We manufacture custom signs and sell them into Illinois, where we're registered; an independent contractor installs them (attached to a building or a pole set in concrete) and an independent carrier delivers them, with installation and freight separately billed above our cost -- do we charge sales tax or owe use tax, does tax apply to the freight and installation charges, and what happens if we use subcontractors to install?

Plain-English summary

A custom sign manufacturer registered in Illinois asked the Department a long list of sales/use tax questions about its business: it sells signage that gets attached to a building or to a pole set in concrete, uses an independent contractor to install the signs, uses an independent freight carrier to deliver them, and separately bills the customer for installation and freight at a markup over its own cost. The Department did not answer every question point-by-point; instead it explained the general framework that determines which tax applies.

Step 1 -- Does the sign have "commercial value" to anyone besides the buyer? A sign that has commercial value -- meaning it would have value to persons other than the purchaser, such as a generic sign reading "real estate," "insurance," or "hamburgers" that doesn't spell out the purchaser's name or brand -- triggers Retailers' Occupation Tax (Illinois's sales tax) on the sale, even if the sign was custom-made to order. When a sign with commercial value is sold and installed, the installation charge is also subject to Retailers' Occupation Tax, unless there is a separate agreement covering the installation charge.

Step 2 -- If the sign has NO commercial value to anyone but that customer (i.e., it's so specialized or personalized that no one else would want it), the vendor does NOT incur Retailers' Occupation Tax on the sale. Instead, the transaction falls under the Service Occupation Tax Act, and the vendor is treated as a "serviceman."

Step 3 -- But all of that assumes the sign stays tangible personal property after installation. If the sign is permanently affixed structurally as real estate, the analysis changes: whoever takes tangible personal property off the market and converts it into real estate is deemed a "construction contractor" and is treated as the legal end-user of that property. That construction contractor incurs Illinois Use Tax and local Retailers' Occupation Tax reimbursement liability if the property was bought from a registered Illinois supplier -- or, if bought from a supplier that didn't collect the tax, the construction contractor must self-assess and remit Use Tax directly to the Department based on the property's cost price.

Step 4 -- Subcontractors. If a subcontractor acts as the construction contractor (i.e., is the one incorporating the property into real estate), the transaction between the general contractor and the subcontractor is not itself taxable, and the subcontractor incurs Use Tax on the property it installs. But if the general contractor is the one who purchases the materials and merely hires subcontractors to do the installation, then the general contractor -- not the subcontractor -- incurs the Use Tax liability.

On freight: the letter simply points to 86 Ill. Adm. Code 130.410 without further explanation in the ruling text.

The Department did not separately address several of the taxpayer's other questions (e.g., taxing only the profit element on installation/freight, repair work specifically, local tax remittance mechanics, or new-construction/remodeling exemptions) beyond directing the taxpayer to the regulations cited above.

What this means for you

Sign manufacturers and vendors

Whether you owe sales tax on a sign sale turns on whether the sign has commercial value to someone other than your customer. A sign that's custom-made but still generic enough to have resale/reuse value to other buyers (no customer-specific name or branding) is taxed under Retailers' Occupation Tax. A sign that's so personalized it would be worthless to anyone but that one customer instead makes you a "serviceman" under the Service Occupation Tax.

If you also handle installation

When you sell a commercially-valuable sign and also install it, the installation charge rides along with the sale and is taxed too -- unless you structure a genuinely separate agreement for the installation charge, in which case that separate charge may be treated differently under 86 Ill. Adm. Code 130.450.

If the sign becomes part of the real estate

Once a sign is permanently affixed as real estate (rather than remaining tangible personal property), the taxable event shifts: it's no longer about Retailers' Occupation Tax on a sale, but about Use Tax on whoever converts the property into real estate as a "construction contractor." Track who bought the materials and who did the installing -- that determines who owes the Use Tax.

If you use subcontractors to install

Figure out who is legally the "construction contractor" incorporating the property into real estate. If your subcontractor buys the materials and installs them, the subcontractor owes the Use Tax and your payment to them isn't itself taxed. If you (the general contractor) buy the materials and merely have the subcontractor install them, you owe the Use Tax instead.

Common questions

Q: We custom-make every sign to order -- doesn't that mean it's a nontaxable service?
A: Not necessarily. Custom-order production alone doesn't avoid Retailers' Occupation Tax. What matters is whether the finished sign has commercial value to someone other than the purchaser (i.e., it doesn't spell out that specific customer's name or brand). A generic custom sign reading "real estate" or "insurance" is still taxed like any other retail sale.

Q: Is our separately stated installation charge taxable?
A: If the sign itself is subject to Retailers' Occupation Tax, the installation charge is also taxed unless there is a separate agreement for the installation charge (86 Ill. Adm. Code 130.450). The ruling doesn't further break down which specific installation cost components (surveys, permits, engineering, repairs) escape tax under a separate agreement.

Q: What if the sign is permanently attached to the building or set in concrete -- does that change things?
A: Yes. If the sign becomes real estate rather than remaining tangible personal property, the taxable transaction is no longer a retail sale -- it's Use Tax owed by whoever, as "construction contractor," converts the property into real estate (86 Ill. Adm. Code 130.1940, 130.2075).

Q: We use an independent contractor to install and an independent carrier for freight -- who owes tax on those charges?
A: For freight, the letter cites 86 Ill. Adm. Code 130.410 without elaborating further. For installation, see the "separately stated installation charge" answer above; the Department's letter does not separately break out freight-and-installation tax treatment beyond those citations.

