Does an out-of-state contractor owe Illinois sales or use tax on installing, maintaining, and supplying car wash equipment in Illinois?

Plain-English summary

The Illinois Department of Revenue issued this General Information Letter (GIL) in response to an out-of-state company planning to remove old car wash equipment and install new equipment purchased by an Illinois customer, maintain that equipment under a one-year agreement, and provide electrical and plumbing services with labor and materials for the installation. The company also asked whether it would owe Illinois sales tax on products and parts it might sell and deliver separately to Illinois customers.

The Department's core answer is about construction contracting: when a contractor permanently affixes or incorporates tangible personal property into real property, the contractor — not the customer — is treated as the "end user" of that property. As the end user, the contractor owes Illinois Use Tax on its own cost price for the materials, under 86 Ill. Adm. Code 130.1940 and 130.2075. The contractor has no legal authority to bill the customer "sales tax" on that work, though it may build the cost into its price or separately list a "reimbursement" of tax on the bill. If the installation work involves labor only, with no tangible personal property transferred (as described for the car wash equipment installation in the facts presented), no sales/use tax liability arises from that labor.

The GIL separately addresses the one-year maintenance agreement: if sold together with the equipment's selling price, the maintenance charge is part of taxable gross receipts; if sold separately, the agreement itself isn't taxed, but the company (as a service provider) owes Use Tax on its cost price of any parts transferred while performing the maintenance, under 86 Ill. Adm. Code 140.301(b)(3).

Finally, on the question of separately shipping products and parts to Illinois customers without installation, the Department discussed the retailer-nexus rules that determine whether the company must register and collect Illinois Retailers' Occupation Tax or Use Tax, including the physical-presence and click-through/affiliate nexus standards. Because a GIL is issued only to direct a taxpayer to relevant regulations and other information, it does not resolve every specific fact pattern with certainty — it lays out the framework the company (or others in similar situations) would need to apply to its own transactions.

What this means for you

Construction contractors and installers

If your business permanently affixes or incorporates equipment, materials, or fixtures into real property in Illinois, you are the end user of that tangible personal property, not a reseller. You owe Illinois Use Tax on your own cost price for the materials — you do not charge your customer "sales tax." If you didn't pay Use Tax to your supplier, you must register with the Department and self-assess and remit it directly. You may pass the cost through in your price or bill it as a "reimbursement of tax," but never label it as sales tax charged to the customer.

Businesses selling maintenance or service agreements

Whether a maintenance agreement is taxable depends on how it's sold. Bundled into the price of the equipment, the whole charge is taxable gross receipts. Sold separately, the agreement itself isn't taxed, but you as the service provider owe Use Tax on your cost price of any parts used while performing the maintenance work, and you cannot charge your customer tax on the labor or parts used under that agreement.

Out-of-state retailers shipping goods into Illinois

If you sell and deliver products or parts to Illinois customers without installation, whether you must collect Illinois Retailers' Occupation Tax or Use Tax depends on nexus — physical presence (including delivery/installation on a repetitive basis, or an in-state agent) or, since 2011/2015, contractual click-through or affiliate relationships with in-state referrers that exceed $10,000 in cumulative gross receipts over four quarters. If you lack sufficient nexus, you don't collect tax, but your Illinois customers still owe Use Tax and must self-assess it themselves.

Common questions

Q: If I only provide installation labor and don't sell the equipment, do I owe tax?
A: Based on the facts described in this letter, no — if a contractor performs services and does not transfer any tangible personal property, no sales or use tax liability arises from performing the services.

Q: Can I bill my customer "sales tax" for materials I permanently install?
A: No. As the end user of the materials, the contractor — not the customer — owes the Use Tax, and the contractor has no legal authority to collect tax from the customer as "sales tax." A cost pass-through can be reflected in price or listed as a tax reimbursement, but not billed as sales tax.

Q: Does separately stating labor and material costs on a construction contract change the tax treatment?
A: No. The GIL states that separately stating installation costs and tangible personal property costs on the contract or billing does not change the tax consequences of the transaction.

Q: Is this letter binding on the Department?
A: No. This is a General Information Letter, not a Private Letter Ruling. It directs the taxpayer to relevant regulations and general principles but is not a statement of Department policy and is not binding on the Department.

Citations and references

• 86 Ill. Adm. Code 130.2075 (construction contractors as end users; Use Tax on cost price)
• 86 Ill. Adm. Code 130.1940 (construction contracts; sale and installation of tangible personal property)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101-140.109 (Service Occupation Tax; sales of service)
• 86 Ill. Adm. Code 140.301(b)(3) (maintenance agreements sold separately)
• 86 Ill. Adm. Code 150.310 (credit for tax paid to another state)
• 86 Ill. Adm. Code 270.115 (nexus-triggering selling activities)
• 86 Ill. Adm. Code 150.201(i) and 150.801 (retailer maintaining a place of business; registration)
• 35 ILCS 105/2(1.1), 105/2(1.2) (click-through and affiliate nexus)
• 2 Ill. Adm. Code 1200.110 (PLR procedure); 2 Ill. Adm. Code 1200.120 (GIL procedure)
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130
• Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992)
• Brown's Furniture, Inc. v. Zehnder, 171 Ill.2d 410 (1996)
• Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.2d 54 (2013)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0006-gil.pdf

Original ruling text

ST 18-0006-GIL 03/27/2018 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.)

