Who owes Illinois tax on building and remodeling materials that a construction contractor permanently incorporates into real property?

Plain-English summary

Illinois treated a construction contractor as the end user of tangible personal property permanently affixed to or incorporated into real estate. The contractor owed Use Tax based on its cost of those materials.

If the supplier did not collect Use Tax, the contractor had to self-assess and pay it directly. Tax properly due and paid to another state could be credited against Illinois liability to the extent described in 86 Ill. Adm. Code 150.310.

The customer did not owe the contractor's Use Tax

The customer incurred no Use Tax on the incorporated materials. The contractor could not collect its liability from the customer as "sales tax."

The contractor could increase its price or use a contract clause requiring reimbursement, but an invoice had to identify that amount as reimbursement rather than sales tax.

The party buying the materials generally bore the tax

When a subcontractor acted as construction contractor and bought materials for incorporation, the subcontractor owed Use Tax and the general-contractor/subcontractor transaction was not taxable.

If the general contractor purchased the property and hired a subcontractor only to install it, the general contractor owed Use Tax.

What this means for you

Builders and remodelers

Pay or self-assess Use Tax on material cost for Illinois real-property work. Do not collect that liability from the property owner as sales tax.

General contractors using subcontractors

Track who buys the materials and who acts as construction contractor; that determines which contractor bears Use Tax under the rules described.

Common questions

Q: What is the tax base?
A: The contractor's cost price of the incorporated tangible personal property.

Q: Does the building owner owe Use Tax?
A: No.

Q: Can the contractor bill "sales tax" to the customer?
A: No, though a contract may require reimbursement of the contractor's tax.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075 — construction contractors as end users.
• 86 Ill. Adm. Code 150.310 — credit for tax properly due and paid to another state.

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-11-0084.pdf

Original ruling text

ST 11-0084-GIL 09/26/2011 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.)

September 26, 2011

Dear Xxxxx:
This letter is in response to your inquiry dated September 15, 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:
We have a client who builds and remodels buildings. They have recently obtained a
contract with jobs nationwide. They normally pay sales tax when they purchase
materials and in other states have been considered the ultimate consumer and have not
been required to submit any reports or tax to those states. What is the requirement in
your state? Where can I find the law that states your position?

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.

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.
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,

Debra M. Boggess
Associate Counsel
DMB:msk