When a construction contractor buys materials and permanently installs them into real property, who owes Illinois Use Tax, and can a subcontractor's out-of-state tax payment avoid double taxation down the sales chain?

Plain-English summary

This General Information Letter answers a question about who owes Illinois sales/use tax in a multi-party countertop deal. A residential homebuilder in Illinois hired a retail dealer/lumber yard to supply and install granite countertops. The retail dealer, in turn, had an installing subcontractor based in Iowa actually purchase the countertops and install them at the Illinois home. The subcontractor was charged Iowa sales tax and treated itself as the "end user" with a tax-paid inventory, then billed the Illinois retail dealer a completed contract price that already included the taxes it had paid. The retail dealer wanted to know whether it could pass that cost along to the homebuilder without also charging sales tax on top of it, since that would amount to double taxation.

The Department explained that under the Illinois Retailers' Occupation Tax Act and Use Tax Act, a contract that provides for both the sale and installation of tangible personal property permanently affixed to real estate is a "construction contract." Whoever acts as the construction contractor — including a general contractor, subcontractor, or specialized contractor such as a landscape contractor — is deemed the "end user" of the materials it permanently installs into real property. As the end user, that contractor (not its customers) owes Illinois Use Tax on its own cost price for the materials, citing 86 Ill. Adm. Code 130.1940 and 130.2075.

Applying this to the facts, the Department concluded that the Iowa-based installing contractor was acting as a subcontractor and was the party liable for Illinois Use Tax on its cost of the countertops (it may claim a credit for Iowa tax properly paid, per 86 Ill. Adm. Code 150.310). Because the subcontractor is the end user, neither the retail dealer nor the homebuilder incurs Use Tax on the transaction, and none of them has legal authority to bill each other "sales tax" for it. A contractor may, however, pass its own tax cost up the chain contractually as a price increase or as a stated "reimbursement of tax" — just not labeled or billed as sales tax itself.

The letter also notes that separately stating installation costs from material costs on a construction contract does not change these tax consequences, and that if a general contractor (rather than a subcontractor) makes the purchase itself and merely subcontracts out the installation work, it is the general contractor — as the purchaser — who incurs the Use Tax liability.

What this means for you

If you are a construction contractor or subcontractor

If you buy materials and permanently affix or incorporate them into real property (counters, fixtures, landscaping, and similar improvements), you are treated as the "end user" of those materials under 86 Ill. Adm. Code 130.1940 and 130.2075. You owe Illinois Use Tax on your own cost price for the materials — not Retailers' Occupation Tax on what you charge the customer for the completed job. If you didn't pay Use Tax to your supplier, you must register and self-assess it directly with the Department. If you already paid a similar tax to another state on the same property, 86 Ill. Adm. Code 150.310 lets you claim a credit against your Illinois Use Tax liability for tax properly paid elsewhere.

If you are a retailer, dealer, or customer further up the chain

Because the contractor who installs the property is the end user, you (as the dealer, builder, or property owner buying the finished, installed job) do not incur Use Tax on that transaction, and the contractor has no legal authority to bill you "sales tax." A contractor may still pass along its own tax cost to you through a higher price or a contract clause requiring you to "reimburse" its tax liability — but that charge cannot be labeled or invoiced as "sales tax." This chain can repeat: a retailer who was asked to reimburse a subcontractor's tax may in turn seek reimbursement from its own customer, again without billing it as sales tax.

Common questions

Who owes Illinois Use Tax when a contractor installs materials into real estate?
The construction contractor (general contractor, subcontractor, or specialized contractor) that actually purchases and permanently affixes the tangible personal property to real property is the end user and owes the Use Tax on its own cost price for that property.

Can a contractor charge its customer "sales tax" on an installed materials job?
No. Because the contractor, not the customer, is the end user for Use Tax purposes, the contractor has no legal authority to collect Use Tax or bill it as "sales tax" to the customer. It can pass along the cost as a higher price or as a stated tax reimbursement, but not as sales tax.

What if the contractor already paid tax on the materials in another state?
Under 86 Ill. Adm. Code 150.310, the contractor may claim a credit against its Illinois Use Tax liability to the extent it properly paid tax on the same property to another state.

Does it matter whether installation and material costs are billed separately?
No. Separately stating the cost of installation and the cost of the tangible personal property on a construction contract or bill does not change the tax consequences — it remains a construction contract for sales tax purposes.

