Does Illinois Service Occupation Tax or Use Tax apply when a company sells two-component spray-on bedliner products to franchisees/dealers who apply them to customers' trucks?

Subject

Service Occupation Tax

Plain-English summary

A company that manufactures a two-component spray-on bedliner material (referred to in the letter only as "PRODUCT A" and "PRODUCT B") asked the Illinois Department of Revenue how sales tax applies down its supply chain. The company sells the raw components to independent franchisees and dealers, who then spray the components onto truck beds -- where they chemically react and harden into a finished bedliner -- and separately bill their own customers for the bedliner and for installation labor.

The Department explained that Retailers' Occupation Tax (regular sales tax) does not apply to sales of services. Instead, when a business provides a service and transfers tangible personal property as part of that service -- here, applying the hardened bedliner material to a customer's truck -- the business is a "serviceman" under the Service Occupation Tax Act and owes either Service Occupation Tax or Use Tax on that property, calculated under 86 Ill. Adm. Code 140.101. Because the franchisees/dealers are acting as servicemen, they can buy PRODUCT A and B from the Company tax-free by giving the Company a resale certificate, and then account for tax themselves using one of four methods described below.

The Department did not directly rule on whether the resale certificate is valid (issue 1) or bless a specific tax treatment as "correct" (issue 2) -- as a GIL, it instead walked through the general legal framework for how servicemen calculate and remit tax, and concluded factually that "the dealer/franchisees buying your products are acting as servicemen when applying the products to their customers' trucks and would pay Service Occupation Tax or Use Tax using one of the four methods described."

What this means for you

Manufacturers/wholesalers selling components used in installed services

If your customers buy your raw materials or components and then combine, install, or apply them as part of a service they sell (rather than reselling your product unchanged), your customers are likely "servicemen" for Illinois tax purposes, not ordinary retailers. They may be able to buy from you tax-free using a resale/Certificate of Resale, but that shifts the tax-collection obligation to them -- it does not make the transaction tax-free all the way down the chain.

Franchisees, dealers, and installers (servicemen)

If you apply a product to a customer's property as part of a service (like spraying on a bedliner), you are a "serviceman" and must account for Service Occupation Tax or Use Tax on the materials transferred, using one of four methods: (1) tax on the separately stated selling price of the material; (2) tax on 50% of the entire bill if you don't separately state the price; (3) if you're a registered "de minimis" serviceman, tax on your cost price; or (4) if you're a de minimis serviceman not required to register, Use Tax paid to your supplier instead of collecting tax from customers. You qualify as "de minimis" if the cost of materials you transfer is less than 35% of your gross receipts from services (75% for pharmacists and graphic arts producers).

Accountants and tax professionals advising installers

Under 86 Ill. Adm. Code 130.450, a separately stated installation/labor charge is not part of the taxable tangible personal property, so servicemen who clearly break out labor from materials on their invoices can limit the tax base to the materials themselves. Watch which of the four Service Occupation Tax/Use Tax methods your client actually uses, since the resale-certificate paperwork and registration obligations differ by method.

Common questions

Q: Does the Company owe sales tax when it sells PRODUCT A and B to franchisees and dealers?
A: The GIL indicates the franchisees/dealers are acting as servicemen, which supports the Company accepting a resale certificate from them instead of charging Retailers' Occupation Tax -- but the Department's response addresses the servicemen's tax treatment rather than expressly confirming the resale certificate's validity.

Q: What tax do the franchisees/dealers owe once they install the bedliner?
A: They owe either Service Occupation Tax or Use Tax on the value of the bedliner material transferred to their customer, calculated under one of four methods set out in 86 Ill. Adm. Code 140.101 and 140.108, depending on whether they separately state the price, use the 50%-of-bill method, or qualify as a registered or unregistered de minimis serviceman.

Q: Is the installation labor charge taxable?
A: No. The letter confirms that under 86 Ill. Adm. Code 130.450, a separately stated installation charge is not part of the taxable tangible personal property, so if the invoice separately states the installation charge, that charge is not taxed.

Q: Is this letter binding on the Department?
A: No. This is a General Information Letter (GIL) issued under 2 Ill. Adm. Code 1200.120. It only directs the requester to the relevant regulations and general rules; it is not a statement of Department policy and does not bind the Department the way a Private Letter Ruling would.

Q: What does "de minimis serviceman" mean?
A: It's a serviceman whose annual aggregate cost price of tangible personal property transferred incident to services is less than 35% of gross receipts from those service transactions (75% for pharmacists and graphic arts production). De minimis servicemen may pay tax on cost price rather than selling price, under 86 Ill. Adm. Code 140.101(f) and 140.108.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on tangible personal property transferred incident to sales of service)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman threshold)
• 86 Ill. Adm. Code 140.108 (unregistered de minimis servicemen pay Use Tax to suppliers)
• 86 Ill. Adm. Code 130.450 (separately stated installation charges)
• 35 ILCS 105/2 (referenced in the letter as "35 Illinois Code Section 105/2" -- Use Tax Act resale exemption)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• Section 2a of the Retailers' Occupation Tax Act (registration requirement)

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/st20-0038-gil.pdf

Original ruling text

ST 20-0038-GIL 12/28/2020 SERVICE OCCUPATION TAX
This letter discusses the Service Occupation Tax. See 86 Ill. Adm. Code 140.101. (This is a
GIL.)

