What does Illinois General Information Letter ST 20-0026-GIL conclude about Construction Contractors?

Plain-English summary

This Illinois General Information Letter answers questions from a specialty contractor that builds cleanrooms (used in life-science and microelectronics manufacturing to control humidity, temperature, and contamination) about how Illinois sales and use tax applies to its work. The contractor asked whether tax is due on the materials it buys or on what it bills its customers, whether the answer changes for lump-sum versus separately stated labor/materials billing, whether its work as a subcontractor versus a direct contractor for the owner matters, whether any of its product lines (modular walls, specialty doors, flooring, filtration systems, lighting, and more) could qualify for the manufacturing machinery and equipment exemption, and how pre-construction design services are taxed.

The Department's answer rests on a core rule: when a construction contractor permanently affixes tangible personal property to real property, the contractor -- not the customer -- is treated as the "end user" of that property. As the end user, the contractor owes Use Tax on the cost price of the materials, not Retailers' Occupation Tax on what it bills the customer. This holds true whether the contract is billed as a lump sum or with labor and materials separately stated, and it does not change based on whether the contractor is working as a subcontractor or directly for the property owner -- what matters is who is doing the purchasing. If a contractor buys materials and pays no Use Tax to its supplier, it must register with the Department and self-assess and pay the Use Tax directly. Contractors get a credit against Illinois Use Tax for tax properly paid to another state on the same property.

Because the contractor (not the customer) is the end user, customers incur no Use Tax liability on permanently affixed materials, and the contractor has no legal authority to collect "sales tax" from the customer on that work. Contractors may still pass along their tax cost through higher prices or a contract clause requiring the customer to "reimburse" the tax liability, but that reimbursement cannot be billed or labeled as "sales tax" -- it must be described as a reimbursement of the contractor's tax cost. For subcontractor arrangements, the transaction between a general contractor and a subcontractor is not itself taxable; the party that actually purchases the materials for incorporation into real estate is the one that owes the Use Tax.

The letter also flags Illinois' manufacturing machinery and equipment exemption from Retailers' Occupation Tax, which covers machinery and equipment used primarily in manufacturing or assembling property for wholesale or retail sale. Since July 1, 2019, that exemption has been expanded to cover "production related tangible personal property," including certain items incorporated into real estate within a manufacturing facility, supplies and consumables used in the manufacturing process, protective apparel and safety equipment, and material-handling and quality-control items. The Department did not resolve whether the contractor's specific cleanroom products qualify -- it directed the contractor to review 86 Ill. Adm. Code 130.330 to determine applicability, consistent with the limited, directional purpose of a GIL.

What this means for you

Construction contractors and subcontractors

If you permanently affix materials (walls, flooring, doors, filtration systems, lighting, etc.) to real property in Illinois, you are the end user of those materials and you owe Use Tax on their cost price -- regardless of whether your contract is billed lump-sum or with materials and labor broken out separately, and regardless of whether you're a subcontractor or contracting directly with the property owner. You cannot bill your customer "sales tax" on this work; if you want to recover that cost, it has to be built into your price or billed as a tax reimbursement, not sales tax.

Businesses evaluating the manufacturing exemption

If some of your installed materials are used in a manufacturing facility's production process (for example, cleanroom components supporting a manufacturing or research process), review 86 Ill. Adm. Code 130.330, including subsection (h) on "production related tangible personal property." The Department did not make a specific finding for this taxpayer's product lines -- it pointed to the regulation and left the fact-specific determination to the taxpayer.

Accountants and tax professionals

Watch the interplay between 86 Ill. Adm. Code 130.1940 and 130.2075 (construction contractor end-user rules) and 130.330 (manufacturing exemption): a contractor can simultaneously be an end user owing Use Tax on most incorporated materials while still checking whether specific items purchased for a manufacturing facility qualify for the exemption. Also note the state-tax credit under 86 Ill. Adm. Code 150.310 for tax already properly paid to another state on the same property.

Common questions

Q: Does a construction contractor pay sales tax on the materials it buys, or does it charge its customer sales tax?
A: Neither, exactly. The contractor owes Use Tax (not Retailers' Occupation/sales tax) on the cost price of materials it permanently affixes to real property, because the contractor -- not the customer -- is deemed the end user of that property.

Q: Does it matter whether the contract is billed as a lump sum or with labor and materials separately stated?
A: No. The letter states that separately stating installation costs and material costs on a contract or bill "does not change the tax consequences of the transaction" -- it remains a construction contract either way.