Citations and references

• 86 Ill. Adm. Code 130.101 — Illinois Retailers' Occupation Tax Act imposes tax on persons engaged in selling tangible personal property for use or consumption
• 86 Ill. Adm. Code 150.101 — Use Tax imposed on the privilege of using tangible personal property purchased at retail
• 86 Ill. Adm. Code 150.130 — retailers may reduce Use Tax remittance by Retailers' Occupation Tax liability paid on the same sales
• 86 Ill. Adm. Code 130.1940 — construction contractor tax liabilities, including Section 130.1940(c) on materials permanently affixed or incorporated into a structure incident to a construction contract
• 86 Ill. Adm. Code 130.2075 — construction contractors deemed end users of tangible personal property incorporated into real property
• 86 Ill. Adm. Code 150.310 — credit against Illinois Use Tax liability for tax properly paid to another state
• 2 Ill. Adm. Code 1200.110 — procedures for requesting binding Private Letter Rulings (PLRs)
• 2 Ill. Adm. Code 1200.120 — General Information Letters (GILs) are non-binding and not a statement of Department policy

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0017-gil.pdf

Original ruling text

ST 17-0017-GIL 06/02/2017

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 130.2075. (This is a GIL.)

June 2, 2017

Dear Xxxxx:
This letter is in response to your letter dated April 12, 2017, in which you requested
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 requesting a clarification on where sales/use tax should be paid (and to which
state) in the following sales process. The string of players are as follows:
Company
COMPANY

Role
Fabricator & Supplier of
Granite Countertops

Location
STATE

Installing Contractor

Purchases & Installs
Granite Countertops

Iowa

Retail Dealer/Lumber Yard

Purchases from Installing
Contractor (Product & Install)

Illinois

Residential Home Builder

Purchases completed services
from the Retail Dealer

Illinois

What happens in this sales process is that the Builder contracts with the Retail Dealer
for a countertop to be installed at either a new or remodel residence in Illinois. The
Dealer then purchases both the product and install from the Installing contractor
(located in Iowa) and has them perform the installation at the home located in Illinois.

ST 17-0017-GIL
Page 2
The installing Contractor is being charged iowa sales tax by COMPANY so they have a
Tax Paid-up Inventory since they are considered the “end user”. They invoice the
Illinois Retail Dealer a completed contract price which includes use taxes already paid.
The Retail Dealer is now trying to determine how they are to invoice the Illinois Builder.
Currently, they are charging sales tax on their invoice to the Builder but it is our belief
they should not be since sales/use tax has already been paid appropriately by the
installing Contractor. This would result in double taxation for the same transaction.
Can you provide a written General Guidance on this transaction to make sure all parties
within the sales chain understand where the sales/use is owed and paid? Also, the
Retail Dealer would like to know how to report this on their Illinois Sales Tax return.
If you have any questions, please don’t hesitate to call or email me. My Direct Dial
number is ### and email is [email protected].

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 reduce the amount of Use Tax they must remit by the amount of
Retailers' Occupation Tax liability which they are required to and do pay to the Department with
respect to the same sales. See 86 Ill. Adm. Code 150.130.
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 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 register
and 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

ST 17-0017-GIL
Page 3
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.
Section 130.1940(c) addresses situations where tangible personal property is permanently
affixed or incorporated into a structure incident to a construction contract. As previously noted, a
construction contractor does not incur Retailers' Occupation Tax liability as to receipts from labor
furnished and tangible personal property (materials and fixtures) incorporated into a structure as an
integral part thereof for an owner when furnished and installed as an incident of a construction
contract. A construction contract that provides for both the sale and installation of tangible personal
property that is permanently affixed or incorporated into a structure may separately state the cost of
installation and the cost of the tangible personal property and remain a construction contract for sales
tax purposes. The fact that the installation costs and the tangible personal property costs are
separately stated in the contract or on the billing does not change the tax consequences of the
transaction.
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 and then contract to
have subcontractors do the installation, the general contractors incur Use Tax liability because they
are making the purchases of such tangible personal property.
In your fact pattern, the installing contractor is acting as a subcontractor. It must self-assess
Use Tax on its cost price of the counters and pay the tax directly to the Department. If the installing
contractor has already paid a tax in another state regarding the purchase of the counters, it will be
entitled to a credit against its Illinois Use Tax liability to the extent that it has paid tax that was
properly due to another state. The retail dealer, or contractor, has no tax liability to the subcontractor.
The subcontractor may seek reimbursement from the retailer for any tax the subcontractor may have
paid, but the subcontractor may not bill the contractor for tax. Lastly, the retailer may seek
reimbursement from the builder for reimbursement of tax the retailer may have paid the
subcontractor, but the retailer may not bill the builder for tax.
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:bkl