How does Illinois tax fabricated structural steel sold without installation, incorporated under a construction contract, or shipped out of state?

Plain-English summary

Illinois gave a structural-steel fabricator general rules rather than a transaction-specific ruling. The company cut, welded, drilled, and painted beams to construction specifications and asked how to handle Illinois jobs and out-of-state shipments.

Stock-like property versus special-order service

If the fabricated item was substantially similar to stock or standard property, even though custom-made, its sale produced Retailers' Occupation Tax liability.

For a retail sale, tax applied to gross receipts. The seller could not deduct material cost, labor, service costs, freight, overhead, processing, or other business expenses, even if separately stated to the customer.

If the property qualified as special-order property under 86 Ill. Adm. Code 130.2115, the transaction could instead create Service Occupation Tax or de minimis Use Tax liability under one of the serviceman tax-base methods.

Installation into real estate changed the analysis

A contract covering both sale and installation of property permanently affixed to a structure was a construction contract. Illinois treated the contractor as the end user of the property incorporated into real estate, with Use Tax based on the contractor's cost.

Seller-delivered out-of-state shipments could be exempt

Tax did not apply when, under the sales agreement, the seller delivered the goods by carrier or mail from Illinois to an out-of-state point and the goods were not returned to Illinois. The purchaser could arrange or pay the carrier without defeating the exemption, but the seller had to appear as consignor or shipper on the bill of lading.

The seller also had to retain records proving the agreement and bona fide out-of-state delivery.

What this means for you

Structural-steel fabricators

Do not choose tax treatment solely from the amount of customization. Determine whether the finished item remains substantially similar to standard property and whether the contract includes permanent installation.

Construction contractors

When the contract includes incorporation into real estate, the contractor-use-tax rules apply to cost rather than treating the work as an ordinary retail sale of beams.

Sellers shipping outside Illinois

Shipping documents matter. The exemption described requires seller delivery under the agreement and records showing the seller as consignor or shipper and the property reaching the out-of-state destination.

Common questions

Q: Is custom fabrication automatically a service transaction?
A: No. An item substantially similar to stock or standard property can remain a retail sale even when custom-made.

Q: May a retailer deduct steel, labor, freight, or overhead from taxable receipts?
A: No under the retail rule described.

Q: Who owes tax when the fabricator also installs the steel into real estate?
A: The construction contractor is treated as the end user and incurs Use Tax on cost.

Q: Is a shipment from Illinois to another state exempt?
A: It can be when the seller delivers under the agreement, is shown as consignor or shipper, and keeps proof of bona fide out-of-state delivery.

Citations and references

• 86 Ill. Adm. Code 130.2115 — special-order items.
• 86 Ill. Adm. Code 130.410 — costs included in retailers' gross receipts.
• 86 Ill. Adm. Code 130.1940 and 130.2075 — construction contractors as end users.
• 86 Ill. Adm. Code 130.605(d) and (f) — interstate and foreign-commerce delivery rules.
• 86 Ill. Adm. Code 140.106(d), 140.108(a)(2)(B), and 140.109(a)(3) — exemptions for servicemen under different tax bases.

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-11-0099.pdf

Original ruling text

ST 11-0099-GIL 12/09/2011 MISCELLANEOUS
The issue of whether a person incurs a Retailers' Occupation Tax or Service Occupation Tax
liability depends upon the nature of the items being produced and the nature of the design
work involved. See 86 Ill. Adm. Code 130.2115. (This is a GIL.)

December 9, 2011

Dear Xxxxx:
This letter is in response to your letter dated November 28, 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:
I am a CPA and have a client located in Illinois and our desire is to confirm that we are
handling their sales and use tax reporting requirements correctly. They operate a
structural steel fabrication business and as such take steel beams and engineer them to
conform with specifications needed to erect buildings. This process involves cutting,
welding, drilling and painting the beams.
Our questions revolve around whether sales or use tax is applicable and under what
circumstances. Currently they pay no tax when purchasing the raw materials, such as
the steel beams. Once a taxable sale is determined the use tax is paid on the cost of
the raw materials used for the job. This is how we were told to handle the sales and
use tax issue based upon a sales tax audit conducted several years ago.
Please advise us how the following scenarios should be handled.
1.
Taxable job in Illinois, not in an enterprise zone or for a governmental entity or a
nonprofit organization, where we don’t install the product that was produced and don’t
have a construction contract with the purchaser. What tax should we pay? Would it be
sales tax on the sales price or use tax on the raw material cost because it will be
permanently attached to the real estate by the ultimate consumer?

2.
Job located out of state where the product is being shipped out of state and we
are not installing?
We appreciate you [sic] assistance in this matter.

