How did Illinois treat an out-of-state repair manager that hired local contractors for plumbing, electrical, painting, and building repairs?

Plain-English summary

An out-of-state company arranged repairs for commercial buildings, hired local plumbers and other trades, paid their invoices, and rebilled customers with a management fee. Illinois gave general contractor, service, and nexus rules but did not expressly decide the company's nexus or final tax liability.

Construction contractors are end users

A contract for sale and installation of property permanently affixed to real estate was a construction contract. The contractor was the end user and owed Use Tax on the cost of the property incorporated into the building.

The customer did not incur Use Tax, and the contractor had no authority to collect its Use Tax liability as "sales tax." The contractor could raise its price or contract for reimbursement, but the invoice had to characterize it as reimbursement rather than sales tax.

When a subcontractor itself acted as the construction contractor, the transaction between general contractor and subcontractor was not taxable; the subcontractor owed Use Tax on its materials. If the general contractor bought the property and hired a subcontractor only to install it, the general contractor owed Use Tax.

Service transactions depended on property transfer

Retailers' Occupation and Use Taxes did not apply to services that transferred no tangible personal property. When property was transferred with a service, Service Occupation Tax or Use Tax could apply under the serviceman methods.

A primary serviceman that contracted out part of its service used the multi-service rules in 86 Ill. Adm. Code 140.145.

Nexus was left as a general framework

An out-of-state serviceman maintaining a place of business in Illinois registered as a Service Use Tax collector. The GIL says an Illinois agent or representative operating under the company's authority could create nexus.

Under the historical Quill discussion, physical presence included an agent or representative and could include repetitive delivery and installation. The letter did not determine whether the local contractors were the requester's agents or representatives.

What this means for you

Repair-management companies

Separate the contractor's use of materials, the manager's own service, any property transferred with that service, and the factual relationship with local trades. This GIL does not collapse those issues into one answer.

Construction contractors and subcontractors

The party that purchases materials for permanent incorporation generally bears Use Tax on cost. Reimbursement may be contractual, but the contractor cannot label its own liability as sales tax collected from the customer.

Businesses evaluating current nexus

Do not use the 2011 physical-presence discussion as a current safe harbor. Nexus was not decided and later law may use different standards.

Common questions

Q: Who owed Use Tax on materials permanently installed by a subcontractor?
A: The subcontractor acting as construction contractor.

Q: Could the contractor charge the customer "sales tax" for that Use Tax?
A: No. A contract could require reimbursement, but it could not be billed as sales tax.

Q: Are services with no property transfer subject to Retailers' Occupation or Use Tax?
A: No under the rule stated.

Q: Did Illinois decide that using local contractors created nexus?
A: No. It gave an agent-or-representative framework without applying it to the facts.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075 — construction contractors.
• 86 Ill. Adm. Code 140.101-140.109 and 140.145 — service transactions and multi-service situations.
• 86 Ill. Adm. Code 160.105(f) — serviceman maintaining a place of business in Illinois.
• 86 Ill. Adm. Code 150.310 — credit for tax paid to another state.
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992), and Brown's Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (1996), as cited in the GIL.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0097.pdf

Original ruling text

ST 11-0097-GIL 12/09/2011 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.)

