What does Illinois General Information Letter ST 20-0014-GIL conclude about Construction Contractors?

Subject

Construction Contractors

Plain-English summary

An out-of-state manufacturer of demountable partition wall systems asked the Illinois Department of Revenue for a private letter ruling on whether it should charge 6.25% or 10.25% sales tax on its Illinois sales, after getting conflicting answers from a Department employee, its own CPA, and three different Department phone representatives. Because the taxpayer's letter did not lay out its facts clearly enough to support a binding Private Letter Ruling, the Department instead issued this General Information Letter (GIL), which explains the general rules rather than resolving the taxpayer's specific rate question.

The Department's core point is that construction contractors are treated as the "end users" of the materials they permanently affix to real property. That means a contractor does not collect sales tax from its customer on those materials; instead, the contractor itself owes Use Tax on its own cost of the materials, generally at 6.25% plus any applicable local rate. If the contractor is also the manufacturer of the item being installed, the tax base is what the contractor paid for the raw materials and hardware (like nails and screws) that went into the finished product, not the price charged to the customer.

Separately, the Department explains that "nexus" (having enough contact with Illinois to be required to register and collect tax) is a different question from whether someone is a construction contractor. A remote seller can have nexus with Illinois — through a showroom, a sales representative, or a project manager physically present in the state — and still not be subject to the Retailers' Occupation Tax as a retailer; instead, nexus can trigger a duty to collect and remit Use Tax on behalf of customers. The letter also walks through both "physical presence" nexus (pre-dating and independent of Wayfair) and the newer "Wayfair nexus" economic thresholds ($100,000 in sales or 200 transactions annually) that took effect October 1, 2018, plus a note that Illinois's remote-seller collection rules changed again on January 1, 2021 under the Leveling the Playing Field for Illinois Retail Act.

Ultimately, the Department could not tell the taxpayer definitively whether it should charge 6.25% or 10.25%, because that depends on whether the taxpayer is acting as a construction contractor, a retailer, or both — a factual determination the letter says it couldn't make on the facts submitted.

What this means for you

Construction contractors and subcontractors

If you incorporate materials permanently into someone else's real property (general contractors, subcontractors, and specialty trades like landscapers are all included), you are the "end user" of those materials under Illinois law. You generally should not give your suppliers a resale certificate; instead you pay Use Tax (or Retailers' Occupation Tax reimbursement) on your purchase price when you buy the materials. If you bought from an out-of-state supplier that didn't charge you Illinois tax, you must self-assess and remit Use Tax directly to the Department yourself, though you get credit for any tax properly paid to another state. You cannot legally bill your markup or tax pass-through to the customer as "sales tax," though you can build it into your price or bill it as a "tax reimbursement."

Manufacturers who also install their own products

If you both manufacture an item and install it as part of a real estate improvement, your Use Tax base is what you paid for the raw materials and components (not what you charge the customer for the finished installed product). If you also make separate retail ("over the counter") sales of the same product outside of a construction contract, that separate retail activity is governed by a different rule (86 Ill. Adm. Code 130.2075(b)) and may make you a retailer subject to Retailers' Occupation Tax on those specific sales.

Out-of-state sellers wondering about nexus

Having a showroom, an independent sales representative, or even a home-based project manager physically present in Illinois can be "more than the slightest" physical presence and can create nexus requiring you to register and collect Use Tax — this is a separate question from whether you're a construction contractor. Sellers with no physical presence can still have "Wayfair nexus" if they exceed $100,000 in cumulative Illinois sales or 200 separate transactions in a 12-month period, tested quarterly. Note that the collection framework for remote retailers changed again effective January 1, 2021 under the Leveling the Playing Field for Illinois Retail Act, so more recent transactions may be governed by different rules than those summarized in this 2020 letter.

Common questions

Q: Does a construction contractor charge its customer sales tax on materials installed into real property?
A: No. The contractor is deemed the end user of those materials and instead owes Use Tax itself, based on what the contractor paid for the materials. The contractor has no legal authority to collect Use Tax from its customer, though it may build the cost into its price or bill a "tax reimbursement" (but not label it as "sales tax").

