How did Illinois tax a facilities manager's fixed service fees, repair materials, construction work, and subcontracted services?

Plain-English summary

A national retailer asked IDOR to classify dozens of facilities-management charges: monthly labor and administration, repair materials, specialized construction and maintenance work, subcontractor invoices, and profit markups.

IDOR declined an item-by-item answer because the result depended on each contract and transaction. It instead explained the controlling categories.

When property was permanently incorporated into real estate, the provider was a construction contractor and owed Use Tax on material cost. The customer owed no Use Tax, and the contractor could seek reimbursement but could not label it customer "sales tax."

For non-construction services, tangible property transferred to the customer triggered Service Occupation Tax or Use Tax rules. Depending on the method available, the tax base could be the separately stated property price, 50% of the bill, or the serviceman's cost. Different rules applied to registered and unregistered de minimis servicemen. Subcontracted services followed the primary-and-secondary-serviceman rule.

Common questions

Did IDOR say the monthly fixed fee was taxable? No fact-specific conclusion was given.

Could a construction contractor collect 'sales tax' from the retailer? No. It could contract for reimbursement of its own tax liability, but not label the charge as sales tax.

Did separately stating materials always settle the issue? No. The governing method and whether property became real estate or was transferred incident to service still mattered.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075
• 86 Ill. Adm. Code 140.101 through 140.109
• 86 Ill. Adm. Code 140.145
• 86 Ill. Adm. Code 150.310

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0021.pdf

Original ruling text

ST 13-0021-GIL 04/30/2013 SERVICE OCCUPATION TAX
The Service Occupation Tax is a tax imposed upon servicemen engaged in the
business of making sales of service in this State, based on the tangible personal
property transferred incident to sales of service. See 86 Ill. Adm. Code Part 140. (This
is a GIL.)
April 30, 2013
Dear:
This letter is in response to your letter dated April 15, 2013, 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 are requesting technical assistance on an anonymous basis for a company
(“Company”) with operations in the state of Illinois. Please find below the Company
description and technical questions regarding the appropriate application of Illinois sales
tax law.
Company Description:

1. Company is a national retailer with hundreds of retail locations throughout the U.S.
2. Company owns, manages, and/or leases real estate property through which it
   conducts its retail business.
3. Company has entered into an agreement with a Facilities Management Services
   Firm (“FMSF”) to provide Fixed Fee Services, Ad Hoc Materials, and Variable Fee
   Services.
4. FMSF is in the business of providing such services for the owners, managers, and
   operators of commercial, banking, educational, medical, retail and industrial real
   estate properties. FMSF is registered with the Illinois Department of Revenue.
5. Company requires standard repair, maintenance, and administration on a monthly
   basis at its retail locations for which the FMSF charges a monthly fixed fee for
   services (“Fixed Fee Services”).
6. Fixed Fee Services invoices are for direct labor, administrative services, customer
   service, overhead, and profit.
7. Company requires standard repair and maintenance on a monthly basis at its retail
   locations for which the FMSF charges for materials used on an as needed basis (“Ad
   Hoc Materials”).
8. Ad Hoc Materials invoices are for materials and profit.

ST 13-0021-GIL
April 30, 2013
Page 2

9. Company requires specialized repair and maintenance at its retail locations
   (“Variable Fee Services”). The FMSF provides specialized repair and maintenance
   and also identifies third-parties to perform some of these services for the Company.
10. Variable Fee Services invoices are for labor, materials, and profit.
    Fixes Fee Services:
11. The Fixed Fee Services are billed on a monthly basis and include the following:
    direct labor, administrative services, customer service, overhead at 8%, and profit at
    10.42%. The Fixed Fee Services agreement includes 8 hours of direct labor per
    month per location. The Fixed Fee Services are inclusive of:
    a. Fixed Fee Services provided 24 hours a day, 7 days per week, 365 days per year
    b. FMSF Technician Services
    i.
    Twenty (20) HVAC certified technicians dedicated only to Company
    c. HVAC Services
    i.
    All preventative maintenance
    ii.
    HVAC capital projects
    iii. All service calls to include general repairs as requested by Company or
    recommended by contractor
    d. Site Inspection and Repair
    i.
    HVAC
    ii.
    Light electrical
    iii. Bulb replacement
    iv. Ballast replacement
    v. Roof inspection
    vi. General handyman & repair services
    vii. All interior and exterior lighting
    viii. Light plumbing
    ix. Building envelope
    x. Paint tough ups and repairs
    xi. Parking lot repairs
    xii. Sign repair
    xiii. Repairs within skill set of technician
    e. Program Administration with Dedicated Resources.
    i.
    Project Director
    ii.
    Three (3) Customer Service Representatives
    iii. Two Administrators
    f. Administration and Other Services
    i.
    Call center dedicated to repair and maintenance administration
    ii.
    Administration of customer service database
    iii. Uploading of all property and historical data into database
    iv. Dedicated operational support staffing
    v. 24/7/365 fulfillment center support
    vi. Scheduled site evaluation
    vii. Project coordination
    viii. Emergency response
    ix. Property maintenance consultation program