December 9, 2011

Dear Xxxxx:
This letter is in response to your letter dated November 15, 2011, 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:
On behalf of a client, hereafter referred to as AAA (an alias), we are respectfully
requesting a general information letter concerning nexus for sales tax purposes for the
State of Illinois. Specifically we are inquiring if based on the business activities of AAA as
described below, would nexus exist for purposes of sales or use tax to AAA including for
registration and remitting purposes. Further, if nexus does exist, are the activities of AAA
subject to sales or use tax.
AAA is organized as a limited liability company under the laws of the STATE. All of the
members of AAA are residents of STATE. AAA has only one physical location and it is in
STATE. All employees work solely in STATE. AAA has agreements with national
companies (AAA’s customers) to arrange repairs and maintenance to their customer’s
[sic] commercial buildings that are located in various states. For example if a customer’s
commercial building that is located in Illinois has a water leak, the corporate national
office will call directly to AAA to get the services of a plumber. The customer’s corporate
national office may be located in another state or possibly in Illinois. AAA then will locate
local contractors (e.g. plumbers in Illinois for this example), and then usually issue a
repair order on a not-to-exceed basis to a local contractor (e.g. plumber). A not-toexceed order is a work order where the price is set by AAA at a limit that the contractor
cannot exceed. The contractor (e.g. plumber) can choose whether to accept such an

order or counter with different amount. As an alternative to a not-to-exceed order, on
occasion AAA will get bids and then issue a repair order to the contractor (e.g. plumber).
The repair order will direct the contractor (e.g. plumber) to contact the building manager
to schedule and make the repairs. Upon completion of the repairs AAA will pay the
contractor’s (e.g. plumber) bill. AAA will then bill their commercial building customer for
the cost of the contractor (e.g. plumber) and add on AAA’s management fee.
Management fees usually run from 14% to 23% of the contractor’s bill. AAA’s has no preexisting arrangement with the contractors and no continuing one after the job is
completed. Repair and maintenance work could include such items as plumbing,
electrical, painting and other general building repairs.
Based [sic] our review of federal law and Illinois statutes and rules it does not appear
AAA’s activities would create nexus for purposes of reporting and remitting sales or use
taxes to Illinois. Further, if nexus does exist, does it not appear AAA’s activities would be
subject to reporting and remitting sales or use tax to Illinois. Nonetheless, we are seeking
a general information letter on these matters.
We would appreciate your prompt assistance on this matter. If you have any questions
please do not hesitate to contact us. Our address and telephone number are noted on
this letter. Thank you very much.

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
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.
If subcontractors are utilized and are acting as construction contractors, the transaction
between the general contractors and the subcontractors is not a taxable transaction. The
subcontractors incur Use Tax liability on any tangible personal property that they purchase for
incorporation into real estate. If, however, general contractors make purchases of tangible personal
property and then contract to have subcontractors install that tangible personal property, the general
contractors incur Use Tax liability on that tangible personal property.
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
serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or (4) Use Tax on the serviceman's cost price if the
serviceman is a de minimis serviceman and is not otherwise required to be registered under
Section 2a of the Retailers' Occupation Tax Act.
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.
Nexus
The definition of a "serviceman maintaining a place of business in Illinois" is set forth at 86 Ill.
Adm. Code 160.105(f). An out-of-state "serviceman maintaining a place of business in this State" is
required to register with the State as an Illinois Service Use Tax collector. The serviceman must
collect and remit Service Use Tax to the State of Illinois on behalf of its Illinois customers. Under
Section 160.105(f), an Illinois agent or representative operating in this State under the company's

authority would give the State nexus over the out-of-state serviceman. As an out-of-state serviceman
maintaining a place of business in Illinois, a company is required to register in Illinois as a Service
Use Tax collector and remit tax to the Department on behalf of its Illinois customers.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.
A physical presence is not limited to an office or other physical building. Under Illinois law, it
also includes the presence of any agent or representative of the seller. The representative need not
be a sales representative. Any type of physical presence in the State of Illinois, including the
vendor’s delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Wagner, 171 Ill.2d 410, (1996).
The final type of serviceman is the out-of-State serviceman that does not have sufficient nexus
with Illinois to be required to submit to Illinois tax laws. A serviceman in this situation does not incur
Service Occupation Tax on sales of service into Illinois and is not required to collect Service Use Tax
on behalf of its Illinois customers. However, the serviceman’s Illinois customers will still incur Service
Use Tax liability on the purchase of the goods and have a duty to self-assess and remit their Service
Use Tax liability directly to the State.
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