Q: If a contractor is also the manufacturer of the item it installs, what's the tax base?
A: The Use Tax base is what the contractor paid for the materials that went into the finished item, plus incidental hardware like nails and screws used in the installation — not the price the customer ultimately pays for the finished, installed product.

Q: Does having a showroom or a home-based employee in Illinois automatically mean a company owes the higher combined local sales tax rate?
A: Not necessarily, and this is exactly the ambiguity the taxpayer ran into. Physical presence (a showroom, sales representative, or project manager) can create nexus requiring Use Tax collection, but nexus is a different question from whether the seller is a "retailer" subject to Retailers' Occupation Tax versus a construction contractor whose customers owe no Use Tax at all. The Department said it could not resolve the taxpayer's specific rate question on the facts provided.

Q: What's the difference between a GIL and a Private Letter Ruling (PLR)?
A: A PLR is binding on the Department for the specific taxpayer and facts presented, but only if procedures under 2 Ill. Adm. Code 1200.110 are followed and the facts are complete and correct. A GIL, issued under 2 Ill. Adm. Code 1200.120, merely points the taxpayer to relevant regulations and other resources; it is not a statement of Department policy and is not binding. Here, the Department found the taxpayer's facts insufficient for a binding PLR and issued a GIL instead.

Q: Did the 2018 Wayfair decision change how construction contractors are taxed?
A: Not directly. Wayfair and Illinois's implementing statute (Public Act 100-587) created new "economic nexus" thresholds for remote retailers making sales into Illinois. That's a separate framework from the construction-contractor end-user rules, which have long treated contractors as owing Use Tax on their own material purchases regardless of nexus analysis.

Citations and references

• 86 Ill. Adm. Code 130.1940 (construction contractors deemed end users of tangible personal property)
• 86 Ill. Adm. Code 130.2075 (tax base for construction contractors; subsection (a)(2) for contractor-manufacturers; subsection (b) for contractors who also act as retailers; subsection (c) for the Use Tax rate on purchases from unregistered out-of-state suppliers)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on persons selling tangible personal property at retail)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on the privilege of using tangible personal property in Illinois)
• 86 Ill. Adm. Code 270.115 (sourcing rules for local Retailers' Occupation Tax)
• 35 ILCS 105/2, Use Tax Act (definition of "retailer maintaining a place of business in this State")
• 86 Ill. Adm. Code 150.801 and 150.802 (physical presence nexus regulations)
• 86 Ill. Adm. Code 150.803 (Wayfair/economic nexus regulations, including the $100,000/200-transaction thresholds and quarterly testing)
• 35 ILCS 185/5-1 et seq., Leveling the Playing Field for Illinois Retail Act (effective January 1, 2021)
• 86 Ill. Adm. Code 150.310 (credit against Illinois Use Tax for tax properly paid to another state)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)
• Scripto v. Carson, 362 U.S. 207 (1960); National Bellas Hess v. Department of Revenue of the State of Illinois, 386 U.S. 753 (1967); Quill Corporation v. North Dakota, 504 U.S. 298 (1992) (physical-presence nexus case law)
• Brown's Furniture v. Wagner, 171 Ill. 2d 410 (1996) (Illinois "more than the slightest" physical presence standard)
• South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018), 138 S. Ct. 2080 (economic nexus for remote retailers)
• Illinois Public Act 100-587 (enacted Wayfair-nexus standards effective October 1, 2018)
• ST 15-0001-GIL (referenced regarding local Retailers' Occupation Tax sourcing for contractor-retailers)
• ST 19-0005-GIL (referenced regarding nexus and out-of-state retailer Use Tax collection)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0014-gil.pdf

Original ruling text

ST 20-0014-GIL 09/30/2020 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.)

