How should a construction contractor that also sells tangible personal property over-the-counter (a 'combination' or 'dual-purpose' contractor) handle Illinois sales and use tax on the materials it buys and the ST-1 return it files?

Plain-English summary

A construction contractor wrote to the Illinois Department of Revenue after going through a sales tax audit. The auditor told the contractor it needed a Private Letter Ruling (PLR) for a "Dual Purpose Contractor" to correctly fill out its monthly ST-1 return, and the contractor asked the Department for that guidance so it could file correctly going forward. The Department responded that it lacked sufficient information to issue a binding PLR, and instead issued this General Information Letter (GIL) laying out the general rules for construction contractors and combination retailer/contractors.

The Department explained that Illinois' Retailers' Occupation Tax (86 Ill. Adm. Code 130.101) taxes persons selling tangible personal property at retail, while Use Tax (86 Ill. Adm. Code 150.101) taxes the privilege of using tangible personal property purchased at retail -- together these make up what's commonly called "sales tax" in Illinois. A construction contractor (a term covering general contractors, subcontractors, and specialized contractors like landscapers) is treated as the end user of tangible personal property it permanently affixes to real property, so the contractor -- not its customer -- incurs Use Tax on the cost price of that property (86 Ill. Adm. Code 130.1940, 130.2075).

The letter then addresses the combination contractor/retailer scenario: if a contractor gave its supplier a certificate of resale when buying materials, but later sells some of that same property over-the-counter at retail (without installing it, e.g. an appliance or countertop sold on its own), the contractor owes Retailers' Occupation Tax and must collect Use Tax from that retail customer, reporting the cost price as receipts on Lines 1 and 4a of its ST-1 (86 Ill. Adm. Code 130.2075(b), (b)(2), (b)(3)). If the contractor instead converts that same resale-certificate property into real estate (installs it as part of a construction contract), it must self-assess and pay the Retailers' Occupation Tax (not Use Tax) on it, plus any applicable local occupation taxes, again reported to the Department.

The Department also distinguished ordinary Use Tax self-assessment (for contractors who never gave a resale certificate): if such a contractor didn't pay Use Tax to an out-of-state supplier, it must self-assess and pay Use Tax directly to Illinois at 6.25%, with credit available for tax properly paid to another state (86 Ill. Adm. Code 150.310). The letter clarifies that a contract covering both the sale and installation of property permanently affixed to a structure (bathtubs, sinks, cabinets, water heaters, built-in appliances, etc.) is a construction contract regardless of whether installation is separately stated, while separately contracted installation of over-the-counter items is a distinct, non-taxable service (86 Ill. Adm. Code 130.450). Finally, the Department noted that as end users, contractors' own customers incur no Use Tax and contractors have no authority to collect Use Tax from them -- though contractors may pass their own tax cost through via higher prices or a labeled "reimbursement" (never billed as "sales tax").

What this means for you

Construction contractors (general, sub, and specialty trades)

If you buy materials and permanently install them into real property, you are the end user under Illinois law and you owe Use Tax on your cost price for those materials -- your customer owes nothing on them, and you have no legal right to collect Use Tax from your customer as such. You may still build your tax cost into your price or list it as a "reimbursement" on an invoice, but you cannot call that line item "sales tax."

Combination (dual-purpose) contractor/retailers

If you sometimes resell materials over-the-counter and sometimes install the same kind of materials into real property, and you can't always tell at purchase time which way a given item will go, you may give your supplier a resale certificate and then account to the Department yourself depending on how each item is actually used: Retailers' Occupation Tax (collecting Use Tax from the customer) if sold over-the-counter, or self-assessed Retailers' Occupation Tax if instead installed into real estate. Report the cost price as receipts on Lines 1 and 4a of your ST-1. Get this election right, since an audit (as happened to the requester here) is a common trigger for the Department to scrutinize how a combination contractor has been self-assessing.

Accountants and tax professionals advising contractor clients

Note that the Department declined to issue a binding PLR here because it lacked sufficient client-specific facts -- this GIL is general guidance only, not a ruling on any particular contractor's facts. If a client needs a binding answer about its own dual-purpose contractor status, it should pursue its own PLR under 2 Ill. Adm. Code 1200.110 with full factual detail, rather than relying on this GIL.

Common questions

Q: Does a construction contractor pay Use Tax or Retailers' Occupation Tax on the materials it installs into real property?
A: Use Tax. Because the contractor is deemed the end user of tangible personal property it permanently affixes to real property, it owes Use Tax on the cost price of that property under 86 Ill. Adm. Code 130.1940 and 130.2075.

Q: What if the contractor also sells the same kind of materials over-the-counter, without installing them?
A: If the contractor gave its supplier a resale certificate at purchase, and then sells the property at retail over-the-counter (e.g., an appliance or countertop sold without installation), the contractor owes Retailers' Occupation Tax and must collect the corresponding Use Tax from its customer, per 86 Ill. Adm. Code 130.2075(b)(2).

Q: How is the cost price of resale-certificate materials that end up installed into real estate reported?
A: The contractor must self-assess and pay State Retailers' Occupation Tax (not Use Tax) on the cost price, plus any locally-imposed retailers' occupation taxes, reporting the cost price as receipts on Lines 1 and 4a of the ST-1 Sales and Use Tax Return, per 86 Ill. Adm. Code 130.2075(b)(2).

Q: Can a construction contractor collect "sales tax" from its customer on materials it installs?
A: No. Since the contractor -- not the customer -- is the end user and incurs the Use Tax liability, the contractor has no legal authority to collect Use Tax from the customer. A contractor may pass the cost along through higher prices or a labeled reimbursement, but it cannot be billed to the customer as "sales tax."

