When do Illinois construction contractors owe use tax, and what documentation supports exempt-entity or enterprise-zone purchases?

Plain-English summary

An audiovisual systems retailer and integrator asked who bears Illinois tax on installed equipment and what contractors must provide for exempt-organization and enterprise-zone projects.

Under Rules 130.1940 and 130.2075, a construction contractor is the end user of property permanently affixed to Illinois real estate and owes Use Tax on its cost. If the supplier does not collect, the contractor must self-assess. Tax properly due and paid to another state can generate a credit under Rule 150.310. The contractor may recover the cost contractually, but cannot bill the customer as “sales tax”; it may describe the amount as reimbursement.

For engineering, installation, and maintenance of voice, data, video, security, and telecommunications systems sold for one specified contract price, Rule 130.1940(c)(3) allowed contractor treatment for the related equipment and supplies even when some items were not physically incorporated into real estate.

Exempt-project purchases required documentation:

• For an exempt organization or government project, the contractor had to give the supplier a certification identifying the entity, address, contract date, and the entity's active Illinois E number under Rule 130.2075(d)(4).
• For enterprise-zone building materials, the purchaser certification had to identify the zone and project location, describe the materials, include the Department-issued Enterprise Zone Building Materials Exemption Certificate number, and be signed and dated.

A customer's refusal to pay tax did not relieve the seller of liability.

What this means for you

Construction contractors and integrators

Determine whether the contract is for permanently installed property or a qualifying one-price audiovisual/telecommunications system, then pay or self-assess Use Tax unless a documented project exemption applies.

Suppliers

Do not accept a customer's unsupported claim. Keep the E-number certification or enterprise-zone certificate details required by the rule.

Common questions

Who owes tax on ordinary installed materials? The construction contractor, as end user, owes Use Tax on cost.

Does an exempt customer's status automatically pass through? No. The contractor must provide the prescribed certification and active E number.

Does refusing to pay shift liability away from the seller? No. The seller's recourse against the customer is private.

Citations and references

• 86 Ill. Adm. Code 130.1940, 130.2075, 130.2007, and 130.2080
• 86 Ill. Adm. Code 150.310
• 35 ILCS 120/5k

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-14-0007.pdf

Original ruling text

ST-14-0007-GIL 03/07/2014 CONSTRUCTION CONTRACTORS
This letter discusses the rules regarding sales of tangible personal property to construction contractors for

incorporation into real estate in an Illinois Enterprise Zone and the requirements for using “E” numbers. See 86
Ill. Adm. Code 130.1940, 35 ILCS 120/5k, and 86 Ill. Adm. Code 130.2075(d).

March 7, 2014

Dear XXXXxX:

This letter is in response to your letter dated November 5, 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:

The purpose of this letter is to solicit guidance on the applicability of sales tax for the
sale of tangible personal property to contractors in the state of Illinois. 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.

Based on the following fact pattern and circumstances, we respectfully request a
general information letter of opinion from your department that we may use as a guide
and to update our tax policies.

Facts:

COMPANY (COMPANY) is a retailer of integrated audio visual, telepresence and
broadcast systems focused on building professional solutions for business, commercial,
educational and government clients. With offices throughout the Midwest and on the
West Coast, COMPANY has both a regional presence and a nationwide scope of
operation.

COMPANY ’s products include design, sales and integration; servicing of broadcast and
cable systems; boardroom, sales, and training presentation systems; video production
and post-production systems; videoconferencing endpoint and networks; specialized
video and presentation applications. The company designs, integrates, and services

video, presentation broadcast, distance learning, and videoconferencing systems.
These systems are designed for and integrated in both new construction and existing
structures.

The company makes retail sales of equipment to the business owners or building
tenants. In some cases, retail sales are made to private businesses, and federal, state
or local government entities and certain tax-exempt entities such as non-profit hospitals
and universities.

Progress invoices are issued monthly based on the portion of the technical services or
set up services expended and/or the value of equipment, materials, and supplies
expended on the project. Title to the equipment, materials, and supplies are considered
to pass as of the date of delivery to the customer.

Approximately 75% of the company’s Illinois revenue comes from equipment sales and
approximately 25% from service and integration activities.