ST 13-0021-GIL
April 30, 2013
Page 3

Ad Hoc Materials

1. Ad Hoc Materials are purchased by the FMSF and resold to Company.
2. Ad Hoc Materials are utilized by the FMSF on an as needed basis when providing services
   under its Fixed Fee Services agreement.
3. FMSF purchases materials, on an as needed basis, from stores including STORE1,
   STORE2, and STORE3. The FMSF pays sales tax to the stores for these materials.
4. FMSF purchases materials, routinely needed, in bulk and issues a resale certificate at the
   time of purchase.
5. FMSF charges Company for materials and sales tax as the bulk purchases are allocated to
   a particular work order.
6. FMSF charges a 12% profit on the total sales price, before sales tax, of material resold to
   Company.
   Variable Fee Services
7. The Variable Fee Services invoices, for services provided by FMSF and third parties,
   separately state and itemize the following components:
   a. Carpet repair exceeding skill set of technician and cleaning
   b. General cleaning (daily or roll-out services)
   c. Electrical/plumbing exceeding skill set of technician or service requiring permit
   d. Elevator/escalator
   e. Exterminating
   f. Fire & safety
   g. Glass repair
   h. Landscaping repair
   i. Doors and locks exceeding skill set of technician
   j. Mold mediation
   k. Painting (projects)
   l. Parking lot repair (other than pot hole repair)
   m. Roof repair exceeding skill set of technician
   n. Sign repair exceeding skill set of technician or at heights exceeding the reach of a 18’
   ladder working height
   o. Snow removal
   p. General supplies
   q. Window washing
   r. Services not provided by Fixed Fee Services based technicians
   s. Services provided by Fixed Fee Services technicians in excess of 8 hours per location
   per month is billed at $46.00 per hour
   t. Store purchased materials, including sales tax, utilized by the FMSF for specialized
   repair and maintenance, purchased from vendors such as STORE1, STORE2, and
   STORE3
   u. Bulk purchased materials, including sales tax, utilized by the FMSF for specialized
   repair and maintenance
   v. Third party services, including labor, materials, and sales tax, for specialized repair and
   maintenance

ST 13-0021-GIL
April 30, 2013
Page 4
w. Profit at 12% of total sales price, excluding any sales taxes passed through by FMSF
from their third parties or directly charged by FMSF for materials and/or labor.
x. Company review and approval of proposals in required for Variable Fee Services
performed by either the FMSF or third parties. Certain services have thresholds which
do not require Company approval such as carpet cleaning, plumbing, and HVAC.
Emergency work does not require approval
Technical Questions:
Fixed Fee Services
A. Is the monthly charge for Fixed Fee Services subject to sales tax?
B. Are any of the Fixed Fee Services components subject to sales tax?
a. Direct Labor
b. Administrative Services
c. Customer Service
d. Overhead
e. Profit
C. If the monthly charge for Fixed Fee Services is subject to sales tax, would any of the
components be exempt if separately invoiced?
D. If profit is subject to sales tax, would it be exempt if more accurately defined on the invoice
as management fee, consulting fee, administrative fee, processing fee, etc.?
Ad Hoc Materials
A. Are store purchased materials, including sales tax paid to the store and resold by FMSF to
Company subject to sales tax?
B. Are bulk purchased materials resold by FMSF to Company subject to sales tax?
C. Is profit charged on store materials, including sales tax, subject to sales tax?
D. Is profit charged on bulk materials, including sales tax, subject to sales tax?
E. If any of the Ad Hoc Materials components (materials, sales tax and profit) are subject to
sales tax, would they be exempt if separately invoiced?
F. If profit is subject to sales tax, would it be exempt if more accurately defined on the invoice
as management fee, consulting fee, administrative fee, processing fee, etc.?
Variable Fee Services
A. Are any of the Variable Fee Services components subject to sales tax?
a. Carpet repair exceeding skill set of technician and cleaning
b. General cleaning (daily or roll-out-services)
c. Electrical/plumbing exceeding skill set of technician or service requiring permit
d. Elevator/escalator
e. Exterminating
f. Fire & safety
g. Glass repair
h. Landscaping repair
i. Doors and locks exceeding skill set of technician
j. Mold mediation

