many circumstances –
for example:
The retail store located in IL, has a clogged toilet, they call their home
office (generally located in another state) who in turn redirects the call to
us – or sometimes the store will call us directly. We then call the store
from STATE to confirm the problem and begin calling plumbers local to
that store that can repair the toilet. Once we find the plumber, he gives us
a price (which sometimes does or does not include sales tax) and repairs
the toilet. The plumber sends us a bill in STATE and we mark up the
invoice by adding costs to cover our overhead and desired profit and bill
the client (generally located in another state). When the home office of

the retailer pays us, we pay the local plumber.
collecting or remitting any taxes to IL.

Currently we are not

We manage plumbing, electric, HVAC, painting, flooring, roofing, basically
all phases of construction as well as security guards in this fashion on a
regular basis.
Please contact me at your earliest convenience so that we can discuss how to manage
what we may have already done as well as how to move forward.

DEPARTMENT’S RESPONSE:
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.
Construction Contractors
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. 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 install that tangible personal property, the general
contractors incur Use Tax liability on that tangible personal property.
Service Occupation Tax
Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve
the transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information see of 86
Ill. Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm.
Code 140.101. The purchase of tangible personal property that is transferred to the service customer
may result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending
upon his activities. The serviceman’s liability may be calculated in one of four ways: (1) separately
stated selling price of tangible personal property transferred incident to service; (2) 50% of the
serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or (4) Use Tax on the serviceman's cost price if the
serviceman is a de minimis serviceman and is not otherwise required to be registered under
Section 2a of the Retailers' Occupation Tax Act.
The provision of professional or consulting services that do not include the transfer of tangible
personal property with the provision of such services does not result in Service Occupation Tax or
Use Tax liability. The transfer of any tangible personal property such as, for example, written reports,
tangible media (CDs) and training manuals incident to a sale of service would result in Service
Occupation Tax liability or Use Tax liability. See 86 Ill. Adm. Code 140.01 et seq. In regards to
workshops or training classes when tangible personal property may be transferred to participants,
please see the Department’s regulations on the taxation of seminar materials at 86 Ill. Adm. Code
140.129.
When a serviceman contracts out all or a portion of the service that he will provide, he is acting
as a primary serviceman in a multi-service situation. As a primary serviceman, he engages the
services of a secondary serviceman in order to obtain all or part of the product and services desired
by the service customer. See 86 Ill. Adm. Code 140.145 to determine the tax incurred in these
situations.
Generally, security guards are considered servicemen, and if no tangible personal property is
transferred by the security guards incident to the service there is no tax on his or her services.
Nexus
The definition of a "serviceman maintaining a place of business in Illinois" is set forth at 86 Ill.
Adm. Code 160.105(f). An out-of-state "serviceman maintaining a place of business in this State" is
required to register with the State as an Illinois Service Use Tax collector. The serviceman must
collect and remit Service Use Tax to the State of Illinois on behalf of its Illinois customers. Under
Section 160.105(f), an Illinois agent or representative operating in this State under the company's

authority would give the State nexus over the out-of-state serviceman. As an out-of-state serviceman
maintaining a place of business in Illinois, a company is required to register in Illinois as a Service
Use Tax collector and remit tax to the Department on behalf of its Illinois customers.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.
A physical presence is not limited to an office or other physical building. Under Illinois law, it
also includes the presence of any agent or representative of the seller. The representative need not
be a sales representative. Any type of physical presence in the State of Illinois, including the vendor’s
delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Wagner, 171 Ill.2d 410, (1996).
The final type of serviceman is the out-of-State serviceman that does not have sufficient nexus
with Illinois to be required to submit to Illinois tax laws. A serviceman in this situation does not incur
Service Occupation Tax on sales of service into Illinois and is not required to collect Service Use Tax
on behalf of its Illinois customers. However, the serviceman’s Illinois customers will still incur Service
Use Tax liability on the purchase of the goods and have a duty to self-assess and remit their Service
Use Tax liability directly to the State.
The Department does not administer franchise taxes in Illinois. I suggest you contact the
Illinois Secretary of State.
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