COMPANY’s customer contracts and tax policy require COMPANY to charge, collect
and remit Illinois sales tax on all sales to Illinois customers with the following
exceptions:

1. Customer presents COMPANY with a valid resale exemption certificate; or

2. Exempt-entity customer (organizations that qualify as exclusively as religious,
   charitable, or educational and governmental entities) provides COMPANY
   with an active exemption identification number (“E” number); or

3. Construction contractors fulfilling a contract to an exempt-entity customer
   (see #2, above) provides COMPANY with the exempt organizations active
   identification number (“E” number) and a certification that purchases made by
   the construction contractor are for conversion into real estate; or

4. Construction contractors fulfilling a contract to an exempt-entity customer
   (see #3 above) are required to provide COMPANY a statement from the
   exempt entity authorizing the contractor to make exempt purchases on its
   behalf; or

5. Construction contractors fulfilling a contract to remodel, rehabilitate, or new
   construction of real estate located in an enterprise zone established by a
   county or municipality provides COMPANY with a “Certificate of Eligibility for
   Sales Tax Exemption” (meeting all the requirements on the enterprise zone
   ordinance) and a statement that the building materials purchased are being
   incorporated into real estate located in an enterprise zone. Additional details
   required by COMPANY ’s tax policy in an enterprise zone include the location
   / address of the real estate; the name of the enterprise zone where the real
   estate is located; a description of the building materials purchased for
   incorporation into real estate; the date of the purchase; and the purchasers
   signature.

Circumstances:

COMPANY frequently enters into contracts with Illinois construction contractors to
provide audio-visual equipment as described above on a project for an Illinois exempt

entity or municipality. Occasionally COMPANY also contracts with Illinois construction
contractors for a project located in an enterprise zone.

Based on COMPANY ’s tax policy as described above, sales tax is charged on the retail
sale of the audio-visual equipment in all cases. Illinois sales tax is not charged when a
construction contractor presents a resale exemption certificate; active exemption
identification number (“E” number) for exempt entities and a certification that the
purchases will be incorporated into real property; a statement that the contractor can
make exempt purchases on behalf of the exempt entity; or a “Certificate of Eligibility for
Sales Tax Exemption” when a project is located in an enterprise zone.

More often than not, Illinois construction contractors are not paying the sales tax to
COMPANY when invoiced, are reluctant and sometimes refusing to provide the required
documentation. General statements from the construction contractors when refusing to
pay the Illinois sales tax as invoiced by COMPANY include:

a. All purchases made by the contractor are exempt because of the “E” number
certificate;

b. Other suppliers of the contractor do not require a statement or certification
that the purchased property is for incorporation into real property;

c. Other suppliers of the contractor do not require a statement from the exempt
entity authorizing the contractor to make purchases on its behalf;

d. The contractors state it is inconvenient to ask an exempt entity to prepare a
letter of authorization;

e. Other suppliers of the contractor do not require the additional details
described in COMPANY’s tax policy for a project located in an enterprise
zone (See #5 above).

As a retailer of tangible personal property, COMPANY can be held responsible for
Illinois sales tax when a construction contractor refuses to pay the invoiced Illinois sales
tax.

Analysis of Applicable Statutes, Requlations and Official Material:

Contractors / Construction-Sales of building materials, fixtures, and other tangible
personal property to contractors, builders, or developers for conversion into real estate
are subject to sales and use tax. Supplies sold to contractors, builders, or developers
for use or consumption rather than for incorporation into real property are also taxable.
[Ill. Admin. Code 86 8130.2075(a)(1).]

Tangible personal property sold to contractors, developers, or builders who resell it in
the form of tangible personal property is not taxable, but the contractor, developer, or
builder would be making taxable re-sales. (Ill. Admin. Code 86 8130.2075(a)(4).]

Purchasers who are not sure whether they will use tangible personal property by
converting it into real estate or reselling it, and at the time of purchase it is impracticable
to determine how the property will be used, may certify to their vendor that they are
buying all of the property for resale and later account for the tax on disposing of the
item. A buyer cannot give this certification to a supplier unless the buyer agrees to and

does assume liability for the tax on any tangible personal property converted into real
property. The buyer must report and pay the tax in the same form that its supplier
would have reported and paid the tax. The buyer must include the cost price of tangible
personal property converted into real property in taxable receipts reported on the
buyer’s return. If the buyer resells the property “over-the-counter” to a user apart from
acting as a construction contractor, the buyer must pay state and any applicable local
retailers' occupation tax on the full selling price of the property. A buyer accounting for
the tax must be registered under the Retailers’ Occupation (Sales) Tax Acct. [Ill. Admin.
Code 868130.2075(b).|

Sales of materials to construction contractors are exempt when the materials are for
incorporation into real property owned by:

(1) exclusively charitable, religious, or educational organizations;

(2) nonprofit organizations with no compensated officers or employees, which are
organized and operated primarily for the recreation of persons age 55 or older; or

(3) any governmental body.