ST 13-0021-GIL
April 30, 2013
Page 5
k. Painting (projects)
l. Parking lot repair (other than pot hole repair)
m. Roof repair exceeding skill set of technician
n. Sign repair exceeding skill set of technician or at heights exceeding the reach of a 18’
ladder working height
o. Snow removal
p. General Supplies
q. Window washing
r. Services not provided by Fixed Fee Services based technicians
s. Services provided by Fixed Fee Services technicians in excess of 8 hours per location
per month billed at $46.00 per hour
t. Store purchased materials, including sales tax, utilized by FMSF for specialized repair
and maintenance, purchased from vendors such as STORE1, STORE2, and STORE3
u. Bulk purchased materials, including sales tax, utilized by the FMSF for specialized
repair and maintenance
v. Third party services, including labor, materials, and sales tax, for specialized repair and
maintenance
w. Profit at 12% of total price, excluding sales tax
B Is profit charged on labor subject to sales tax?
C. Is profit charged on store materials, including sales tax, subject to sales tax?
D. Is profit charged on bulk materials, purchased for resale, subject to sales tax?
E. Is profit charged on the gross amount of third party invoices subject to sales tax?
F. Whether FMSF is required to issue a resale certificate to its third parties performing
services?
G. Whether FMSF is required to collect sales tax on the gross amount of the third party’s
invoice?
H. If any of the Variable Fee Services components are subject to sales tax, would they be
exempt if separately invoiced?
I. If profit is subject to sales tax, would it be exempt if more accurately defined on the invoice
as management fee, consulting fee, administrative fee, processing fee, etc.?
We appreciate your assistance with these technical questions. If you have any questions or
require any additional information please contact me at XXX.

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

ST 13-0021-GIL
April 30, 2013
Page 6
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

ST 13-0021-GIL
April 30, 2013
Page 7
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.
Using the first method, servicemen may separately state the selling price of each item transferred as
a result of the sale of service. The tax is then calculated on the separately-stated selling price of the
tangible personal property transferred. If the servicemen do not separately state the selling price of
the tangible personal property transferred, they must use 50% of the entire bill to the service
customer as the tax base. Both of the above methods provide that in no event may the tax base be
less than the servicemen's cost price of the tangible personal property transferred. See 86 Ill. Adm.
Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis servicemen
who have either chosen to be registered or are required to be registered because they incur Retailers'
Occupation Tax liability with respect to a portion of their business. See 86 Ill. Adm. Code 140.109.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of the sale of service is less than 35% of the
total annual gross receipts from service transactions (75% in the case of pharmacists and persons
engaged in graphics arts production). Servicemen no longer have the option of determining whether
they are de minimis using a transaction by transaction basis. Registered de minimis servicemen are
authorized to pay Service Occupation Tax (which includes local taxes) based upon their cost price of
tangible personal property transferred incident to the sale of service. Such servicemen should give
suppliers resale certificates and remit Service Occupation Tax using the Service Occupation Tax
rates for their locations. Such servicemen also collect a corresponding amount of Service Use Tax
from their customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen that are not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act. Such de
minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their suppliers are
not registered to collect and remit tax, the servicemen must register, self-assess and remit Use Tax to
the Department. The servicemen are considered to be the end-users of the tangible personal
property transferred incident to service. Consequently, they are not authorized to collect a "tax" from
the service customers. See 86 Ill. Adm. Code 140.108.
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.
We are unable to provide answers to each of your questions. As you can see from the above
explanations on the Retailers' Occupation Tax, construction contractors and the Service Occupation
Tax, the answers to most of your questions are dependent on the facts in each particular case and
cannot be answered without knowing the actual arrangements between all the parties involved.

ST 13-0021-GIL
April 30, 2013
Page 8
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