March 27, 2018

Dear Xxxxx:
This letter is in response to your letter dated November 8, 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:
We are a STATE entity and I am writing to formally request direction on the IL tax policy
for labor services rendered. We may soon be doing work in IL that we want to make
sure we are billing our customer correctly. Based on the IL tax policy, are the following
taxable or nontaxable for sales tax?

1. We will be removing the old car wash equipment and installing the new
   equipment. We will not be selling this equipment, it will be purchased by the
   customer and delivered to the work site where we have been hired by the
   manufacturer to provide installation. We will charge for labor services only.
2. We will be paid to maintain the equipment for 1 year. The cost of labor for
   this is currently unknown as of yet.

ST 18-0006-GIL
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3. We will provide minor electrical and plumbing services related to the car wash
   installation. We will provide labor, material and installation for this.
   Also, we may be selling products and parts and delivering these items to the IL
   customer. Will we need to charge IL sales tax on these items and remit this sales tax to
   IL?
   If you could send me any ruling regarding the above questions. Thank you in advance
   for your assistance on this inquiry and look forward to hearing from you on your
   decision.

DEPARTMENT’S RESPONSE:
Sales and Occupation Taxes
You indicate in your letter that the Company has been hired by a manufacturer to install car
wash equipment and will only charge for the installation of the equipment.
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.
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 businesses providing services (e.g., servicemen) depending upon their activities.
For your general information, see of 86 Ill. Adm. Code 140.101 through 140.109 regarding sales of
service and Service Occupation Tax.
If a company only performs services and does not transfer any tangible personal property, no
tax liability will arise from performing the services.
Maintenance Contracts
In your letter you state that the Company will be hired to maintain the car wash equipment for
one year.
The taxability of a maintenance or service agreement depends upon whether the charge for
the agreement is included in the selling price of tangible personal property. If the charge for the
agreement is included in the selling price of tangible personal property, the charge is part of the gross

ST 18-0006-GIL
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receipts of the retail transaction and is subject to tax. No tax is incurred on the maintenance services
or parts when the repair or servicing is performed.
If a maintenance agreement is sold separately from tangible personal property, the sale of the
agreement is not a taxable transaction. However, when maintenance services or parts are provided
under the terms of the maintenance agreement, the seller of the maintenance agreement will be
acting as a service provider under provisions of the Service Occupation Tax Act. The Service
Occupation Tax provides that when a service provider enters into an agreement to provide
maintenance services for particular pieces of equipment for a stated period of time at predetermined
fees, the service provider incurs Use Tax based on its cost price of tangible personal property
transferred to the customer incident to the completion of the maintenance service. See 86 Ill. Adm.
Code 140.301(b)(3). Further, the purchaser of the separate agreement is not charged tax on the
labor or tangible personal property that is transferred incident to the completion of the maintenance
agreement. If a deductible is charged to the purchaser under the terms of the separate agreement,
the deductible is also not subject to tax.
Construction Contracts
In your letter you state that the Company will provide electrical and plumbing services and will
provide labor, material and installation.
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
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.

ST 18-0006-GIL
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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.
Nexus
You also mention in your letter that the company may be selling products and parts to the
Illinois customer and delivering those parts to the customer. For purposes of discussion, I assume
these parts are sold without installation by the Company.
An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. The
Illinois Retailer is then liable for Retailers' Occupation Tax on gross receipts from sales and must
collect the corresponding Use Tax incurred by the purchasers. Our regulations were amended in
response to the Illinois Supreme Court’s decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.
The regulations specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois.
See 86 Ill. Adm. Code 270.115.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other
physical building. Under Illinois law, it also includes the presence of any agent or representative of
the seller. The representative need not be a sales representative. Any type of physical presence in
the State of Illinois, including the vendor’s delivery and installation of his product on a repetitive basis,
will trigger Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171
Ill.2d 410 (1996).

ST 18-0006-GIL
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The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase
of the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:
A. The retailer sells the same or substantially similar line of products as the person located in
this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and
B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).
These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998
N.E.2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1),
a “click-thru nexus provision” enacted in 2011. However, new provisions became effective January 1,
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v.
Hamer, 998 N.E. 2d 54 (2013).
Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or
other consideration based upon the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing to the potential customers a
promotional code or other mechanism that allows the retailer to track purchases referred by such
persons.
Examples of mechanisms that allow the retailer to track purchases referred by such persons
include but are not limited to the use of a link on the person's Internet website, promotional codes
distributed through the person's hand-delivered or mailed material, and promotional codes distributed
by the person through radio or other broadcast media. These provisions apply only if the cumulative
gross receipts from sales of tangible personal property by the retailer to customers who are referred
to the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4
quarterly periods ending on the last day of March, June, September, and December. A retailer
meeting these requirements shall be presumed to be maintaining a place of business in Illinois but
may rebut this presumption by submitting proof that the referrals or other activities pursued within this
State by such persons were not sufficient to meet the nexus standards of the United States
Constitution during the preceding 4 quarterly periods. See 35 ILCS 105/2(1.1).
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.

ST 18-0006-GIL
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Very truly yours,

Richard Wolters
Associate Counsel
RSW:bkl