Is a solar-panel construction contractor exempt from Illinois Use Tax on materials when its contract is with a third-party owner instead of directly with the tax-exempt school district that will host the panels?

Plain-English summary

A construction contractor was installing solar panels on three buildings owned by a school district in Illinois. Normally, a construction contract with a school district (which holds a tax-exempt "E-number") would let the contractor buy materials tax-free, because the materials are being incorporated into property owned by an exempt organization.

But this project had a twist: the contractor's actual contract was not with the school district. It was with a third party who would own the solar panels and sell the school district electricity under a Purchase Power Agreement (PPA). The contractor asked the Department whether the project still qualified for the sales/use tax exemption, since the panels would end up physically attached to exempt school buildings even though the school district itself never took ownership of them.

The Department's answer: no exemption. Illinois treats construction contractors as the "end users" of the materials they permanently incorporate into real estate, which makes them liable for Use Tax on those materials. That liability can be avoided only when the contractor's own contract is directly with an "E-number" holder (like the school district) and the contractor gives its supplier the specific certification required by 86 Ill. Adm. Code 130.2075(d). Here, the contractor's counterparty was the third-party PPA company -- an entity without an E-number that will own the panels -- so the exemption chain never attaches, regardless of whose building the panels end up on.

What this means for you

Construction contractors and subcontractors

You are treated as the end user (not a reseller) of any tangible personal property you permanently affix or incorporate into real estate, so you generally owe Use Tax on the cost of materials -- even if your customer would otherwise be tax-exempt. You can only buy materials tax-free when your own contract is directly with the "E-number" holder and you give your supplier the certification described in 86 Ill. Adm. Code 130.2075(d) (identifying the exempt entity by name and address and stating the contract date). If you contract instead with a non-exempt party -- even one installing equipment on an exempt entity's property -- the exemption does not apply, and if you didn't pay Use Tax to your supplier you must self-assess and remit it directly to the Department.

Solar, PPA, and energy-project developers

Purchase Power Agreement structures, where a third party owns the generating equipment and sells power to the host site, are common for solar projects on schools, municipalities, and other exempt entities. This ruling flags a tax trap in that structure: because the contractor's agreement runs to the PPA owner rather than to the exempt host, the usual "government/nonprofit construction is tax-exempt" assumption does not carry over. Structuring the contract, and lining up who actually holds the E-number, matters as much as who benefits from the installation.

Accountants and tax professionals

Advise clients that the exemption under 86 Ill. Adm. Code 130.2075 turns on contractual privity with the E-number holder, not on ultimate ownership or physical location of the improvement. Confirm which party is named in the construction contract before assuming a project qualifies, and make sure any exemption certification given to suppliers correctly names the actual exempt contracting party.

Common questions

Q: If a school district benefits from the project, why isn't it exempt?
A: Because the contractor's contract was with the third-party PPA company, not with the school district. The exemption under 86 Ill. Adm. Code 130.2075(d) requires the contractor's own construction contract to be with the "E-number" holder; the school district's tax-exempt status doesn't transfer through simply because the panels sit on its buildings.

Q: What is an "E-number" and why does it matter here?
A: It's the tax exemption identification number Illinois issues to organizations determined to be exclusively charitable, religious, educational, or governmental. Only purchases made under a contract directly with an E-number holder -- backed by the required certification to the supplier -- can be made tax-free under this provision.

Q: Who owes the Use Tax in this scenario?
A: The construction contractor. Contractors are deemed end users of materials they incorporate into real property, so they incur Use Tax liability based on the materials' cost price. If the tax wasn't paid to the supplier, the contractor must self-assess and remit it directly to the Department.

Q: Would the answer change if the contractor's agreement were directly with the school district?
A: Based on the Department's reasoning, yes -- a contract directly with the E-number holder, paired with the certification required by 86 Ill. Adm. Code 130.2075(d), is what makes the tax-free purchase possible. The PPA structure here breaks that direct link.

Q: Is this letter binding on the Department?
A: No. It's a General Information Letter, which only directs the taxpayer to relevant regulations and is explicitly not a statement of Department policy or binding on the Department.

Citations and references

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on retail sellers of tangible personal property)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax imposed on the privilege of using property purchased at retail)
• 86 Ill. Adm. Code 130.1940 (construction contractors treated as end users of incorporated materials)
• 86 Ill. Adm. Code 130.2075, including 130.2075(d) (exemption for contractors buying materials for incorporation into property of "E-number" holders, and the required certification)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures; basis for this GIL)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2025/st25-0042-gil.pdf

Original ruling text

ST 25-0042-GIL

8/1/2025

CONSTRUCTION CONTRACTORS

Tangible personal property purchased by construction contractors for contracts
between construction contractors and entities that do not have an Exempt
Identification Number (E-number), where the tangible personal property will be
owned by the entity without an E-number upon incorporation, is not exempt from
Retailers' Occupation Tax and Use Tax. See 86 Ill. Adm. Code 130.2075. (This is a
GIL.)

August 1, 2025
NAME
TITLE
COMPANY
EMAIL
Dear NAME:
This letter is in response to your email dated May 12, 2025, 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
https://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’m trying to get a definitive answer to a sales tax exemption
qualification question. We are installing solar projects on three buildings
owned by a school district in IL. Normally a construction project with a school
district would be exempt from sales and use tax in IL. In this case though our
contract is with a third party who will own the solar panels being attached to
the school buildings. The third party will have a Purchase Power Agreement
(PPA) with the school district to supply them with the energy. Since our
contract is not with the school district will this project still qualify for the tax
exemption?

COMPANY
Page 2
August 1, 2025
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.
In Illinois, construction contractors are deemed end users of tangible personal
property purchased for incorporation into real property. The term construction contractor
includes general contractors, subcontractors, and specialized contractors such as
landscape contractors. The term contractor means any person or persons who are engaged
in the occupation of entering into and performing construction contracts for owners. 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
(even if the cost of installation is separately stated in the contract). As end users of such
tangible personal property, contractors incur Use Tax liability for such purchases based
upon the cost price of the tangible personal property. Therefore, any tangible personal
property that general contractors or subcontractors purchase that will be permanently
affixed to or incorporated into real property in this State will be subject to Use Tax. If
contractors did not pay the Use Tax liability to their suppliers, contractors must self-assess
their Use Tax liability and pay it directly to the Department. See 86 Ill. Adm. Code 130.1940
and 86 Ill. Adm. Code 130.2075.
In Illinois, organizations that are determined by the Department to be exclusively
charitable, religious, educational, or a governmental body, are issued tax exemption
identification numbers (“E” numbers). Organizations holding such numbers are exempted
from paying sales tax on organizational purchases. The organization must obtain and
present this number to a retailer, however, before it can make a tax-free purchase. Suppliers
selling tangible personal property to such exempt organizations must retain the “E” number
in order to document the exempt sale.
Construction contractors who physically incorporate tangible personal property into
real estate owned by holders of “E” numbers can purchase such property tax-free by
providing their suppliers with a certification stating that its purchases are for conversion into

COMPANY
Page 3
August 1, 2025
real estate under a contract with the “E” number holder that is involved by name and
address and stating on what date its contract was entered into. See 86 Ill. Adm. Code
130.2075(d). If, however, the contract is not between the construction contractor and the
“E” number holder, but rather between the construction contractor and an entity that is not
an “E” number holder and who will own the tangible personal property at the conclusion of
the construction contract, the exemption does not apply.
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,

George L. Encarnacion, Jr.
Associate Counsel
GLE:sce