Does a construction contractor owe Illinois Use Tax or Retailers' Occupation Tax on materials, like solar panels, that get permanently installed into real estate?

Plain-English summary

A tax professional wrote to the Illinois Department of Revenue asking how sales and use tax applies when a contractor sells and installs solar panel systems (and, as a follow-up, a "solar car port" combining a car port structure with solar panels). The question was whether the transaction should be taxed as a sale of tangible personal property (with Retailers' Occupation Tax charged to the customer) or as a construction contract involving real property (with the contractor itself owing Use Tax on the materials).

The Department responded with a General Information Letter rather than answering the solar-panel question directly, since GILs point taxpayers to the relevant rules rather than resolve a specific taxpayer's facts (that requires a binding Private Letter Ruling). The letter explains the general framework: construction contractors are considered "end users" of the tangible personal property they permanently install into real estate. That means the contractor — not the customer — owes Use Tax on the cost price of the materials, and the contractor generally should not be issuing resale certificates to its suppliers.

Whether a given item (solar panels included) is treated as real property once installed, or remains tangible personal property, turns on Illinois's "intention test." The Department looks at whether the item is physically affixed to the realty and applied to the realty's use or purpose, and — most importantly — whether the party installing it intended the item to become a permanent part of the building. Items that can be removed without damage, or that a seller could repossess for nonpayment, tend to indicate the parties intended the item to remain tangible personal property rather than become part of the realty.

The letter also distinguishes over-the-counter retail sales (e.g., an appliance or countertop sold without installation, or sold with separately contracted installation) from true construction contracts, where the sale and installation of permanently affixed property are bundled together regardless of how the price is stated. It closes by describing the combination retailer/contractor rule: a contractor who can't tell in advance whether purchased materials will be resold over the counter or installed into real estate may buy under a resale certificate and later self-assess Retailers' Occupation Tax (not Use Tax) if the materials end up incorporated into real estate.

What this means for you

Construction contractors (including solar installers)

If you buy materials that you will permanently affix to a customer's property — solar panels, cabinets, water heaters, and similar fixtures are the kinds of items discussed — you are generally the "end user" of that property and you owe Illinois Use Tax on your cost price, currently at 6.25%, unless you already paid tax to another state (in which case you may claim a credit). You should not be handing suppliers a resale certificate for materials you intend to install as part of a construction contract. The letter notes contractors may pass their Use Tax cost on to customers through higher prices or a contract line for "reimbursement of tax," but it cannot be billed to the customer as "sales tax."

Combination retailers/contractors

If your business sometimes sells the same item over the counter and sometimes installs it as part of a contract, and you genuinely cannot tell in advance which will happen, you may buy the materials under a resale certificate. If you later install the item into real estate, you must self-assess and report Retailers' Occupation Tax (not Use Tax) on your cost price of that property to the Department, including any applicable local retailers' occupation tax, reported on Lines 1 and 4a of the ST-1 return.

Accountants and tax professionals

The letter is a useful pointer to the governing regulations (86 Ill. Adm. Code 130.1940 and 130.2075) and to two prior GILs (ST 00-0156-GIL and ST 01-0093-GIL) that lay out the multi-factor "intention test" used to decide whether installed property becomes realty. Note that this letter does not itself decide whether solar panels or solar car ports are realty or tangible personal property — it declines to answer that specific question and instead directs the requester to the general framework, so a client needing certainty on solar installations would need to request a binding PLR.

Common questions

Q: Does this letter say whether solar panels are taxed as real property or as tangible personal property?
A: No. The letter was written in response to a solar panel question, but the Department answered with general guidance on the intention test and construction contractor rules rather than resolving that specific fact pattern. A taxpayer wanting a binding answer on their own solar panel or solar car port installation would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Q: Who owes the tax when a contractor installs permanent fixtures — the contractor or the customer?
A: The contractor. Construction contractors are treated as end users of tangible personal property incorporated into real estate, so they owe Use Tax on their cost price. The customer generally incurs no Use Tax liability on that property, and the contractor has no legal authority to collect Use Tax from the customer for it (though the contractor's costs may be passed on through price or a "reimbursement" line item, not labeled as sales tax).

Q: How does the Department decide whether an installed item is "real property" versus still tangible personal property?
A: Under the intention test described in ST 00-0156-GIL and ST 01-0093-GIL, the Department looks at whether the item is physically affixed to the realty, whether it's applied to the realty's use or purpose, and — centrally — whether the party affixing it intended it to become a permanent part of the realty. Removability without damage, and contract terms allowing repossession for nonpayment, both point toward the item remaining tangible personal property.

