Who owed Illinois tax when a financing company paid a contractor to install energy-efficiency equipment and recovered costs through a capital lease?

Plain-English summary

A financing company paid contractors to obtain and install LED lighting, HVAC equipment, and other energy-efficiency upgrades in commercial buildings. It then recovered equipment, labor, interest, and fees through a customer "capital lease" with a one-dollar purchase option.

IDOR treated the underlying work as a construction contract, not a purchase of property for leasing. The installer permanently affixed equipment to real estate, making the contractor the end user. The contractor owed Use Tax on its cost of the installed property and could not treat the acquisition as a resale.

The financing company therefore could not give a resale certificate for the construction contract and was not technically responsible for the contractor's tax. The contractor could contractually require reimbursement, and the financing company could similarly recover its costs from the building customer, but the charge could not be labeled "sales tax."

The GIL added that Illinois did not tax receipts from leases of tangible personal property for state-administered sales and use tax, but the described transaction did not appear to be such a lease purchase.

What this means for you

Financing documents and a nominal buyout do not override the tax character of permanently installed real-property improvements. Identify who buys and installs the equipment and whether it becomes part of the building before issuing resale certificates or collecting tax from the end customer.

Common questions

Who owed Use Tax? The construction contractor, on its cost of installed property.

Could the financing company use a resale certificate? No.

Could the tax cost be passed through? Yes as a contractual reimbursement or price component, not as tax collected from the customer.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075.
• 86 Ill. Adm. Code 150.310.
• 86 Ill. Adm. Code 130.220.

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-15-0075-gil.pdf

Original ruling text

ST 15-0075-GIL 12/03/15 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.)

December 3, 2015

Dear Xxxxx:
This letter is in response to your letter dated August 27, 2015 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:
ABC (“the "Company") respectfully requests a ruling concerning the applicability of
sales tax to: a) labor costs in commercial equipment installation; and b) interest and
fees paid on a capital lease used to finance the equipment and its installation. The
Company requests and [sic] exemption from paying both labor costs associated with the
installation of commercial equipment and interest and fees associated with the capital
lease of commercial equipment.
A. STATEMENT OF FACTS
1)

Taxpayer Information:
a) COMPANY
b) Formation
COMPANY is a Limited Partnership formed under the
laws of the state of State 1 on DATE.
2) Facts relating to the request:
ABC (“the "Company") uses debt capital from accredited investors to finance
energy efficiency upgrades to commercial buildings (the "Business" of the Company).
The Company pays a contractor (the "Contractor") to obtain and install the energy
efficiency equipment (the "Equipment") such as LED lights, or HVAC equipment. The
Company pays the Contractor directly on behalf of the recipient of the Equipment (the
"Customer") for the Equipment and labor, just as the Customer would pay the

Contractor for those services. The Company enters into a capital lease (the "Capital
Lease") with the Customer who makes lease payments to the Company in monthly
installments. The Company itemizes that the cost of labor (the "Labor Cost"), the cost
of the Equipment (The "Equipment Cost") and fees and interest on the Equipment Cost
and the Labor Cost (the "Interest/Fees") in the Customer's lease. The Customer may
purchase the Equipment for a nominal cost of one dollar ($1.00) at the conclusion of the
Capital Lease.
3) Payment of sales tax:
The Company pays the Contractor for the equipment, it provides the Contractor
with a resale certificate and obtains title to the Equipment. The Company is then
responsible for collecting and remitting sales tax. Sales taxes due on the equipment are
collected on monthly lease payments in the form of the Illinois stream tax.
B. RULING REQUESTED
The following rulings are respectfully requested:
1) That the Company be exempt from paying sales tax on the Labor Cost in
accordance with Illinois State Statute §14-113.06.
2) That the Company be exempt from paying sales tax on the Interest/Fees in
accordance with Illinois State Statute §14-113.05.
3) That the way in which the Company has itemized the Equipment Cost, Labor Cost,
and Interest/Fees within its Capital lease -as shown in Exhibit B, Table 2 and 3- is
sufficient for the purpose of exempting Labor Cost and Interest/Fees from sales tax.
The method by which The Company plans to pay sales tax is acceptable.
C. STATEMENT OF LAW
Illinois State Statute § 14-113.06 states the following:
Installation Charges. If a charge for alteration, installation, or other special service in
connection with the transfer of tangible personal property is included in the selling price,
then it must be included in gross receipts. As with freight, however, if such a charge is
separately contracted for, such charge need not be included in gross receipts.
Illinois State Statute § 14-113.05 states the following:
Finance Charges. Interest and finance charges (if clearly identified in a retailer's books
and records) on installment sales contracts are not considered to be part of the "selling
price" and therefore need not be included in "gross receipts" for ROT calculation.
In light of the above language, the Company requests exemptions from paying
state sales tax on both Labor Costs and Interest/Fees. Further, the Company
requests a ruling on whether the Capital Lease is sufficiently itemized to achieve
these exemptions (see below).

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. See 86 Ill.
Adm. Code 130.1940 and 130.2075. 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. The Illinois Use Tax rate incurred by an out-of-State construction contractor
on purchases of materials from an unregistered supplier located outside of this State is generally
6.25% as described in subsection (c) of Section 130.2075.
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.
It appears that your company contracts for the improvement of real estate. Because this is a
construction contract between your company and the contractor who installs the equipment, the
construction contractor owes Use Tax on the cost price of the tangible personal property that is
installed. Though the contractor may choose to pass on the cost of the tax to your company in the
form of a reimbursement, your company is not technically responsible for the tax. If the construction
contractor requires you to reimburse him for the amount of his tax liability, your company can similarly
recoup its costs through contractual agreements with your customer. Please also note that your
company cannot utilize a resale certificate when entering a construction contract for the improvement
of real estate. Instead, the construction contractor pays tax on the cost of the tangible personal
property when he purchases it to permanently affix the items into real estate.

Although your letter mentions a lease, the transaction you describe in your letter does not
appear to involve a purchase of tangible personal property for leasing purposes. Instead, the
transaction appears to be a construction contract. If these facts change in any way, the tax liabilities
involved could also change. However, please be advised that Illinois does not have a tax on leases
of tangible personal property. For State-administered tax purposes, sales and use taxes do not apply
to lease receipts. See 86 Ill. Adm. Code 130.220.
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,

Cara Bishop
Associate Counsel

CB:bkl