How did Illinois tax installed carpeting, custom draperies, reupholstery, handling fees, and sales spanning a tax-rate change?

Plain-English summary

Illinois applied different tax rules depending on whether the interior designer made a retail sale, performed a construction contract, sold a custom-made item, or provided a repair service.

For carpeting, an over-the-counter sale was taxable to the customer. If the customer separately contracted for installation, the installation charge was a separate nontaxable service. But a single contract to sell and permanently affix carpet to real property was a construction contract: the contractor was the end user, owed Use Tax on its cost of materials, and had no authority to bill the customer "sales tax." The contractor could raise its price or separately state reimbursement of its own tax liability. Area rugs and floor coverings attached only with two-sided tape were not permanently affixed under the cited rules.

For custom draperies, curtains, slipcovers, and similar made-to-order merchandise, production labor remained in taxable gross receipts even when separately stated. Separately contracted installation charges could be deducted; installation included in a lump-sum product price was taxable.

Reupholstering a chair to its original state was a service transaction subject to one of the historical Service Occupation Tax or Use Tax methods. If the primary serviceman subcontracted work, the multi-service rule applied.

For a retail sale crossing a tax-rate change, the rate in effect on the delivery date generally controlled. If receipts had already been received and tax paid before the change, the GIL said no additional tax or credit resulted solely from later delivery. Handling charges were a retailer's taxable cost of doing business; combined shipping and handling required the separate cited rules.

What this means for you

Classify each contract before calculating tax. Permanent attachment can move liability from a retail sale to the contractor's material cost, while custom fabrication, repair services, installation, and handling each follow different rules.

Common questions

Q: Could a carpet construction contractor collect Use Tax from the customer as sales tax?
A: No. The contractor was the end user, though it could charge a higher price or state reimbursement of its own tax liability.

Q: Was separately stated labor for custom draperies deductible?
A: Production labor was not deductible. Separately contracted installation could be.

Q: Were handling charges taxable?
A: Yes. The GIL treated them as part of the retailer's taxable business costs.

Citations and references

• 86 Ill. Adm. Code 130.101 and 130.450
• 86 Ill. Adm. Code 130.1940, 130.2075, and 130.2101
• 86 Ill. Adm. Code 130.2140(b)
• 86 Ill. Adm. Code 140.101 through 140.109 and 140.145
• 86 Ill. Adm. Code 130.410 and 130.415
• 86 Ill. Adm. Code 150.310

Subject

Construction Contractors

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0035.pdf

Original ruling text

ST 10-0035-GIL 04/19/2010 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 130.1940 and 86 Ill. Adm. Code 130.2075. (This is a GIL.)

April 19, 2010

Dear Xxxxx:
This letter is in response to your letter dated February 9, 2010, in which you request
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 letter is to obtain, in writing, direction on how to properly charge and
pay sales tax. In our attempts to comply with the State of Illinois, we have made
numerous phone calls to your Des Plaines office asking how to handle sales taxes.
When we thought we had our procedures in place, along comes a field auditor from the
state, who contradicts information previously given to us. She cites that the rules are
confusing. It begs the question that if the rules are confusing to a field auditor, how is
the average taxpayer to comply confidently.
I am hopeful that you can provide a guideline that will support our procedures should an
audit be conducted in the future, or direct us to someone who can.
Going forward—COMPANY is an interior design firm doing mainly residential design
work. If the rules are different for working in an office building, please advise. Design
services are provided and also there are sales to clients of furniture, furnishings, custom
window treatments, and reupholstery.
CARPETING
Recently, a client decided to replace some carpeting in the home. We obtained a quote
from a supplier and prepared a proposal for the client. The client objected to the
amount of sales tax on the proposal as it was based on the total amount of this carpet

replacement, specifically, materials and labor. This client pointed out that the estimate
they received from a carpet store included sales tax on carpet only. We called your Des
Plaines office and were told that in fact, if we used separate line items for the carpet and
installation, sales tax need only apply to carpet. Further, installation on any product was
not subject to sales tax. We discussed a ‘common sense’ approach: if the
labor/installation can only be completed after the product is brought into the residencedo not charge tax on the installation. This week an auditor from the state is here and I
posed this same question to her. She said that I shouldn’t charge tax to the client at all,
rather, pay the tax to our supplier, and adjust our selling price to the client to cover this
extra cost to us. The reasoning is that carpet becomes part of the structure. I called the
Des Plaines office again this morning, and was told to charge the client, but only on the
carpet. Further, installation or labor on any product was not subject to sales tax. So we
are getting contradictory information. What we would like to have documented is as
follows:
1.
2.
3.