The supplier must keep in its records a certification from the buyer stating that the
materials will be incorporated into real property of an exempt organization or
governmental body, specified by name and address, and showing the date the contract
was entered into. The supplier must also keep in its records the active exemption
number issued by the Department to the organization for which the purchasing
contractor is acting. Sales of tools, fuel, form lumber, and other items used or
consumed by contractors and not incorporated into the real property are taxable no
matter who the contractor's customer may be. [IIl. Admin. Code 86 §130.2075(d).]

Sales of tangible personal property to a government contractor who will resell such
property to a government body are exempt as sales for resale if:

(1) there is a contract between the purchaser and the governmental body requiring the
purchaser to provide personal property to the governmental body; and

(2) the contract is specific in documenting a sale of personal property from the
purchaser to the government body. [Ill. Admin. Code 86 §130.2076(a)(1); III. Admin.
Code 86 §130.2076(a)(2).]

A supplier claiming this exemption must have a certificate of resale from the purchasing
government contractor. [Ill. Admin. Code 86 §130.2076(c).]

Construction contractors are taxable on sales of tangible personal property without
installation to buyers for use or consumption. They are also taxable on sales of
furniture and furnishings, drapes, floor coverings (unless permanently affixed, below),
trade fixtures, and machinery (except machinery exempted under Ill. Admin. Code 86
§8130.2115(b)) to buyers for use or consumption, with or without installation, and
whether or not the seller furnishes and installs the items as part of a construction
contract. A construction contractor is also taxable when the contractor buys and sells in

finished form appliances that may be connected to or operated from a building’s
electrical, plumbing, or other specialized system, but which is considered to remain
personal property after installation, even if the property is installed pursuant to a
construction contract. Sellers who permanently affix tangible personal property to real
estate, are considered construction contractors and incur use tax. [ILCS Chapter 35
8120/1; Ill. Admin. Code 86 8130.1940(a)(1); Ill. Admin. Code 86 §130.1940(b); Ill.
Admin. Code 86 §130.2140(a)(3).]

For these purposes, a “construction contractor’ includes a general contractor,
subcontractor, and specialized contractor such as a landscape contractor. [Ill. Admin.
Code 86 8130.1940(a)(1).]

The provisions below govern application of the tax to persons who are engaged ina
business that is not subject to tax because it involves the sale of or a contract to sell
real estate, or a construction contract to improve real property or construction contract
to engineer, install, and maintain an integrated system of products. When such persons
transfer tangible personal property to users or consumers in the finished form in which it
was bought, and the property does not become real property or was not engineered and
installed, under any provision of a construction contract or real estate sale or real estate
sales agreement entered into with another person as a result of that person’s
nontaxable business, such person is engaged in the business of selling tangible
personal property at retail to the extent of the transferred property’s value. For
example, when a contractor sells a stove or washer pursuant to a construction contract,
and the property remains personal property, tax applies to the value of the stove or
washer. If a separate charge is made for tangible personal property transferred, the
taxable basis is the amount charged for the property, but not less than its cost to the
transferor. If no separate charge is made, the basis is the cost of the property to the
transferor. Construction contracts for the improvement of real property consisting of
engineering, installation, and maintenance of voice, data video, security, and all
telecommunication systems do not constitute engaging in a business of selling tangible
personal property at retail if they are sold at the specified contract price. [ILCS Chapter
35 §120/1; Ill. Admin. Code 86 8130.1940(b).]

Sales of building materials for incorporation into real estate located in an enterprise
zone or in a high impact business location are exempt. _ [lll. Admin. Code 86
§130.1940(e).]

Government Transactions: A sale or transfer of tangible personal property as an
incident to the rendering of service to or by any governmental body is exempt.
However, a governmental body must have an active exemption ID number from the
Department of Revenue to make tax free purchases. [ILCS Chapter 35 8115/2; Ill.
Admin. Code 86 §140.125(h)(3).]

The sale or transfer of tangible personal property as an incident to the rendering of
service for or by any governmental body is exempt. However, a governmental body
must have an active exemption ID number from the Department to make tax free
purchases. [ILCS Chapter 35 §110/2I; ILCS Chapter 35 8115/2; Ill. Admin. Code 86
§140.201(f)(3).]

