What does Illinois General Information Letter ST 18-0010-GIL conclude about Service Occupation Tax?

Plain-English summary

A trade association representing Illinois auto repair shops, distributors, and machine shops asked the Department of Revenue how sales tax works on "sublet" parts and labor — for example, when an engine-overhaul shop sends pistons out to a separate machine shop, and the machine shop bills the repair shop for parts and labor before the repair shop bills the end customer. The association specifically asked whether tax collection depends on how charges are shown on the invoice, and whether sublet labor is taxed differently from the repair shop's own labor charges.

The Department did not issue a direct yes-or-no ruling on the association's specific invoicing questions. Because a GIL only points taxpayers to the relevant rules rather than deciding a particular taxpayer's facts, the Department instead walked through the general Service Occupation Tax framework that governs these "multi-service" or subservice situations under 86 Ill. Adm. Code 140.145.

The key point from the letter is that the tax result turns on the registration and "de minimis" status of both the primary serviceman (the auto repair shop dealing with the customer) and the secondary serviceman (the machine shop doing the sublet work). Servicemen calculate their Service Occupation Tax base one of four ways: on the separately stated selling price of parts transferred, on 50% of the entire bill if parts aren't separately stated, on cost price if registered and de minimis, or by paying Use Tax on cost price if de minimis and not otherwise required to register. When a secondary serviceman doesn't separately state the cost of parts, the primary serviceman's cost price is presumed to be 50% of the secondary serviceman's total charge (86 Ill. Adm. Code 140.301(a)).

The letter also explains a special certification option: if both the primary and secondary servicemen are unregistered and de minimis, the primary serviceman avoids incurring its own Use Tax liability as long as the secondary serviceman has paid (or will pay) Use Tax on its cost price and certifies that fact in writing. The Department notes transactions work best when both parties are registered, since that lets both use Certificates of Resale; if only the primary serviceman is registered, tax can end up being incurred at more than one point in the chain.

What this means for you

Auto repair shops and machine shops handling sublet work

Whether you owe Service Occupation Tax, collect Service Use Tax from the customer, or instead pay Use Tax to your supplier depends on whether you and the shop you subcontract to are registered with the Department and whether either of you qualifies as a "de minimis" serviceman (generally, under 35% — or 75% for pharmacists and graphic arts producers — of annual gross receipts from service transactions being cost price of transferred parts). This letter doesn't tell you which category you fall into; you need to work that out from your own registration status and cost-price percentages under 86 Ill. Adm. Code 140.101(f).

Trade associations and members with sublet/subcontracted transactions

The letter confirms that how parts and labor are invoiced matters: separately stating the selling price of parts is one path, while lumping everything together forces the 50%-of-bill method. If your secondary vendor doesn't separately state its charges, expect the presumption that 50% of that vendor's bill counts as your cost price under 86 Ill. Adm. Code 140.301(a).

Accountants and tax professionals

This is a GIL, not a PLR — the Department gave general guidance and directed the requester to the regulations rather than resolving the association's specific invoicing scenario. If a client needs a binding answer on a specific sublet transaction, a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110 would be the appropriate route, since a GIL is not binding on the Department and is not a statement of Department policy.

Common questions

Q: Did the Department decide whether sublet labor is taxed differently from the repair shop's own labor?
A: No. The letter does not give a direct answer to that specific question. It instead explains the general multi-service/subservice framework under 86 Ill. Adm. Code 140.145 and leaves the taxpayer to apply it to its own facts, consistent with a GIL's limited, non-binding purpose.

Q: Does invoicing format affect the tax result?
A: Yes, according to the general framework described. Separately stating the selling price of tangible personal property transferred is one method for calculating the tax base; if the price isn't separately stated, the law presumes 50% of the total bill is the cost price (86 Ill. Adm. Code 140.301(a)).

Q: What happens if both the auto repair shop and the machine shop are registered?
A: The letter states transactions work best in that scenario, since both parties can use Certificates of Resale, and the primary serviceman then incurs Service Occupation Tax based on the separately stated price or 50% of the bill to its own customer.

Q: What if only one of the two shops is registered?
A: The letter warns that if the primary serviceman is registered but the secondary (sublet) serviceman is not, tax can be incurred more than once — first as Use Tax paid by the unregistered secondary serviceman, and again as Service Occupation Tax when the primary serviceman transfers the item to its customer.

Citations and references

• 86 Ill. Adm. Code 140.145 (multi-service/subservice transactions)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman threshold: under 35%, or 75% for pharmacists/graphic arts producers)
• 86 Ill. Adm. Code 140.108 (unregistered de minimis servicemen treated as end users; not authorized to collect tax from customers)
• 86 Ill. Adm. Code 140.301(a) (presumed 50%-of-bill cost price when secondary serviceman doesn't separately state charges)
• Section 2a of the Retailers' Occupation Tax Act (registration requirement referenced for de minimis servicemen)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure; GILs are not binding on the Department)

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-18-0010-gil.pdf

Original ruling text

ST 18-0010-GIL 03/30/2018 SERVICE OCCUPATION TAX
This letter describes how a subservice transaction is treated under the Service Occupation Tax
Act. See 86 Ill. Adm. 140.145. This is a GIL.

