When was a custom millwork transaction an Illinois construction contract rather than a retail sale with installation?

Plain-English summary

An out-of-state custom millwork fabricator measured Illinois jobsites, built cabinets, countertops, and fixtures to order, delivered them, performed substantial installation and finishing, and sometimes supplied extra-work items installed partly by another contractor. It asked how those variations affected contractor, retailer, or serviceman treatment.

IDOR declined a transaction-specific Private Letter Ruling and did not decide the extra-work orders. It explained that an over-the-counter sale without installation was a taxable retail sale. A retail sale followed by a separately contracted installation remained taxable on the property, while the separate installation service was not subject to Retailers' Occupation Tax.

A single contract for both sale and installation of property permanently affixed to a structure was a construction contract even if installation was separately stated. Built-in cabinets, sinks, water heaters, and non-freestanding built-in appliances were examples. The contractor was the end user and owed Use Tax on material cost.

A business unable at purchase to know whether property would be resold over the counter or converted into real estate could buy for resale under Section 130.2075(b). If it later incorporated the property into Illinois real estate, it reported cost as taxable receipts and paid State and applicable local Retailers' Occupation Taxes; an over-the-counter resale was taxed on selling price.

Customers did not owe the contractor's Use Tax. The contractor could price in or contract for reimbursement of its cost but could not bill it as sales tax. A subcontractor buying materials for its own construction work owed the tax; if the general contractor bought the materials, the general contractor owed it.

What this means for you

Custom fabrication and participation in a larger project did not alone decide the tax model. Each contract's installation obligation and whether the property became a permanent part of real estate were central.

Common questions

Was a separately contracted installation taxable as a retail sale? No; the property sale remained taxable, but the separate installation service did not.

Did separately stating installation prevent construction-contract treatment? No.

Did IDOR decide the specific extra-work orders? No.

Citations and references

• 86 Ill. Adm. Code 130.450.
• 86 Ill. Adm. Code 130.1940 and 130.2075.
• 86 Ill. Adm. Code 150.310.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0007-gil.pdf

Original ruling text

ST 15-0007-GIL 01/12/2015 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.)

January 12, 2015

Dear XXXX:
This letter is in response to your letter dated September 3, 2014, 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:
Statement of Facts and Information:
COMPANY is engaged in custom millwork fabrication and installation,
mainly, for commercial purposes. All cabinets, countertops, wall fixtures,
etc are made on site at the production facility in STATE and delivered to
various construction job sites inside of IL by COMPANY employees.
Any complex solid surface pieces require a COMPANY employee to
install them on the job site. The majority of all jobs require these
complex pieces.
All pieces are custom and made to customer
specifications; no stock of finished product is maintained for sale to the
public. In addition, most large jobs are bid based and progress billed.
Typical Job:
Most jobs are part of a bid process where COMPANY submits a bid based
upon architect drawings to either a general contractor or the final customer.

Once the bid is accepted and construction is started on the job site, a
COMPANY employee will go to the job site to field measure prior to
fabrication on all jobs. In addition, COMPANY employees are required to
attend architect and construction meetings, generally, on the job site, both
prior to and during construction when related to its portion of the job. All
large and complex pieces are installed on the job site with the help of
COMPANY employees. A typical job will also require the installation of
locks into cabinets and drawers, installation of all field seams for solid
surface materials, adjusting of drawers and/or doors, and various other
finishing items. COMPANY employees also buff out scratches in solid
surface, fix any chips, dents and dings in laminate that occurred during
shipping and/or installation on the job site, do a final fitting and squaring of
all cabinets and drawers, and provide a final inspection of all COMPANY
related work areas. Finally, if necessary, COMPANY receives a punch list
for any remaining items that must be signed off by the customer to ensure
that work is complete. Since COMPANY is involved in the bidding process
and provides substantial on job site installation and other services, COMPANY
considers itself a construction contractor and self-assesses use tax on
materials.
Extra Work Orders:
At certain times, either the general contractor or customer will request extra
work orders (EWO) generally related to a much larger job as the construction
moves forward. Sometimes, these EWOs involve non-complex millwork that
is affixed into real property by either the general contractor or a customer's
contractor without a COMPANY employee being present. Generally, a phone
call is placed to COMPANY to have one of its employees come to the job site
and field measure and potentially mock up, using cardboard or other
appropriate material, the required product. COMPANY makes a drawing
which is sent to the customer, the customer signs off on the drawing for work
to begin, and the product is delivered. A COMPANY employee is still
responsible for all finishing work at the job site; including lock installation, solid
surface seams if necessary, and final fitting.
Questions:
When another contractor installs finished product without the help of
COMPANY employee, is COMPANY still considered a construction contractor,
and hence subject to use tax on material costs due to the other nature of their
work on the job site (measure, drawings, job meetings, installation of other
products, field seems, lock installation, and other finishing work) and the
custom nature of all pieces?
Is the installation of locks and other finish items from EWO considered
installation into real property if a COMPANY employee did not directly affix the
larger item into real property?
Is there a de minimis amount for an EWO compared to the larger job that would
still require the charging of use tax? Or is there a threshold amount from an
EWO that would require the charging of sales tax on the entire EWO amount?