Q: Does it matter whether the contractor is a subcontractor or working directly for the property owner?
A: Not for the core rule. Whoever actually purchases the tangible personal property for incorporation into real estate is the one who owes the Use Tax. If subcontractors do the purchasing and installation, they owe the tax; if a general contractor purchases the materials and merely hires subcontractors to install them, the general contractor owes the tax. The transaction between a general contractor and its subcontractor is not itself a taxable sale.

Q: Can a contractor bill its customer for "sales tax" on installed materials?
A: No. Since the customer incurs no Use Tax liability on permanently affixed materials, the contractor has no legal authority to collect "sales tax" from the customer. A contractor may pass along its own tax cost through higher prices or a contractual "reimbursement" provision, but that charge cannot be labeled or billed as "sales tax."

Q: Could any of the cleanroom product lines (flooring, doors, filtration, lighting, etc.) qualify for a tax exemption?
A: Possibly, if they are "production related tangible personal property" used in a manufacturing facility under the manufacturing machinery and equipment exemption (86 Ill. Adm. Code 130.330, expanded effective July 1, 2019). The Department did not decide this for the specific product lines described -- it directed the taxpayer to review the regulation itself, which is typical for a GIL.

Citations and references

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on use of tangible personal property purchased at retail)
• 86 Ill. Adm. Code 150.130 (credit against Use Tax for Retailers' Occupation Tax paid on the same sale)
• 86 Ill. Adm. Code 130.1940 (construction contractors as end users of tangible personal property)
• 86 Ill. Adm. Code 130.2075 (construction contractors and Use Tax on cost price of materials)
• 86 Ill. Adm. Code 150.310 (credit for tax properly paid to another state)
• 86 Ill. Adm. Code 130.330 (manufacturing and assembling machinery and equipment exemption, including production related tangible personal property)
• 86 Ill. Adm. Code 130.330(h) (definition of production related tangible personal property)
• 44 Ill. Reg. 5392 (Department rulemaking updating the manufacturing machinery and equipment exemption)
• 2 Ill. Adm. Code 1200.110 (procedures for requesting a Private Letter Ruling)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

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/st20-0026-gil.pdf

Original ruling text

ST 20-0026-GIL 10/09/2020

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 130.2075. (This is a GIL.)

October 9, 2020

Dear Xxxx:
This letter is in response to your letter dated November 14, 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:
To Whom It May Concern:
COMPANY requests a ruling on the proper treatment of cleanroom construction in
the state of Illinois.
STATEMENT OF FACTS
Our company performs specialty contracting work throughout the United
States. We have recently started building cleanrooms that are generally used
in manufacturing or scientific research in the life science or microelectronics
industries to create a controlled environment that regulates humidity,
temperature, particulate matter, and contamination which is vital to the
products or research being produced with in the cleanroom. We offer the
following clean room delivery options:
Life Science Industry:

ST 20-0026-GIL
Page 2

Modular Wall & Ceiling Systems - This includes walk-on ceilings, modular
walls, or a combination of modular and stick built construction.
Traditional Wall & Ceiling Systems - These are traditional drywall
which can be combined with modular systems.

finishes

Specialty Doors - COMPANY installs doors in a variety of configurations
such as swing, sliding, and high-speed roll up doors.
Laminar Flow Solutions - COMPANY offers a wide range of laminar
flow and air filtration solutions available such as containment hoods,
stainless steel plenums and air handling units.
Lighting Systems - COMPANY can install many lighting system options
including walk- on, surface mounted and LEDs.
Flooring Solutions - This includes a wide range including resinous floor solutions,
various thicknesses, chemistries and finishes comprised of epoxy, vinyl flake or
sheet vinyl systems. Vinyl seams are heat-welded, providing an impervious, hardwearing, homogeneous floor finish. Floor coves are often incorporated into walls
for ease of cleaning. In addition, COMPANY offers the accurate configuration of
raised access flooring to adhere to under-floor mechanical and electric al
component specifications.
Filtration Systems - COMPANY can install filtration systems that are
integrated and installed into the cleanroom facility.
Specialties - COMPANY provides a variety of specialty items such as slotted
channels, pass throughs, utility boxes, grids and curtains, guard rails, bumper
guards and gown room furniture.
Cold room Integration - COMPANY creates the cold room with materials that meet the
overall cleanroom specifications.
Microelectronics/Semiconductor Industry:
Modular Wall & Ceiling Systems - This includes walk-on ceilings, modular walls, or
a combination of modular and stick built construction.
Air Filtration Systems - From fan-filter units, ducted filter units, plenums, and air
handling units, COMPANY delivers customized solutions to maximize the most
sensitive and critical area of your manufacturing process.
Specialty Doors - COMPANY installs doors in a variety of configurations such as
swing, sliding, and high- speed roll up doors.
Flooring Solutions - This includes a wide range including resinous floor solutions, various
thicknesses, chemistries and finishes comprised of epoxy, vinyl flake or sheet vinyl

