Who owes Illinois use tax when a subcontractor buys and installs drainage tile as part of a pipeline project?

Plain-English summary

A subcontractor restoring and rerouting agricultural drainage tile during a pipeline project asked whether it should pay tax on the tile or charge the general contractor tax on the full invoice.

IDOR said the party contractually required to buy property for permanent incorporation into real estate is the construction contractor and the end user under Rules 130.1940 and 130.2075. That party owes Use Tax on the property's cost.

• If the subcontractor bought and installed the tile, the subcontractor owed Use Tax. The transaction between the general contractor and subcontractor was not a taxable retail sale.
• If the general contractor bought the tile and hired the subcontractor only to install it, the general contractor owed Use Tax.
• If the customer supplied the property, the customer bore tax on its purchase; the installer did not owe Use Tax on customer-provided property.

Tax properly due and paid to another state could reduce Illinois Use Tax under Rule 150.310(a)(3). A contractor could recover its tax cost through price or a contractual reimbursement, but could not bill that reimbursement as “sales tax.”

What this means for you

General contractors and subcontractors

Identify who buys the material. The purchaser that incorporates it into real estate is generally the taxable end user.

Billing teams

Do not collect sales tax on the whole construction invoice. If the contract shifts the contractor's tax cost, describe it as reimbursement rather than sales tax.

Common questions

Did the subcontractor owe tax on labor? The GIL focused the Use Tax on the cost of the tile it purchased, not on charging sales tax on the full invoice.

Was the general-contractor/subcontractor transaction taxable? Not when the subcontractor itself acted as construction contractor and bought the installed property.

Who owes tax on customer-supplied property? The customer owes tax on its purchase.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075
• 86 Ill. Adm. Code 150.310(a)(3)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0003.pdf

Original ruling text

ST-14-0003-GIL 03/03/2014 CONSTRUCTION CONTRACTORS
This letter discusses the tax liability of construction contractors. See 86 Ill. Adm. Code 130.1940.
March 3, 2014

Dear Xxxxx:
This letter is in response to your letter dated December 30, 2013, 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:
We started a project back in DATE. I emailed to REV.TA-Sales a question on who pays
taxes on the project. My question was:
We have a subcontract with a contractor who is installing new pipeline on the PROJECT
that starts in ILLINOIS. We are the subcontractor who will restore agricultural drainage
tile that is destroyed and reroute some drainage tile lines as the contractor is putting in
the pipeline.
I have enclosed the correspondence with the sales revenue agent. I have been paying
sales and use tax on the tile we are installing and called to ask a question about the use
tax and were told that I should have been charging the contractor sales tax on the tile or
they should be self-assessing on the entire amount billed even if it included labor.
I need to know what is correct and if I need to fix anything, how I need to do that.
Please feel free to contact me if you need more information or have questions.
DEPARTMENT’S RESPONSE:
If a person or business is contractually required to purchase tangible personal property for
incorporation into real estate, then it would be acting as a construction contractor. 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, contractors incur
Use Tax liability for such purchases based upon the cost price of the tangible personal property
personal property. See 86 Ill. Adm. Code 130.1940 and 86 Ill. Adm. Code 130.2075. Persons from
other states who act as construction contractors in Illinois by permanently affixing tangible personal
property to real estate owe Illinois Use Tax on the cost price of the tangible personal property affixed
to that real estate.

The Illinois Use Tax Act provides, that in order to prevent multi-state taxation, the Use Tax
does not apply to the use, in Illinois, of tangible personal property acquired outside of this State and
caused to be brought into this State by a person who has already paid a tax in another state in
respect to the sale, purchase, or use of such property, to the extent of the amount of such tax
properly due and paid in such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.
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 and then contract to
have subcontractors do the installation, the general contractors incur Use Tax liability because they
are making the purchases of such tangible personal property. Please note that any tangible personal
property provided by the customer would not subject the construction contractor to use tax liability
(the customer itself will incur the use tax liability on the purchase of that property).
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.
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
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