December 28, 2020

NAME
ADDRESS
Dear Xxxx:
This letter is in response to your letter dated January 28, 2020, 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:
The purpose of this correspondence is to request a non-binding general information
letter on behalf of COMPANY client (known as “Company”) on which Company may
reply for persuasive guidance.
A copy of 2 Illinois Administrative Code Section
1200.120 is attached for your review.
STATEMENT OF FACTS
The Company is a retailer of PRODUCT which are sold to primarily independent
franchisees and other businesses purchased for use in manufacturing bedliners. In
contrast to traditional “in place bedliners” which are purchased whole and installed into
the beds of automobile trucks/vehicles, the Company’s patented PRODUCT, undergo a
PRODUCT reaction process and are transformed/constitute the bedliner upon being
applied to automotive beds by the independent franchises and other businesses which
purchase the Company’s PRODUCT.
From a technical perspective, the mixing of PRODUCT A and PRODUCT B,
respectively, is done at high pressure and polymerized through high impingement
mixing. This mixing is done at high pressure and temperatures that cause an

immediate reaction and is accomplished with a specialized two component gun. This
gun pressurizes PRODUCT A and B separately until it reaches the mix chamber at
2000 psi. The “collision” of PRODUCT A and B, respectively, produces a spray pattern
which is well dispersed to cover a large area; with typical “gel-time”, meaning the
change from liquid to solid bed liner, is 3-6 seconds.
From a practical perspective, as noted above, the Company sells PRODUCT A and
PRODUCT B to the dealers/independent franchisees. Each of these PRODUCT, in and
of themselves, have little if no utility unless and until the aforementioned PRODUCT
reaction/transformation process is complete. In practice, upon purchasing these
PRODUCT (raw materials), the PRODUCT are inserted into the patented manufacturing
equipment, where upon application, these PRODUCT become the hardened bedliners
which chemically adhere to the beds of automotive vehicles and constitute the bedliners
purchased from the franchisees/dealers. The Company’s customers who purchase the
PRODUCT (typically dealers and franchisees) typically invoice a separate charge for
the labor to install the bedliner and a significantly higher charge for the bedliner itself.
ISSUE(S):
1) Does the Department concur that franchisees and independent dealerships
who purchase PRODUCT (PRODUCT A and B, respectively) from the
Company as outlined above can provide the Company with a sale for resale
exemption certificate?
2) If the Department concurs that the franchisees and independent dealerships
can purchase PRODUCT under a sale for resale certificate as outlined above,
please confirm that provided the installation charge and charge for the
bedliners as reflected on the invoices from the dealers/franchisees to the end
users are separately stated, the dealer/franchisees should charge Illinois
Retailers Occupation Tax (Sales Tax) on the sales of the bedliners and
exempt the separately stated installation charge as per 86 Illinois
Administrative Code Section 130.450.

ANALYSIS
Illinois law provides that tangible personal property (other than new motor vehicles)
acquired for resale, rental, or leasing in the ordinary course of the purchaser’s business
is exempt from Illinois Retail Occupational Tax (Sales Tax) if the property is resold,
rented, or leased in the same form in which it was purchased. See 35 Illinois Code
Section 105/2. As such, the Company believes that while there is nothing expressly on
point on this issue, the Company believes that dealers/franchisees who are reselling the
PRODUCT, which become the bedliners, can provide the Company with a valid resale
certificate in lieu of the Company charging the dealers/franchisees Retailers
Occupational Tax (Sales Tax) upon the sale of the PRODUCT since the
franchisees/dealers will be charging Retailers Occupation Tax (Sales Tax) on the sale
of bedliners, but exempt the installation charge pursuant to 86 Illinois Code Section
130.450.

CONCLUSION
We believe that based on our analysis of Illinois law:
i)

That franchisees and independent dealerships, who purchase PRODUCT
(PRODUCT A and B, respectively) from the Company as outlined above,
can provide the Company with a sale for resale exemption certificate; and

ii)

That the franchisees and independent dealerships, who purchase
PRODUCT under a sale for resale certificate as outlined above, provided
the installation charge and charge for the bedliners as reflected on the
invoices from the dealers/franchisees to the end users are separately
stated, the dealers/franchisees should charge Retailers Occupational Tax
(sales tax) on the sales of bedliners, but exempt the separately stated
installation charge(s).

If you have any additional questions or require any additional documentation/information
in order to issue your conclusions with respect to this non-binding general information
letter ruling determination request(s), please contact me at NUMBER. Thanking you in
advance for your assistance.
DEPARTMENT’S RESPONSE:
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on tangible personal
property transferred as an incident to sales of service. 86 Ill. Adm. Code 140.101. 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
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.
It appears that the dealer/franchisees buying your products are acting as servicemen when
applying the products to their customers’ trucks and would pay Service Occupation Tax or Use Tax
using one of the four methods described above.
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:bkl