Governmental bodies must apply to the Department of Revenue for an exemption ID
number, which they must present when making tax-free purchases; foreign diplomats
use cards issued by the U.S. Department of State. The number or its renewal is valid
for five years after the first day of the month after the month it is issued. A renewal
application must be filed at least three months before the expiration date. [ILCS
Chapter 35 8120/1g; Ill. Admin. Code 86 §130.2007.|

Exemption Certificates: Suppliers must get an exemption certificate when making
retail sales to tax-exempt customers or making exempt sales. Illinois accepts the Multi-
State Tax Commission (MTC) Multijurisdictional Sales & Use Tax Certificate — Multi-
jurisdiction for wholesale or resale sales and for purchasing tax-free ingredients or
components of a new product. ST-587 Machinery and Equipment Exemption Certificate
is used when buying tax-exempt machinery and equipment [Publication 113, Retailers’
Overview of Sales and Use Tax, 10/01/2011.]

Entities eligible for exemption under ILCS Chapter 35 8120/2-5(11) and ILCS Chapter
35 8120/2-5(9) must make application to the Department for an exemption identification
number. [ILCS Chapter 358120/1g.]

Charitable, educational, and religious organizations, and nonprofit recreational
organizations for persons 55 or older, must apply to the Department of Revenue for an
exemption ID number. If a charitable organization has more than 50 subsidiary
organizations in Illinois, the Department may issue one exemption ID number for use by
the parent organization and each subsidiary. An exemption ID number or renewal is
valid for five years after the first day of the month after the month it is issued. A renewal
application must be filed not less than three months before expiration date. An
application or renewal must contain any information or documentation requested by the
Department. [ILCS Chapter 35 8120/1g; Ill. Admin. Code 86 8130.2007.] The
Department must furnish on request a list of organizations holding a valid exemption
number on the January 1 or July 1 before the request, and which are located in the
municipality or unincorporated area of the county requesting the information. [ILCS
Chapter 35 8120/1h.]

Enterprise Zones and High Impact Business Locations: A retailer that makes a
“qualified sale” of building materials to be incorporated into real estate in an Enterprise
Zone by remodeling, rehabilitation, or new construction, can deduct those receipts.
[ILCS Chapter 35 8120/5k(a); Ill. Admin. Code 86 8130.195(a)(1).]

Qualified sales: Before July 1, 2013, a “qualified sale’ means a sale of building
materials that will be incorporated into real estate as part of a building project for which
a Certificate of Eligibility for Sales Tax Exemption has been issued by the administrator
of the Enterprise Zone in which the building project is located. Beginning July 1, 2013,
a “qualified sale” is a sale of building materials that will be incorporated into real estate
as part of a building project for which an Enterprise Zone Building Materials Exemption
Certificate has been issued to the purchaser by the Department. A construction
contractor or other entity cannot make tax-free purchases unless it has an active
exemption certificate issued by the Department at the time of the purchase. [ILCS
Chapter 35 8120/5k(a); III. Admin. Code 86 §1951(d) (2).]

Documenting the exemption: Before July 1, 2013, in order to document the exemption,
the retailer must obtain from the purchaser a copy of the Certificate of Eligibility for
Sales Tax Exemption issued by the administrator of the Enterprise Zone into which the
building materials will be incorporated. [ILCS Chapter 35 §8120/5k(b); Ill. Admin. Code
86 §130-1951(a)(5).]

Effective July 1, 2013, to document the exemption, the retailer must obtain from the
purchaser the certification required under ILCS Chapter 35 8120/5k(c), which must
contain the Enterprise Zone Building Materials Exemption Certificate number issued to
the purchaser by the Department. Upon request from the Enterprise Zone
administrator, the Department must issue an exemption certificate for each construction
contractor or other entity identified by the Enterprise Zone administrator. [ILCS Chapter
35 §120/5k(b).]

For Enterprise Zone projects, already in existence and for which construction contracts
are already in place on July 1, 2013, the request for Enterprise Zone Building Materials
Exemption Certificates from the Enterprise Zone administrator to the Department for
these pre-existing construction contractors and other entities must include some of the
information specified in ILCS Chapter 35 8120/5k(b). For any new construction contract
entered into on or after July 1, 2013, all of the information in ILCS Chapter 35
§120/5k(b) must be provided. [ILCS Chapter 35 8120/5k(e).|

Penalty for ineligible tax-exempt purchases: If the Department of Revenue determines
that a construction contractor or other entity that was issued an Exemption Certificate
made a tax-exempt purchase that was not eligible for exemption or allowed another
person to make a tax-exempt purchase that was not eligible for exemption, then, in
addition to any tax or other penalty imposed, the construction contractor or other entity
is subject to a penalty equal to the tax that would have been paid by the retailer as well
as any applicable local retailers’ occupation tax on the purchase that was not eligible for
the exemption. [ILCS Chapter 35 8120/5k(b).]