September 30, 2020

Dear Xxxx
This letter is in response to your letter dated February 5, 2019, in which you requested
information. We apologize for our delay in responding. 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 based manufacturer of demountable partition frames. We sell our
products to general contractors in the ILLINOIS CITY region through an independent
sales representative firm. We have a showroom at LOCATION in ILLINOIS CITY, and
we have a single Illinois employee, a project manager, who works from his home. Here
is a summary of how a transaction unfolds:
Company ABC decide [sic] to renovate their space and hire general contractor XYZ to
perform the renovation. Our local sales representative firm, the GROUP, meet with the
architect and contractor and try to sell our demountable wall system to them. As part of
the sales process, they might bring the client to our showroom at the LOCATION to
show our product. We have no employees at this location. If they are successful, the
general contractor sends a notice to proceed and a subcontract to our STATE office.
The general contractor views us as subcontractor, however this [sic] erroneous in that
we are the manufacturer (will explain further later). I review and revise said contract until
such time as it meets COMPANY’s terms and conditions, I then return it to the
contractor in Illinois. If we reach an agreement, I sign and execute the contract in
STATE. The contractor then sends their deposit check to our office in STATE, which is
deposited in a STATE bank, as are all receipts from the contractor.

ST 20-0014-GIL
PAGE 2

The independent sales representative receives a percentage of the sale in the form of a
commission, they do not receive a draw or other forms of income from us.
Since we are the manufacturer of the product, not a subcontractor, we hire a local
independent installation company to perform the installation of the partitions.
Recently, we hired an Illinois resident as project manager, who works from his home, to
help facilitate projects. He goes onto jobsites occasionally to confirm the loading dock or
freight elevators are sufficiently sized, or he may drop by to attend a construction
meeting to put a face to [sic] transaction for the contractor. He is strictly while [sic]
collar, he performs no physical labor. His main task is to ensure the installer performs
as contracted and to schedule deliveries of materials to the jobsite.
All of the metal pieces of the demountable system come from our warehouse in STATE
and go directly to the jobsite, we have no facilities in Illinois other than the showroom.
The glass is ordered locally and delivered directly to the jobsite by an independent glass
vendor. They send their invoices to our STATE office.
When we hired the project manager, we were told both by an Illinois Department of
Revenue employee and our CPA, doing so created nexus and that we had to increase
the sales tax amount we collect to 10.25%, which we did. The problem came when I
tried to pay this additional tax, as the online ST-1 would not allow me to.
I called the Illinois Department of Revenue and spoke with three individuals, all of whom
told me that I only need to be charging the 6.25% out-of-state sales tax amount, I was
told we do not have nexus. I was directed to an online document that outlined the
necessary items to create nexus. I believe it is accurate that we do not qualify for nexus
and should return to charging the lower sales tax amount. However, before doing so
and creating a potential shortfall that would be difficult to repay later, we would like to
confirm returning to 6.25% is the correct action to take. To resolve temporarily, I have
submitted the the [sic] additional collected tax in the excess tax column of the ST-1.
We request a private letter ruling on which sales tax rate we should be charging going
forward, given the aforementioned facts. We have neve requested a ruling on this
subject previously.
DEPARTMENT’S RESPONSE:
We are unable to provide a private letter ruling based on the information provided. However,
below is a discussion of how Illinois taxes construction contractors. In addition, we refer you to other
resources in the event that the facts of your situation are not fully governed by the construction
contractor rules.
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property at retail to purchasers for use or consumption. See 86
Ill. Adm. Code 130.101. 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.

ST 20-0014-GIL
PAGE 3

NEXUS
It is important to clarify that the question of whether one has nexus with Illinois is not the same
as the question of whether one is engaged in the business of making retail sales in Illinois and subject
to the Retailers’ Occupation Tax. One can have nexus with Illinois and still not be subject to the
Retailers’ Occupation Tax Act, but rather, be subject to mandatory collection of one’s customer’s Use
Tax.
An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. The Illinois
Retailer is then liable for both state and local Retailers' Occupation Tax on gross receipts from sales
and must collect the corresponding state Use Tax incurred by the purchasers and may collect a
reimbursement of local Retailers’ Occupation Tax. The Department has adopted regulations that
specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois. See, e.g., 86 Ill.
Adm. Code 270.115.
Physical presence nexus and Wayfair nexus:
An out-of-State retailer (a “remote retailer”) making sales to Illinois purchasers from locations
outside Illinois is required to register with the Department and collect and remit Use Tax on those
sales at the rate of 6.25% if it falls within the definition of a “retailer maintaining a place of business in
this State” in Section 2 of the Use Tax Act, 35 ILCS 105/2. The Department is authorized to require
these retailers to act as tax collectors because they have established sufficient contacts, or nexus,
with Illinois. There are two groups of remote retailers that must collect Use Tax on sales to Illinois
purchasers:
1)