DEPARTMENT’S RESPONSE:
The issue of whether a person incurs a Retailers' Occupation Tax or Service Occupation Tax
liability depends upon the nature of the items being produced and the nature of the design work
involved. If the item being produced is substantially similar to stock or standard items, even though
custom-made, the sale of that item would result in Retailers' Occupation Tax liability. See, for
example, the test for special order items that result in Service Occupation Tax liability set forth in
subsection (b) of the Department’s rule “Sellers of Machinery, Tools and Special Order Items” at 86
Ill. Adm. Code 130.2115.
Illinois Retailers' Occupation Tax (sales tax) is imposed upon gross receipts from the sale of
tangible personal property to end-users and gross receipts is defined to mean all the consideration
received by sellers valued in money whether received in money or otherwise, but not including the
value of or credits given for like kind traded-in property.
In computing Retailers' Occupation Tax liability, no deductions shall be made by a taxpayer
from gross receipts or selling prices on account of the cost of property sold, the cost of materials
used, labor or service costs, idle time charges, incoming freight or transportation costs, overhead
costs, processing charges, clerk hire or salesmen's commissions, interest paid by the seller, or any
other expenses whatsoever. Costs of doing business are an element of the retailer's gross receipts
subject to tax even if separately stated on the bill to the customer. See 86 Ill. Adm. Code 130.410.
In the case where sellers of special order property are not subject to Retailers’ Occupation Tax
in accordance with Section 130.2115, the purchase of tangible personal property that is transferred to
service customers may result in either Service Occupation Tax liability or Use Tax liability for the
servicemen, depending upon which tax base the servicemen use to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) Service Occupation Tax on the
separately stated selling price; (2) Service Occupation Tax on 50% of the entire bill; (3) Service
Occupation Tax on cost price if they are registered de minimis servicemen; or, (4) Use Tax on cost
price if the servicemen are de minimis and are not otherwise required to be registered under Section
2a of the Retailers’ Occupation Tax Act.
Please note that 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.
The Department’s regulation regarding Sales of Property Originating in Illinois, 86 Ill. Adm.
Code 130.605(d) provides that tax does not apply to gross receipts from sales in which the seller

either by carrier (when the carrier is not also the purchaser) or by mail, under the terms of his
agreement with the purchaser, delivers the goods from a point in this State to a point outside this
State not to be returned to a point within this State. The fact that the purchaser actually arranges for
the common carrier or pays the carrier that effects delivery does not destroy the exemption.
However, it is critical that the seller is shown as the consignor or shipper on the bill of lading. If the
purchaser is shown as either the consignor or the shipper, the exemption will not apply.
Please note that under Section 130.605(f), retailers who ship property to freight forwarders
who take possession of the property in Illinois and ship the property to foreign countries, not to be
returned to the United States, are making exempt sales in foreign commerce and do not incur
Retailers' Occupation Tax liability on the gross receipts from those sales. However, there is no
exemption for property delivered in Illinois to foreign vessels. If foreign vessels purchase items of
tangible personal property from Illinois retailers and have those items delivered to the vessels in an
Illinois port, the sale is made in Illinois, the purchaser takes possession of the items in Illinois, and
therefore, the sale is taxable. In order to reflect this exemption on the ST-556 form, he should check
the "other" box and note that the sale was made into foreign commerce.
To establish that the gross receipts from any given sale are exempt because the tangible
personal property is delivered by the seller from a point within this State to a point outside this State
under the terms of an agreement with the purchaser, the seller will be required to retain in his
records, to support deductions taken on his tax returns proof that satisfies the Department that there
was an agreement and a bona fide delivery outside this State of the property that is sold. See 86 Ill.
Adm. Code 130.605(f).
A serviceman who incurs SOT on his or her selling price is authorized to claim any exemption
provided for in the Service Occupation Tax Act. For example, he or she may claim the interstate
commerce exemption or accept various exemption certificates from his or her customers (e.g.,
Certificates of Resale, exemption identification numbers). 86 Ill. Adm. Code 140.106(d). A de
minimis serviceman incurring Service Occupation Tax liability on his or her cost price also is
authorized to claim any of the various exemptions provided for in the Service Occupation Tax Act.
For example, he or she may claim the interstate commerce exemption or accept various exemption
certificates from his or her customers (e.g., he or she can accept Certificates of Resale). 86 Ill. Adm.
Code 140.109 (a)(3). The Department has also determined that a de minimis serviceman incurring a
Use Tax liability may claim any of the exemptions, except as provided in subsection (a)(2)(C),
authorized under the Service Occupation Tax Act. De minimis servicemen incurring Use Tax liability
may likewise claim the interstate commerce exemption, which is more fully explained at 86 Ill. Adm.
Code 130.605. 86 Ill. Adm. Code 140.108(a)(2)(B).
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