Q: If our subcontractor installs the sign, do we or the subcontractor owe the tax?
A: It depends on who is functioning as the construction contractor incorporating the property into real estate. If the subcontractor buys the materials and installs them, the subcontractor owes Use Tax and the general-contractor/subcontractor transaction itself isn't taxed. If the general contractor buys the materials and the subcontractor just installs them, the general contractor owes the Use Tax.

Citations and references

• 86 Ill. Adm. Code 130.2155 -- Tax liability of sign vendors; the "commercial value" test that determines whether a sign sale is subject to Retailers' Occupation Tax.
• 86 Ill. Adm. Code 140.101 -- Basis and rate of the Service Occupation Tax; applies when a sign is so specialized it has no commercial value to anyone but the purchaser, making the vendor a "serviceman."
• 86 Ill. Adm. Code 130.1940 -- Construction contractors and real estate developers; governs Use Tax liability when tangible personal property is converted into real estate.
• 86 Ill. Adm. Code 130.2075 -- Sales to construction contractors, real estate developers and speculative builders.
• 86 Ill. Adm. Code 130.450 -- Taxability of separately stated installation charges.
• 86 Ill. Adm. Code 130.410 -- Cited regarding the tax treatment of freight/transportation charges.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0029-gil.pdf

Original ruling text

ST 19-0029-GIL 12/06/2019 CONSTRUCTION CONTRACTORS
Persons who sell signs may incur a Retailers’ Occupation Tax, Service Occupation Tax
or Use Tax liability, depending upon the circumstances of the particular sale. See 86 Ill.
Adm. Code 130.2155 (Tax Liability of Sign Vendors); 86 Ill. Adm. Code 140.101 (Basis
and Rate of the Service Occupation Tax); 86 Ill. Adm. Code 130.1940 (Construction
Contractors and Real Estate Developers) and 86 Ill. Adm. Code 130.2075 (Sales To
Construction Contractors, Real Estate Developers and Speculative Builders). (This is a
GIL.)
December 6, 2019
Dear XXX:
This letter is in response to your letter dated August 15, 2019, 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 doing our annual update of our tax files to be sure that we are
aware of any new sales/use tax issues in your state that would affect our
company. Our company, COMPANY, sells custom made signage into
your state where we are currently registered. The signage is either
attached to a building or a pole that is concreted into the ground. We
contract with an independent contractor to install the signs. The
installation charges are separately stated on the billing and include
charges for surveys, permits, engineering and repairs. We also contract
with an independent freight carrier to deliver the sign to the site for
installation. All freight charges are separately stated on the billing. Both
the installation and the freight are charged to the customer at a rate
higher than our companies cost.
Our questions based on the above circumstances are as follows.
•
At the point of sale should we as the seller be charging the
customer sales tax or is this a case where we would pay use tax?
• If this is a case of use tax, how is the use tax calculated?

ST 19-0029-GIL
Page 2
December 6, 2019
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Should tax be charged on the freight?
Should tax be charged on all components of the installation?
If tax is charged on the freight and installation, do we charge on the
selling price or only on the element of profit?
Should tax be charged on all components of service and repair work?
Are we obligated to collect local taxes in your state?
If we are obligated to collect the local tax should those taxes be
remitted to the state or the locality?
Do you have any special rules or exemptions that apply to your state
relating to our situation?
Are there any special circumstances for new construction or
remodeling that would cause our customers to be exempt in this
situation?
Please provide any applicable code sections that would apply to
signage, installation and freight for our future reference.
Does your state have a mass mailing list to provide us with
updates when they become available? If so, will you please add
us to your list or provide us with information to register for this.

We look forward to your response to our inquiries on or before October 15, 2019.
DEPARTMENT’S RESPONSE:
A person who sells signs that have commercial value (i.e., value to persons other than the
purchasers) incurs Retailers’ Occupation Tax (sales tax) liability when making such sales, even if
such signs are produced on special order for the purchaser. Examples of signs having such
commercial value would be ones that spell out “real estate”, “insurance,” or “hamburgers,” and
which do not spell out the name of the purchaser nor the brand name of the purchaser’s product
and which are not otherwise similarly individualized. See 86 Ill. Adm. Code 130.2155 regarding
vendors of signs. When a sign that has commercial value is sold and installed, the installation
charge is also subject to Retailers’ Occupation Tax unless there is a separate agreement for the
installation charge. See 86 Ill. Adm. Code 130.450.
If the sign vendor produces a sign on special order of the customer and the sign is so
specialized that it would have no commercial value to anyone other than that particular customer
who placed the order, the sign vendor would not incur Retailers’ Occupation Tax liability. These
transactions would be subject to liability under the Service Occupation Tax Act, and the sign
vendor would be considered a serviceman. See generally, 86 Ill. Adm. Code 140.101.
The above assumes that the signs remain tangible personal property after installation. If
the signs were permanently affixed structurally as real estate, then there would be different tax
consequences. Under Illinois law, a person who takes tangible personal property off the market
and converts it into real estate is deemed a construction contractor and is the legal end-user of the

ST 19-0029-GIL
Page 3
December 6, 2019
tangible personal property. The construction contractor, as the user, incurs Illinois Use Tax and
local Retailers’ Occupation Tax reimbursement liabilities when the tangible personal property
that will be converted into real estate is purchased from registered Illinois suppliers. If such
items were purchased from suppliers that did not collect the tax, the person who converts the
tangible personal property into real estate is required to self-assess and remit the Use Tax to the
Department based upon the cost price of the property. For information on construction
contractors, see 86 Ill. Adm. Code 130.1940 and 130.2075.
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.
With respect to your question concerning freight, see, 86 Ill. Adm. Code 130.410.
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:rkn