Remote retailers with a physical presence in Illinois. Prior to October 1, 2018, remote
retailers had to have a physical presence in Illinois before they could be required to
collect Use Tax. The types of activities constituting a physical presence, as limited by
the series of court cases described below, are found in Section 2 of the Use Tax Act’s
definition of a “retailer maintaining a place of business” in Illinois. See, 35 ILCS 105/2.
The physical presence requirement was established in a series of United States
Supreme Court decisions. See, for example, Scripto v. Carson, 362 U.S. 207 (1960);
National Bellas Hess v. Department of Revenue of the State of Illinois, 386 U.S. 753
(1967); Quill Corporation v. North Dakota, 504 U.S. 298 (1992). In 1996, the Illinois
Supreme Court ruled that remote retailers need only “more than the slightest” physical
presence to be required to collect Use Tax. See Brown’s Furniture v. Wagner, 171 Ill.2d
410 (1996). Any remote retailer that currently has a physical presence in Illinois will
continue to be required to act as a Use Tax collector. Regulations describing these
types of retailers are found at 86 Ill. Adm. Code 150.801 and 150.802.
The physical presence required to establish physical presence nexus 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. Generally, the presence of a showroom, a sales
representative, and a project manager in Illinois would establish nexus in Illinois
sufficient to require Use Tax collection.

ST 20-0014-GIL
PAGE 4
2)

Remote retailers without a physical presence in Illinois. In South Dakota v. Wayfair, Inc.,
585 U.S. ___ (2018), 138 S. Ct. 2080, the U.S. Supreme Court upheld a South Dakota
statute that imposed tax collection obligations on remote retailers that met specific
selling thresholds but had no physical presence in the state. This decision abrogated
the longstanding physical presence requirement of Quill, deeming it “unsound and
incorrect.” Illinois Public Act 100-587 enacted nexus standards, effective October 1,
2018, that are virtually identical to those upheld in Wayfair. This nonphysical presence
nexus we will call “Wayfair nexus.”

Following are the requirements for Wayfair nexus in Illinois. Public Act 100-587 (adding
item (9) to the definition of “retailer maintaining a place of business in this State” at 35
ILCS 105/2) requires remote retailers with no physical presence in Illinois to register and
collect and remit Use Tax, as provided below (see 86 Ill. Adm. Code 150.803):
1)
Beginning October 1, 2018, a retailer making sales of tangible personal
property to purchasers in Illinois from outside of Illinois must register with
the Department and collect and remit Use Tax if:
a)
The cumulative gross receipts from sales of tangible personal
property to purchasers in Illinois are $100,000 or more; or
b)
The retailer enters into 200 or more separate transactions for the
sale of tangible personal property to purchasers in Illinois.
2)
A retailer shall determine on a quarterly basis, ending on the last day of
March, June, September, and December, whether he or she meets either
of the criteria of paragraph (1) for the preceding 12-month period. If the
retailer meets either of the criteria of paragraph (1) for a 12-month period,
he or she is considered a retailer maintaining a place of business in Illinois
and is required to collect and remit the Use Tax and file returns for one
year.
a)
At the end of that one-year period, the retailer shall determine
whether he or she met either of the criteria of paragraph (1) during
the preceding 12-month period. If the retailer met either of the
criteria in paragraph (1) for the preceding 12-month period, he or
she is considered a retailer maintaining a place of business in
Illinois and is required to collect and remit Use Tax and file returns
for the subsequent year.
b)
If at the end of a one-year period a retailer that was required to
collect and remit the Use Tax determines that he or she did not
meet either of the criteria in paragraph (1) during the preceding 12month period, the retailer shall subsequently determine on a
quarterly basis, ending on the last day of March, June, September,
and December, whether he or she meets either of the criteria of
paragraph (1) for the preceding 12-month period.
In determining whether a remote retailer meets the thresholds above, sales for resale are
excluded. See 86 Ill. Adm. Code 150.803(c)(3)(E)(i). In addition, if a remote retailer makes exclusively
nontaxable sales, he or she is not subject to the Wayfair nexus requirements. See 86 Ill. Adm. Code
150.803(c)(2). If, however, the remote retailer makes both taxable and nontaxable sales into Illinois,
all sales are included, including the nontaxable sales (other than sales for resale and other sales
specified at 86 Ill. Adm. Code 150.803(c)(3)(E)). See 86 Ill. Adm. Code 150.803(c)(3)(E)(v).