Q: Is selling an appliance or countertop over the counter treated the same as a construction contract?
A: No. A sale of tangible personal property over the counter, even with separately contracted installation, is taxed as a retail sale (Retailers' Occupation Tax collected from the customer on the goods, with no tax on the separate installation charge). A construction contract — the bundled sale and installation of property that is permanently affixed or incorporated into a structure — is taxed differently, with the contractor as end user owing Use Tax, regardless of whether installation cost is separately stated.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter (GIL), issued under 2 Ill. Adm. Code 1200.120. A GIL merely points to relevant regulations and other letter rulings; it is not a statement of Department policy and is not binding, unlike a Private Letter Ruling.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 35 ILCS 105/3 (Use Tax Act imposition)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulation)
• 86 Ill. Adm. Code 130.450 (over-the-counter sales with separately contracted installation)
• 86 Ill. Adm. Code 130.1940 (construction contractors as end users)
• 86 Ill. Adm. Code 130.2075 (construction contractors; combination retailers/contractors)
• 86 Ill. Adm. Code 150.101 (Use Tax regulation)
• 86 Ill. Adm. Code 150.310 (credit for tax paid to another state)

Prior letter rulings cited:

• ST 00-0156-GIL (intention test factors)
• ST 01-0093-GIL (intention test, removability and externals)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0020-GIL.pdf

Original ruling text

ST 24-0020-GIL

04/24/2024

CONSTRUCTION CONTRACTORS

An item becomes realty after installation if it is physically affixed to the realty and
the party affixing the item intends to make it a part of the realty. See 86 Ill. Adm.
Code 130.2075. (This is a GIL.)
April 24, 2024
NAME
ADDRESS
Dear NAME:
This letter is in response to your email dated March 25, 2024, 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 some questions for a client of mine related to their sale and
installation of solar panel systems.
I have only been able to find the attached general guidance on
contractors. I’m hoping someone has considered its application related to
solar panels before and can guide me on these questions without having
to request a PLR.

1. Are solar panels, cabling, etc installed on a building by a contractor
   (could be a for profit school, retailer, manufacturer, etc) treated as
   the sale of tangible personal property, instead of a construction
   contract (i.e. real property)? I found a sales tax taxability matrix in
   our research tools (attached), which indicates that solar energy
   devices and systems are taxable in IL (meaning it is tangible
   personal property), but can’t find any IL authority on the matter.
   1a. Would your answer change if the solar panels are installed as a
   “solar car port”, with the contractor building the car port as well?

NAME
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April 24, 2024

I would appreciate it if you can provide me with a contact with experience
in this area (such as an audit supervisor or someone in your department)
so that I can discuss this with them. I’m leaning towards it being real
property with the contractor being subject to Use Tax since the system
generally doesn’t move after installation and therefore is more permanent
in nature, and since something like Venetian blinds are considered
permanently affixed to a structure. However, based on that sales tax chart
I had found, and since much of the contract price is for installation
services that are not separately contracted for, I thought I’d see what
experience there is so far with this type of purchase.
Can you please confirm that you’ve received this email?
DEPARTMENT’S RESPONSE:
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 35 ILCS 120/2; 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 35 ILCS 105/3; 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 retain the amount of Use Tax
paid to reimburse themselves for their Retailers’ Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
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 contractors 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

NAME
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April 24, 2024
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.
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.
For purposes of the Illinois sales tax laws, the Department uses an intention test
to determine whether items remain tangible personal property after installation or
become part of realty. The Department has invoked the intention test in letter rulings
concerning construction contractors.
ST 00-0156-GIL sets forth the intention test as follows:
“In determining whether an item is permanently affixed to real estate, a
very fact-specific inquiry must be made regarding whether the item is
intended to remain with the realty. In order to make a finding that the item
is permanently affixed, at least three factors must generally be examined.
First, the item must be affixed to the realty. The item must also be applied
to the use or purpose to which the realty is put. Finally, the intent of the
person affixing the item must be examined. Another factor often
examined is whether the item is essential to the use to which the real
estate has been put.”
In ST 01-0093-GIL, the Department also discusses the intention test:
"If circumstances indicate that the parties obviously intended that the item
remain with the realty, we give effect to that intention. If an obvious intent

NAME
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April 24, 2024
is not apparent, we look to the extent to which the item has been affixed.
If the item can be removed without damage to the item or to the real
estate, that is an indication that the parties intended that the item remain
tangible personal property. We understand that your client’s material
handling systems can be removed without damage to the system
components or to the real estate and that the systems are often moved
within the buildings in which they are installed to accommodate
expansions and updates to the systems. In addition, the Department
looks to externals to determine intent. So, for example, if a contract for
sale indicates that the seller can repossess the item in the event of nonpayment, we think that is an indication that the parties intended that the
item remain tangible personal property."
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.

NAME
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April 24, 2024
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 the contractor’s 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 the contractor’s 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 tax.illinois.gov or contact the Department’s Taxpayer Information
Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW: sce