Municipalities may limit deduction: The deduction may be limited, to the extent
authorized by ordinance by the municipality or county that created the Enterprise Zone
into which the building materials will be incorporated. The ordinance, however, may
neither require nor prohibit the purchase of building materials from any retailer or class
of retailers in order to qualify for the exemption. [ILCS Chapter 35 §8120/5k(d); Ill.
Admin. Code 86 8130.1951(a)(3)]

Location of the retailer; There is no requirement that the retailer be located in a
municipality or county that created the Enterprise Zone into which building materials will
be incorporated for the exemption to apply. [Ill. Admin. Code 86 8130-1951/(a)(5).]

A retailer who sells building materials that will be incorporated into a High Impact
Business (HIB) location (as designated by the DCEO) can deduct receipts from such
sales when calculating state and local taxes [ILCS Chapter 358120/51(a); Ill. Admin.
Code 86 §130.1952(b); ILCS Chapter 20 8655/5.5(b).]

Effective August 7, 2012, the retailer must obtain from the purchaser the purchaser’s
High Impact Business Building Materials Exemption Certificate number. A construction

contractor or other entity cannot make tax-free purchases unless it has an active
exemption certificate issued by the Department at the time of purchase. [ILCS Chapter
35 §120/51(b).]

Effective August 7, 2012, upon request from the designated HIB, the Department must
issue a High Impact Business Building Materials Exemption Certificate for each
construction contractor or other entity identified by the designated HIB. The Department
must issue the High Impact Business Building Materials Exemption Certificates within
three business days after receipt of request from the designated HIB, unless the
Department has reasonable cause not to do so. The exemption certificate must contain
an expiration date, which must be no more than two years after the date of issuance.
The certificate can be renewed at the request of the designated HIB. [ILCS Chapter 35
§8120/51(b).]

A retailer that is eligible for the Enterprise Zone exemption under ILCS Chapter 35
§8120/5k(a) (See above) is not eligible for this exemption. [ILCS Chapter 20 8655/5.5(b);
ILCS Chapter 35 8§120/51(a).]

For HIBs for which projects are already in existence and for which construction
contracts are already in place on July 1, 2013, the request for a HIB Building Materials
Exemption Certificates from the HIB to the Department for these pre-existing
construction contractors and other entities must include some of the information
specified in ILCS Chapter 35 8120/51(b) For any new construction contract entered into
on or after July 1, 2013, all of the information in ILCS Chapter 35 §120/51(b) must be
provided. [ILCS Chapter 35 §120/51(c).]

Additional Resource Information Used in Preparation of the General Information
Letter:

e Illinois Department of Revenue (IDOR) Informational Bulletin “New Application
Process to Obtain Sales Tax Exemption Certificates for Building Materials”, FY
2013-16, June 2013.

ST 13-0007-GIL, 02/05/2013 Enterprises Zones

ST 13-0010-GIL, 02/19/2013 Construction Contractors

ST 13-0012-GIL, 03/26/2013 Construction Contractors

ST 13-0018-GIL, 04/23/2013 Sale of Resale

ST 13-0002-PLR, 07/31/2013 Construction Contractors

Issues / Questions:

1. Does COMPANY’s tax policy comply with Illinois statutes, regulations and official
   pronouncements in cases where COMPANY’s customer is a_ construction
   contractor whose project involves an exempt entity or a project located in a
   designated enterprise zone?

2. Does Illinois law provide a “pass-through” exemption from an exempt entity to the
   construction contractor and all of its suppliers? Or alternatively, is the active
   exemption identification number (“E” number) considered a_ pass-through
   exemption to the construction contractors and all of it [Sic] suppliers?

3. What recourse does COMPANY have if Illinois construction contractors are
   refusing to provide documentation and are refusing to pay the invoiced sales tax?

4. Is COMPANY liable for the Illinois sales tax when a construction contractor
   refuses to pay the invoiced sales tax?

5. Should COMPANY require an additional statement / affidavit from the
   construction contractor that Illinois use tax will be paid by the contractor if sales
   tax is not paid to COMPANY?