ST 20-0026-GIL
Page 3

systems. Vinyl seams are heat-welded, providing an impervious, hard-wearing,
homogeneous floor finish. Floor coves are often incorporated into walls for ease of
cleaning. In addition, COMPANY offers the accurate configuration of raised access flooring
to adhere to under-floor mechanical and electrical component specifications.
Strut Utility Racks - COMPANY can install unistrut slot channel framing to serve a
variety of support system applications. These include cable management, pipe and
conduit, and HVAC and duct, lighting and equipment supports.
Specialties - COMPANY provides a variety of specialty items such as slotted
channels, pass throughs, utility boxes, grids and curtains, guard rails, bumper
guards and gown room furniture.
Automated Utility Handling Systems - COMPANY can install cleanroom automation
systems for a variety of industries, applications, and automated system types
including conveyors, carousels, storage retrieval and guided vehicles.
Tool Installation Services - COMPANY provides a complete, comprehensive
solution for tool installation service from system rigging to the final outfitting of
technical instruments and machinery.
Protocol, Cleaning and Certification Services - COMPANY provides onsite
operations training and staff monitoring throughout the construction process to
ensure the cleanroom environment is not comprised. COMPANY also offers
postconstruction cleaning and sanitization services to eliminate debris and static
buildup through full super cleans and particle testing.
We are generally included on a project as a subcontractor working for the general
contractor. However, we do occasionally perform this work directly for the owner of
the project.
OPINION REQUESTED
1.

What would be the taxability of the product lines listed above? Would
sales tax be due on the on the (sic) purchase of the materials used or
would sales tax be due on the billings to our customer?

2.

Would the taxability answer differ if the project was billed with a
separated labor and materials billing or as a lump sum billing? Would
the answer differ if we are working as a subcontractor or directly for
the project owner?

3.

Would any of these product lines qualify to be exempt under the
manufacturing exemption?

4.

If the exemption does apply, what documentation do we need to receive
from our customer to support the exemption? Will the answer differ if our

ST 20-0026-GIL
Page 4

customer was a general contractor or the owner of the project? What
documentation/certificate do we need to provide to our vendors to
purchase materials exempt from sales tax?
5.

What would be the taxability if we were to provide pre-construction design
services Would the answer differ if this was a stand-alone service or if it
was included with the construction of the cleanroom?

If you have any questions, please contact me
DEPARTMENT’S RESPONSE:
Construction Contractors
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
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

ST 20-0026-GIL
Page 5

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.
Manufacturing Machinery and Equipment
Machinery and equipment that is used primarily in the manufacturing or assembling of tangible
personal property for wholesale or retail sale or lease is exempt from Retailers’ Occupation Tax. See
86 Ill. Adm. Code 130.330. The manufacturing process is the production of any article of tangible
personal property, whether such article is a finished product or an article for use in the process of
manufacturing or assembling a different article of tangible personal property, by procedures
commonly regarded as manufacturing, processing, fabricating, or refining which changes some
existing material or materials into a material with a different form, use or name. These changes must
result from the process in question and be substantial and significant. The Department recently
updated its regulations to reflect recent changes to the exemption. 44 Ill. Reg. 5392.
Beginning on July 1, 2019, the manufacturing and assembling machinery and equipment
exemption includes production related tangible personal property. Production related tangible
personal property means all tangible personal property used or consumed in a production related
process by a manufacturer in a manufacturing facility in which a manufacturing process takes place
or by a graphic arts producer in graphic arts production. Production related tangible personal property
also means all tangible personal property that is used or consumed in research and development
regardless of use within or without a manufacturing or graphic arts production facility. 86 Ill. Adm.
Code 130.330(h).
The Department included examples of items that are production related. For example, the
Department provided that the following tangible personal property would be considered production
related: (1) tangible personal property purchased by a manufacturer for incorporation into real estate

ST 20-0026-GIL
Page 6

within a manufacturing facility for use in a production related process; or tangible personal property
purchased by a construction contractor for incorporation into real estate within a manufacturing facility
for use in a production related process; (2) supplies and consumables used in a manufacturing
process in a manufacturing facility, including fuels, coolants, solvents, oils, lubricants, and adhesives;
(3) hand tools, protective apparel, and fire and safety equipment used or consumed within a
manufacturing facility; and (4) tangible personal property used or consumed in a manufacturing
facility for purposes of pre-production and post-production material handling, receiving, quality
control, inventory control, storage, staging, and packing for shipping or transportation.
We urge you to review this regulation to determine its applicability to the items you sell or
install for your customers.
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,

Debra M. Boggess
Associate Counsel
DMB:rkn