Q: Why didn't the Department just issue the Private Letter Ruling the contractor asked for?
A: The Department said it was "without sufficient information to provide ... a Private Letter Ruling" and instead gave general information. A contractor wanting a binding, fact-specific answer would need to submit a full PLR request under 2 Ill. Adm. Code 1200.110.

Citations and references

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 130.1940 (construction contractors deemed end users)
• 86 Ill. Adm. Code 130.2075 (combination retailer/construction contractors; resale certificates; ST-1 reporting)
• 86 Ill. Adm. Code 130.450 (separately contracted installation charges not subject to Retailers' Occupation Tax)
• 86 Ill. Adm. Code 150.310 (credit against Illinois Use Tax for tax paid to another state)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/st23-0019-gil.pdf

Original ruling text

ST-23-0019-GIL 07/05/2023 CONSTRUCTION CONTRACTORS
This letter discusses the tax liabilities for a construction contractor that is a
combination contractor and retailer. 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. However, if
the construction contractor provided its supplier with a certificate of resale and
then sells at retail tangible personal property over-the counter, the contractor
must pay Retailers’ Occupation Tax and collect Use Tax from its customer. See
86 Ill. Adm. Code 130.1940 and 86 Ill. Adm. Code 130.2075. (This is a GIL.)
July 05, 2023

COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated May 10, 2023, 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:

I have just gone through an audit with the Illinois Department of
Revenue for Sales Tax. In order to correctly fill out my ST-1, I was told by
the auditor, NAME, that I need a Private Letter of Ruling for a Dual
Purpose Contractor from you. He told me that he was unable to direct me
in the preparation of our monthly tax return. I would like to prepare the
returns in a correct way from here on out to avoid any issues in the future
if we are audited again. I am hoping that the Private Letter of Ruling for
Dual Purpose Contractors will guide me in the right direction.

COMPANY/ NAME
Page 2
July 05, 2023
If you have any questions, I can be reached Monday-Thursday from
7-3 at ###-###-#### or email E-MAIL.
DEPARTMENT’S RESPONSE:
The Department is without sufficient information to provide you with a Private
Letter Ruling. Therefore, we hope the following general information will assist you.
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.
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.
The relevant authority regarding the tax liabilities due on purchases of materials
by contractors acting as combination retailers/construction contractor may be found in
the Department’s regulations located at 86 Ill. Adm. Code 130.2075(b)(2). This
regulation requires the retailer/contractor to self-assess the tax liability directly to the
Department in the same form as the supplier would have assessed (Retailers'
Occupation Tax including local occupation tax, if applicable), if the retailer/contractor
provided the supplier with a certificate of resale at the time of purchase. The
Department’s regulation 86 Ill. Adm. Code 130.2075(b)(3) read in conjunction with
Section (b)(2) discusses the situs of the local occupation taxes to be applied.
If a customer purchases tangible personal property over the counter without
installation, for example an appliance or counter tops, then the retailer/contractor owes
Retailers' Occupation Tax and must collect the corresponding Use Tax from the
customer. If a customer purchases appliances or counter tops over the counter and
separately contracts for installation of the appliances or counter tops, then the
retailer/contractor owes Retailers' Occupation Tax and must collect the corresponding
Use Tax from the customer on the sale of the appliances or counter tops. The
separately contracted for installation of the appliances or counter tops is a separate
service and no Retailers’ Occupation Tax is incurred by the customer on the installation
charges. See 86 Ill. Adm. Code 130.450.

COMPANY/ NAME
Page 3
July 05, 2023
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 (whether or not the cost of installation is separately stated in the
contract). Obvious examples of the type of tangible personal property that is
permanently affixed or incorporated into a structure are bathtubs, sinks, lavatories,
cabinets built into the structure, water heaters, and water softeners. Stoves and
refrigerators that are not free standing and are built into the structure are some
additional examples.
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 out-of-State suppliers, those contractors must self-assess their Use Tax liability
and pay it directly to the Department at the rate of 6.25%. 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.
As a general rule, construction contractors should not be providing resale
certificates to their suppliers in Illinois or to out-of-State suppliers registered to collect
Illinois Use Tax and should be paying use tax and any locally-imposed retailers’
occupation taxes at the time of purchasing the tangible personal property to be
incorporated into real estate. However, when the purchaser (the purchaser here is the
retailer/contractor) of tangible personal property may use such property by converting it
into real estate, but may also resell such property "over-the-counter" apart from acting
as a construction contractor, and where it is impracticable, at the time of purchasing
such tangible personal property, for such purchaser to determine in which way the
purchaser will dispose of the property, such purchaser may certify to the supplier that
the purchaser is buying all of such tangible personal property for resale and thereafter
account to the Department for the tax on disposing of such property. 86 Ill. Adm. Code
130.2075(b). If the purchaser subsequently uses the tangible personal property by
converting it into real estate in this State in any manner, the purchaser must include the
cost price of such tangible personal property in their reported taxable receipts in their
return to the Department and must pay the State Retailers' Occupation Tax (not the Use
Tax, but the Retailers' Occupation Tax) thereon to the Department, and must also pay
locally-imposed retailers' occupation taxes thereon, if any. 86 Ill. Adm. Code
130.2075(b)(2). The cost price of such tangible personal property should be reported
as receipts on Lines 1 and 4a of the ST-1 Sales and Use Tax Return.
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

COMPANY/ NAME
Page 4
July 05, 2023
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.
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,

Kimberly A. Rossini
Associate Counsel
KAR:dlb