How did Illinois tax equipment fabricated out of state and permanently installed by out-of-state contractors at an Illinois jobsite?

Plain-English summary

An Illinois general contractor hired out-of-state trade contractors to fabricate major equipment outside Illinois, ship it to an Illinois jobsite, and perform final installation. It asked for confirmation that only the 6.25% State tax applied and no local tax was due.

IDOR did not confirm the proposed result because it had not reviewed the construction contracts. It said a person who contracted to permanently incorporate tangible property into real estate was a construction contractor and the end user of that property.

The out-of-state contractors therefore owed Illinois Use Tax on the cost of property permanently affixed to Illinois real estate. If they had not paid a supplier, they had to self-assess and remit the tax. Properly due tax paid to another state could be credited against Illinois liability.

The letter described a 6.25% State general-merchandise rate. Although it said Illinois technically had no local Use Tax, an Illinois supplier could incur local Retailers' Occupation Tax and collect reimbursement from the contractor, so an in-state purchase could carry a local reimbursement charge.

The property owner did not owe Use Tax on the contractor's materials. A contractor could include its own tax cost in price or contract for reimbursement, but could not bill that reimbursement as "sales tax."

What this means for you

This is historical 2015 rate guidance, and the exact result remained contract-dependent. Fabrication outside Illinois did not by itself eliminate Use Tax when the contractor installed the property permanently in Illinois.

Common questions

Did IDOR approve the contractor's no-local-tax conclusion? No.

Who owed Use Tax on permanently installed equipment? The construction contractor as end user.

Could tax paid to another state reduce Illinois tax? Yes, to the extent properly due and paid.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075.
• 65 ILCS 5/8-11-1.
• 86 Ill. Adm. Code 150.310.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0024-gil.pdf

Original ruling text

ST 15-0024-GIL 04/30/2015 CONSTRUCTION CONTRACTORS
Construction contractors are deemed end users of tangible personal property purchased for
incorporation into real property, and they incur Use Tax liability based upon their cost price of
the tangible personal property. See 86 Ill. Adm. Code 130.1940 and 86 Ill. Adm. Code
130.2075

April 30, 2015

Dear XXXX:
This letter is in response to your letter dated February 2, 2015, 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:
I am writing this letter in regards to obtaining formal written confirmation as to the
proper recognition of sales tax in the State of Illinois. My company is a general
contractor currently building a project in CITY. We procured several scopes of work in
which there are out of state contractors that do not have a physical presence (office) in
the State of Illinois. The work entails fabricating major equipment items out of state at
their home offices/factories and shipping those items to the jobsite location for final
installation. It is my understanding that the trade contractor is only responsible for
remitting 6.25% sales tax in these instances, and no local sales tax is due on these
transactions. This was confirmed by the DOR verbally but I was directed to request
written confirmation to formally document this sales tax ruling.
We request that written confirmation be provided regarding this situation. If you
have any additional questions regarding this, please contact me to discuss.

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. 86 Ill. Adm.
Code 130.101. The Use Tax Act imposes a tax upon the privilege of using in this State tangible
personal property purchased at retail from a retailer. 86 Ill. Adm. Code 150.101. If no tangible
personal property is being transferred to the customers, then neither Illinois Retailers’ Occupation Tax
nor Use Tax would apply. Likewise, the Service Occupation Tax Act and Service Use Tax are
imposed on the transfer of tangible personal property incident to sales of service. 86 Ill. Adm. Code
140.101 and 160.101. If no tangible personal property is being transferred to customers incident to
the services being provided, then neither Illinois Service Occupation Tax nor Service Use Tax would
apply. We cannot determine your tax liability without reviewing your construction contracts. Though
we cannot provide you with a specific answer based on the limited information contained in your
letter, we hope you will find the following general information about construction contractors helpful.
If a person or business enters into a contract to permanently incorporate tangible personal
property 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. See 86 Ill. Adm. Code
130.1940 and 86 Ill. Adm. Code 130.2075. Though there is technically no local Use Tax in Illinois,
retailers located in Illinois often incur local Retailers’ Occupation Tax. Retailers are authorized by
statute to collect a reimbursement from customers for such local taxes. See 65 ILCS 5/8-11-1. As a
result, contractors who make purchases in Illinois will incur these reimbursement charges as well.
The State rate of tax on general merchandise is 6.25%. 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. 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.
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,

Cara Bishop
Associate Counsel
CB:kd