We are seeking a General Information Letter opinion as authorized by 2 Ill. Adm. Code
1200.120 based on the facts and circumstances discussed above and guidance as to
whether our tax policy, analysis, and conclusions are accurate. We appreciate your
time and prompt response on this matter. Should you have any additional questions or
require additional information, please call me at.

DEPARTMENT’S RESPONSE:

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 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 a contractor does not pay the Use Tax liability to his/her suppliers, the contractor must self
assess Use Tax liability and pay it directly to the Department. If the contractor has already paid a tax
in another state regarding the purchase or use of such property, he/she will be entitled to a credit
against his/her Illinois Use Tax liability to the extent that he/she has paid tax that was properly due to
another state. See 86 Ill. Adm. Code 150.310. The Illinois Use Tax rate incurred by an out-of-State
construction contractor on purchases of materials from an unregistered supplier located outside of
this State is generally 6.25% as described in subsection (c) of Section 130.2075.

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 specific case of installers of audio visual equipment, Section 1 of the Retailers’
Occupation Tax Act, in an attempt to ease the burden of administration, provides specifically that
“[c]onstruction contracts for the improvement of real estate consisting of engineering, installation, and
maintenance of voice, data, video, security, and all telecommunication systems do not constitute
engaging in a business of selling tangible personal property at retail within the meaning of this Act if
they are sold at one specified contract price.” The Department's administrative rules elaborate on this
further by stating “[t]his provision applies to all of the items... even if they are not incorporated into
real estate.”

See 86 Ill. Adm. Code 130.1940(c)(3).

As a result of the statutory and regulatory language, installers of such systems described in
subsection (c)(3) of Section 130.1940 are authorized to pay Use Tax to their providers on all
equipment and supplies they purchase related to the security systems they sell and install, even if
some of those supplies are not technically incorporated into real estate. This provision applies only if
the sale and installation of the systems are packaged for one specified contract price.

Sales to exempt organizations (organizations that qualify as exclusively religious, charitable, or
educational) and governmental entities are subject to tax unless the exempt organization or
governmental entity has obtained an active exemption identification number ("E" number) from the
Department. See 86 Ill. Adm. Code 130.2007 and 130.2080. Persons or businesses selling tangible
personal property to these organizations or governmental entities must be provided with an "E"
number for the sales to be tax exempt, unless another exemption can be documented. It is important
to note that only sales of tangible personal property invoiced to the organization or governmental
entity itself are exempt. Sales made to an individual member or client of an exempt organization or
entity are generally subject to tax. Purchases of tangible personal property by a construction
contractor for incorporation into the real estate owned by an exempt organization or governmental
entity that possesses a valid “E” number at the time of sale may be made free of Illinois Retailers’
Occupation Tax and Use Tax under the provisions of 86 Ill. Adm. Code 130.2075(d).

In claiming the exemption from tax, the construction contractor must provide his/her supplier
with a certification stating that his/her purchases are for conversion into real estate under a contract
with an exempt organization or governmental entity, identifying the organization or entity by name and
address and stating on what date the contract was entered into. The construction contractor must
also provide the “E” number issued by the Department to the organization or entity for which the
purchasing contractor is acting. See 86 Ill. Adm. Code 130.2075(d)(4).

The requirements for purchases of building materials for incorporation into real estate in an
Illinois enterprise zone are set out in Section 5k of the Illinois Retailers’ Occupation Tax Act. If the
qualifying building materials are purchased from an Illinois retailer, the retailer must obtain a
purchaser's certification containing the following:

i) a statement that the building materials being purchased are being purchased for
incorporation into real estate located in an Illinois enterprise zone,

il) the location or address of that real estate,

ill) the name of the enterprise zone in which that real estate is located,

iv) a description of the building materials being purchased

v) the purchaser’s Enterprise Zone Building Materials Exemption Certificate number

issued by the Department, and

vi) the purchaser's signature and date of purchase

To the extent that you have construction contactor customers who believe that they can refuse
to pay tax on equipment which they will use in an Enterprise Zone without proper documentation, or
will use in performing a contract with an exempt entity, you may provide a copy of this letter as
general guidance. However, the fact that a customer refuses to pay tax to you does not relieve you of
the liability. If a customer refuses to pay you the tax, your remedy is a private one.

| 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,

Cara Bishop
Associate Counsel
CB:Ikm