March 30, 2018

Dear Xxxxx:
This letter is in response to your letter dated January 9. 2018, 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:
On behalf of the ASSOCIATION of Illinois, we seek clarification for our members
regarding the collection of sales tax for “sublet” parts and services.
“Sublet” services in our industry are services provided by outside vendors to complete
an auto repair. For example, a member is overhauling an engine and sends to an
outside machine shop work for the engine’s pistons. The machine shop invoices the
member auto repair shop for their labor and any parts as needed for completion of their
work.
Clarification is needed as to the collection of sales tax on “sublet” parts and “sublet”
labor.
Is the collection of sales tax dependent on how the charges are reflected on the
invoice?
Is sales tax on the “sublet” labor handled differently than labor charges invoiced by the
auto repair shop?
The ASSOCIATION of Illinois is the state’s leading trade association advocating for
businesses and individuals involved in the automotive aftermarket industry.
ASSOCIATION of Illinois works to promote a business-friendly environment while

ST 18-0010
Page 2

maintaining the highest ethical standards. Members, including retailers, distributors,
repair facilities and machine shops, are provided the tools and support they need to
grow their business and meet their customers’ needs.
DEPARTMENT’S RESPONSE:
Your question relates to a subservice situation. We will begin with a basic explanation of the Service
Occupation Tax.
SERVICE OCCUPATION TAX
Under the Service Occupation Tax Act, a serviceman is taxed on tangible personal property
transferred incident to a sale of service. The transfer of tangible personal property to service
customers may result in either Service Occupation Tax liability or Use Tax liability for servicemen,
depending upon which tax base they choose to calculate their liability. Servicemen may calculate
their tax base in one of four ways: (1) separately stated selling price; (2) 50% of the entire bill; (3)
Service Occupation Tax on cost price if they are registered de minimis servicemen; or (4) Use Tax on
cost price if the servicemen are de minimis and are 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 sales of service. The tax is based on the separately stated selling price of the tangible
personal property transferred. If servicemen do not wish to separately state the selling price of the
tangible personal property transferred, those servicemen must use the second method where they
will use 50% of the entire bill to their service customers as the tax base. Both of the above methods
provide that in no event may the tax base be less than the cost price of the tangible personal property
transferred. Under these methods, servicemen may provide their suppliers with Certificates of Resale
when purchasing the tangible personal property to be transferred as a part of sales of service. They
are required to collect the corresponding Service Use Tax from their customers.
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. Servicemen may qualify as de
minimis if they determine that their annual aggregate cost price of tangible personal property
transferred incident to sales of service is less than 35% of their annual gross receipts from service
transactions (75% in the case of pharmacists and persons engaged in graphic arts production). See
86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is authorized to pay
Service Occupation Tax (which includes local taxes) based upon the cost price of tangible personal
property transferred incident to sales of service. Servicemen that incur Service Occupation Tax
collect the Service Use Tax from their customers. They remit tax to the Department by filing returns
and do not pay tax to their suppliers. They provide suppliers with Certificates of Resale for the
tangible personal property transferred to service customers.
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.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the

ST 18-0010
Page 3

servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). 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.

MULTI-SERVICE TRANSACTION
With that background, we will now address multi-service situations.
Multi-service situations exist where a primary serviceman subcontracts work to a secondary
serviceman. See 86 Ill. Adm. Code 140.145. A primary serviceman engages the services of a
secondary serviceman in order to obtain part or all of the products and services desired by the
service customer. Depending upon whether the primary and secondary servicemen are registered or
de minimus will determine at what point Service Occupation Tax or Use Tax will be incurred. In multiservice situations, a primary serviceman’s cost price is determined either by the separately stated
selling price of the tangible personal property transferred from a secondary serviceman, or if the
secondary serviceman does not separately state the cost of goods, it is presumed that the primary
serviceman’s cost price is 50% of the secondary serviceman’s total charge. See 86 Ill. Adm. Code
140.301(a).
When both primary servicemen and secondary servicemen are registered, primary servicemen
provide secondary servicemen with a Certificate of Resale. A primary serviceman would then incur
Service Occupation Tax based upon the separately stated selling price of the property or 50% of the
bill to the service customers. If the primary serviceman is registered and de minimus (that is, under
the 35% threshold, or the 75% for pharmacists and printers), he may choose to remit Service
Occupation Tax to the Department based upon his cost price of tangible personal property purchased
from the secondary serviceman. If the cost price of the tangible personal property is not separately
stated by the secondary serviceman, the cost price will be deemed to be 50% of the total bill from the
secondary serviceman. Upon selling their product, servicemen are required to collect the
corresponding Service Use Tax from their customers.
If an unregistered de minimis serviceman subcontracts service work to another unregistered de
minimis secondary serviceman, the primary serviceman does not incur a Use Tax liability if the
secondary serviceman (i) has paid or will pay Use Tax on his or her cost price of any tangible
personal property transferred to the primary serviceman and (ii) certifies that fact in writing to the
primary serviceman. This certification option is only available in multi-service situations when both the
primary and secondary servicemen are unregistered and de minimis.
Transactions involving multiple servicemen work best if both the primary and secondary servicemen
are registered. This will enable both parties to utilize Certificates of Resale. If the primary serviceman
is registered and the secondary serviceman is not registered, it is possible that tax will be incurred at
more than one point during the course of sale of a particular item. This will occur if the unregistered
secondary serviceman has paid Use Tax with respect to an item of tangible personal property, then

ST 18-0010
Page 4

transfers that property to a primary serviceman who will, in turn, incur a Service Occupation Tax
liability when transferring the item to the service customer.
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,

Samuel J. Moore
Associate Counsel

SJM:bkl