Since all items produced by COMPANY are custom and only have value to the
purchaser, is COMPANY a "serviceman" if it meets the cost of materials/goods
test?
Prior Issues:
To the best of our knowledge, COMPANY or its representatives have never
submitted a Private Letter Ruling request to IL for this or any similar or other
issue.
Support for Current Tax Treatment:
Title 86 Part 130 Section 130.1940 Construction Contractors & Real Estate
Developers.
Title 86 Part 130 Section 130 2075 [sic] Sales to Construction Contractors
ST 07-0057-GIL
Contrary Views for Current Tax Treatment:
Title 86 Part 130 Section 130.1940 Construction Contractors & Real Estate
Developers. Title 86 Part 130 Section 130 2075 [sic] Sales to Construction
Contractors
COMPANY did not directly affix all finished product to real property.
Trade Secrets:
There are no trade secrets involved in this matter; the record can be public.
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). The Department recently met and determined that it would decline to
issue a Private Letter Ruling in response to your request. We hope however, the
following General Information Letter will be helpful in addressing your questions.
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, water heaters and water softeners. Stoves and
refrigerators that are not free standing and are built into the structure are some
additional examples. Regulations governing the tax liabilities of construction
contractors in Illinois may be found at 86 Ill. Adm. Code 130.1940 and 130.2075 on
the Department’s 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 he or she will permanently affix to or incorporate into real property in
this State will be subject to Use Tax. If such contractors did not pay the Use Tax
liability to their out-of-State suppliers, those contractors must self assess their Use
Tax liability and pay it directly to the Department at the rate of 6.25%. 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.
As a general rule, construction contractors should not provide resale
certificates to their suppliers in Illinois and to out-of-State suppliers registered to
collect Illinois Use Tax and should instead pay Use Tax and any locally-imposed
retailers’ occupation taxes at the time of purchase of tangible personal property to be
incorporated into real estate. However, when the purchaser of tangible personal
property may use such property by converting it into real estate, but may also resell
such property "over-the-counter" apart from acting as a construction contractor, and
where it is impracticable, at the time of purchasing such tangible personal property,
for such purchaser to determine in which way he will dispose of the property, such

purchaser may certify to his supplier that he is buying all of such tangible personal
property for resale and thereafter account to the Department for the tax on disposing
of such property. 86 Ill. Adm. Code 130.2075(b). If the purchaser subsequently uses
the tangible personal property by converting it into real estate in this State in any
manner, he must include the cost price of such tangible personal property in his
reported taxable receipts in his return to the Department and must pay the State
Retailers' Occupation Tax (not the Use Tax, but the Retailers' Occupation Tax)
thereon to the Department, and must also pay locally-imposed retailers' occupation
taxes thereon, if any. 86 Ill. Adm. Code 130.2075(b)(2). The cost price of such
tangible personal property should be reported as receipts on Lines 1 and 4a of the
ST-1 Sales and Use Tax Return. If the purchaser subsequently sells the tangible
personal property “over-the-counter” he will owe Retailers’ Occupation Tax and any
locally-imposed retailers’ occupation taxes on the selling price.
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 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 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 have further questions related to the
Illinois sales tax laws, 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:lkm