In providing wall to wall carpeting to a client, do we charge them sales tax, and if
so, is it on carpet only-or on carpet and installation?
If we do not charge client sales tax, do we pay our vendor sales tax on product
only?
If the vendor does not charge us sales tax, do we add it to line 12a on form ST1?

DRAPERIES AND WINDOW TREATMENTS
We provide custom window treatments which consist of fabric, trim, sometimes
hardware such as rods, rings, and these items are shipped direct to a workroom where
the fabric is cut, sewn and fabricated into a window covering. We have received
conflicting information on whether or not the labor cost in this case is subject to sales
tax to our client. I have heard ‘No, it is labor and labor is not taxable’. And ‘Yes, it is
taxable as it is part of a new product.”
1.

What components are taxable to the client?

REUPHOLSTERY
We find replacement fabric for furniture pieces currently in the possession of the client.
We provide the fabric to a reupholstery firm and they pick up the existing piece of
furniture and replace the fabric on it. We have been told that sales tax applies to both
fabric and any other material and also to labor because both are needed to produce a
finished product. We have also been told that the labor portion, if broken out on the
proposal, is not subject to sales tax, as this is reworking of an existing product. A client
recently pointed out that she could purchase the fabric and take her chair and fabric to a
reupholsterer and not pay sales tax for that labor.
1.

What components are taxable to the client?

SALES TAX RATE CHANGES
In the course of business, we provide a proposal to a client listing the item or items
proposed for sale with the cost of those items and this proposal also lists the sales tax
amount applicable to this sale. This proposal is signed by COMPANY and also the
client, and a deposit normally accompanies the signed proposal from the client, thus

creating a contract. In a few circumstances, a sales tax rate adjustment went into place
between the time that the contract was signed and the time when the product was
actually delivered. In the case of customer furniture or area rugs, the lead time can be
several months.
1.
2.

When we invoice for merchandise in a case like this, do we charge sales tax as
outlined on the contract—or on the tax rate in place on the date of the delivery?
In the event that we are to charge the increased rate, how do we justify it to a
client?

HANDLING CHARGES
When we invoice a client for an order, we add a handling charge of $7.50.
1.
2.

Is this taxable to client?
Do we need to ‘self-assess’ sales tax to the state if we do not charge sales tax on
this fee?

Thank you for your assistance in this matter. It is very much appreciated.

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 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 retain the amount of Use Tax paid to reimburse themselves for their
Retailers' Occupation Tax liability incurred on those sales.
Construction Contractors
If a customer purchases tangible personal property, for example carpeting, over the counter
without installation, then the retailer owes Retailers' Occupation Tax and must collect the
corresponding Use Tax from the customer. If a customer purchases carpeting over the counter and
separately contracts for installation of the carpeting, then the retailer owes Retailers' Occupation Tax
and must collect the corresponding Use Tax from the customer on the sale of the carpeting. The
separately contracted for installation of the carpeting is a separate service and no 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. 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 Internet 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 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
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.
In the case of floor coverings, the construction contractor must permanently affix the floor
coverings to the real estate under the terms of the contract. 86 Ill. Adm. Code 130.2101. The floor
coverings must be cemented or otherwise permanently affixed to the structure by use of tacks,
staples, or wood stripping filled with nails that protrude upward (sometimes referred to as "tacking
strips" or "tack-down strips"). Floor coverings that are area rugs or that are attached to the structure
using only two-sided tape are not permanently affixed to the real estate. 86 Ill. Adm. Code
130.1940(c)(1).
Vendors of Curtains, Slip Covers and Other Similar Items Made to Order
If vendors of curtains, slip covers and other similar items made to order sell merchandise in
addition to furnishing services, they incur Retailers' Occupation Tax liability on the receipts from the
sales of the merchandise involved. See 86 Ill. Adm. Code 130.101. In computing the tax base for
custom-designed merchandise, such as draperies, labor is included in the gross receipts subject to
tax. Please see 86 Ill. Adm. Code 130.2140(b), which states, in part:
"(1) In computing Retailers' Occupation Tax liability on the retail sale of custom-made
items, no deduction may be taken for the cost of labor involved in producing the finished
item for sale. This is true whether such production labor is included in a lump sum price
with the tangible personal property or whether such production labor is priced
separately from the tangible personal property. The thing that is being sold is the
finished item (drapes, carpeting, etc.), and the cost of labor involved in making such
item is no more deductible than is the cost of labor that is involved in producing a stock
or standard item for sale.
2) However, receipts from installation charges are deductible from total receipts in
computing Retailers' Occupation Tax liability if such charges are contracted for by the
seller and the purchaser separately from the selling price of the finished tangible
personal property, but even receipts from installation charges are taxable if the
installation charge is included in a lump sum price with the tangible personal property
(see Section 130.450 of this Part.)"
Service Occupation Tax

Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve
the transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information see of 86
Ill. Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
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. See 86 Ill. Adm.
Code 140.101. The purchase of tangible personal property that is transferred to the service customer
may result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending
upon his activities. The serviceman’s liability may be calculated in one of four ways: (1) separately
stated selling price of tangible personal property transferred incident to service; (2) 50% of the
servicemen's entire bill; (3) Service Occupation Tax on the servicemen's cost price if the servicemen
are registered de minimis servicemen; or (4) Use Tax on the servicemen's 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 the sale of service. The tax is then calculated on the separately-stated
selling price of the tangible personal property transferred. If the servicemen do not separately state
the selling price of the tangible personal property transferred, they must use 50% of the entire bill to
the service customer as the tax base. Both of the above methods provide that in no event may the tax
base be less than the servicemen's cost price of the tangible personal property transferred. See 86
Ill. Adm. Code 140.106.
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. See 86 Ill. Adm.
Code 140.109. Servicemen may qualify as de minimis if they determine that the annual aggregate
cost price of tangible personal property transferred as an incident of the sale of service is less than
35% of the total annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphics arts production). Servicemen no longer have the option of determining
whether they are de minimis using a transaction by transaction basis. Registered de minimis
servicemen are authorized to pay Service Occupation Tax (which includes local taxes) based upon
their cost price of tangible personal property transferred incident to the sale of service. Such
servicemen should give suppliers resale certificates and remit Service Occupation Tax using the
Service Occupation Tax rates for their locations. Such servicemen also collect a corresponding
amount of Service Use Tax from their customers, absent an exemption.
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. 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.
For example, when a serviceman repairs or reupholsters a chair to its original state for a
customer, he or she incurs a Service Occupation Tax or Use Tax liability based on one of the four
methods described above. When a serviceman contracts out all or a portion of the service that he will
provide, he is acting as a primary serviceman in a multi-service situation. As a primary serviceman,
he engages the services of a secondary serviceman in order to obtain all or part of the product and

services desired by the service customer. See 86 Ill. Adm. Code 140.145 to determine the tax
incurred in these situations.
Rate Changes
The Retailer’s Occupation Tax is incurred on the gross receipts from the sale of tangible
personal property at the tax rate in effect on the date of delivery of the property. If delivery occurs
after the tax rate changes, and if receipts were received before the date of the rate change, and tax
was paid on the receipts when received by the seller, no additional tax will be due or credit allowed
because of the delivery of the property after the change in rate. See 86 Ill. Adm. Code 130.101(a).
For situation involving sales to construction contractors, please see Section 130.101a)(2).
Handling Charges
Handling charges represent a retailer's cost of doing business, and are consequently always
includable in gross charges subject to tax. See 86 Ill. Adm. Code 130.410. However, such charges
are often stated in combination with shipping charges. If this is the case, please see Section
130.410(c) and Section 130.415.
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,

Richard S. Wolters
Associate Counsel
RSW:msk