ST 20-0014-GIL
PAGE 5
We note, however, that the law governing remote retailer obligations will change on January 1,
2021 under the Levelling the Playing Field for Illinois Retail Act (35 ILCS 185/5-1 et seq.). For more
information, please see the Department’s Levelling the Playing Field for Illinois Retail Act Resource
Page at tax.illinois.gov.
CONSTRUCTION CONTRACTORS
While the detail supplied with your letter is not sufficient to make a determination, we assume,
for the purpose of this letter, that you are not acting as a retailer or a mandatory use tax collector, but
rather as a construction contractor. In that case, the following provisions apply.
A contract to incorporate tangible personal property into real property is considered a
construction contract. 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. As a general rule, except in cases of construction contractors
who also act as retailers as discussed below, construction contractors should not provide resale
certificates to their suppliers and should instead pay Use Tax and any reimbursement for locallyimposed occupation taxes at the time of purchase of tangible personal property to be incorporated
into real estate. If such contractors did not pay Illinois Use Tax liability to their suppliers, which may
occur when purchasing from out-of-state suppliers, those contractors must self-assess their Illinois
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.
When the purchasing construction contractor (whether he or she is the prime contractor or the
subcontractor) buys the item that he or she will convert into real estate in finished form, the tax base
is what such construction contractor pays for the item. When the construction contractor-installer
(whether he or she is the prime contractor or a subcontractor) is also the manufacturer of the finished
item that he or she will incorporate into real estate for his or her customer, the tax base is what such
construction contractor pays for the materials that he or she incorporates into such finished item, plus
whatever such construction contractor may pay for nails, screws or other items of tangible personal
property that he or she buys and incorporates into real estate for his or her customer in the course of
making the installation of the finished item. See 86 Ill. Adm. Code 130.2075(a)(2).
The Illinois Use Tax rate incurred by a 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 construction
contractors cannot bill this reimbursement to a customer as “sales tax,” but can include a
reimbursement of tax on the bill. The choice of whether a construction contractor requires a tax

ST 20-0014-GIL
PAGE 6
reimbursement from the customer or merely raises his or her price is a business decision on the
construction contractor’s part.
CONSTRUCTION CONTRACTORS WHO ALSO ACT AS RETAILERS
If, in addition to acting as a construction contractor, a person makes separate “over the
counter” sales of his or her product, then a different set of rules would apply. If that is the case,
please see 86 Ill. Adm. Code 130.2075(b). If the sales are made in Illinois, please see as ST 150001-GIL and 86 Ill. Adm. 270.115 regarding how to source local retailers’ occupation taxes for sales
made in Illinois.
ILLINOIS RETAILERS AND OUT-OF-STATE RETAILERS WITH NEXUS
If a person is not acting as a construction contractor, but is, instead, strictly selling tangible
personal property at retail, then, if the sale occurs in Illinois, that person is subject to Retailers’
Occupation Tax and the sale is sourced to the appropriate Illinois location based on the sourcing
rules cited above, which may be found, for example, at 86 Ill. Adm. Code 270.115. If, however the
retail sale occurs outside Illinois, then, if the retailer has nexus with Illinois, the retailer is required to
collect Use Tax on behalf of the purchaser and remit it to Illinois. For a discussion of nexus as it
relates to whether an out-of-state retailer is required to collect Illinois Use Tax from his or her Illinois
customer, please see ST 19-0005-GIL.
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:rkn