Were custom closet systems lightly secured to walls taxable retail property or real-estate improvements, and were installation charges taxable?

Plain-English summary

A seller designed and installed custom floor-based closet and home-organization systems. The units rested on the floor and were secured mainly by anti-tip brackets with two screws and rear panels with finishing nails. They could be removed with only small wall holes. The seller separately stated product and installation charges.

IDOR said Illinois used an intention test to decide whether installed property became real estate. If intent was unclear, attachment and removal damage mattered. The light brackets and nails suggested these systems remained tangible personal property rather than permanent real-estate improvements.

Although custom-made, the systems performed the same function as standard retail closet products. They were therefore generally subject to Retailers' Occupation Tax, including design and production labor.

Installation charges were excluded only when the seller and buyer separately agreed to them apart from the product price. If the customer could not buy the product without installation, the installation was included in selling price and taxable.

What this means for you

Custom fabrication and installation do not automatically make a product a construction contract. Attachment method, removal damage, and whether the customer can decline installation all affect the result.

Common questions

Did the closet systems become real estate? They generally appeared not to on the described facts.

Were design and fabrication labor taxable? Yes.

Were separately stated installation fees always exempt? No; installation also had to be separately agreed and optional.

Citations and references

• 86 Ill. Adm. Code 130.1940 and 130.2075.
• 86 Ill. Adm. Code 130.2140.
• 86 Ill. Adm. Code 130.450.
• 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-15-0063-gil.pdf

Original ruling text

ST 15-0063-GIL 10/29/2015 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 130.2075. (This is a GIL.)

October 29, 2015

Dear Xxxxx:
This letter is in response to your letter dated, January 7, 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:
We would appreciate your guidance in confirming the proper sales and use tax
treatment of the facts presented below.
BACKGROUND
ABC (“TAXPAYER”) is a national retailer of home organizational products.
TAXPAYER operates 67 retail locations in 24 states and an internet business.
Examples of products sold by TAXPAYER include shelving, shoe and clothing
boxes, trash cans, kitchen containers and other home organizational products.
TAXPAYER operates in Illinois under taxpayer number #### and is classified
under Standard Industrial Classification Code 5719 Miscellaneous
Homefurnishings Stores. The issue addressed in this request is based upon a
prospective product offering and is not the subject of review with the Illinois
Department of Revenue.
FACTS
TAXPAYER is introducing a new product (“PRODUCT”) to help organize
closets of our customers (“CUSTOMER”). PRODUCT is a floor-based solution,

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resting on the floor but not connected or attached in any manner to the floor, that
can be placed against walls or freestanding in the center of a closet. PRODUCT
can be enhanced to include drawers, hanging rods, retractable dressing mirrors, tie
and belt racks, jewelry trays, hampers and other organizational amenities the
customer desires.
PRODUCT is designed to CUSTOMER’s specifications using actual closet
measurements from CUSTOMER. Depending on CUSTOMER’s preference,
PRODUCT can be placed freestanding in the center of a room, against a single
wall or configured against multiple walls to give the appearance of wall-to-wall
built in cabinetry.
After PRODUCT has been designed to CUSTOMER’s specifications,
CUSTOMER is billed for 50% of the total cost of PRODUCT and related
installation charges. After receipt of the initial payment, TAXPAYER orders
PRODUCT from the supplier (“SUPPLIER”). SUPPLIER custom builds the
components of PRODUCT to the design specifications as laid out by
TAXPAYER. PRODUCT components are shipped on a pallet from SUPPLIER to
CUSTOMER’s location. Given the size and weight of PRODUCT, PRODUCT is
shipped in component pieces to be assembled onsite by TAXPAYER. PRODUCT
is not pre-assembled and taken apart for shipment by SUPPLIER.
PRODUCT is assembled onsite at CUSTOMER’s location by subcontractor’s
[sic] working on behalf of TAXPAYER. After assembly, PRODUCT is placed
free-standing in the center of a room or against a wall according to design
specifications. Wall-to-wall appearance is achieved by placing PRODUCT
components adjacent to each other against each wall of the room. Decorative trim
may be added across PRODUCT components to further give the appearance of
built-in cabinetry.
When PRODUCT is placed against walls, it utilizes anti-tip brackets (resembling
an L-bracket) to prevent damage and injury from tipping. The anti-tip bracket
connects PRODUCT to the wall with two screws and generally consists of one
anti-tip bracket per wall. Freestanding PRODUCT requires no anti-tip brackets
connected to walls or additional safety features.
PRODUCT placed against a wall can be augmented with rear paneling of the
same color and material as PRODUCT to give the appearance of an enclosed
cabinet. If rear paneling is not chosen by CUSTOMER, the wall against which
PRODUCT is placed is visible between shelves.
Rear paneling is placed similar to PRODUCT in that it rests on the floor against
the wall. Rather than an anti-tip bracket, it is secured using finishing nails to
prevent shifting and tipping. After the paneling is placed against the wall,

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PRODUCT is placed on the floor adjacent to the paneling to give the appearance
of a complete cabinet. PRODUCT’s anti-tip bracket is secured after placement
against the rear panel.
Upon completion of PRODUCT installation, the remaining balance is collected
from CUSTOMER. TAXPAYER presents CUSTOMER with a final receipt that
separately states charges for TAXPAYER’s assembly and placement costs (i.e.,
“Installation”) and TAXPAYER’s material costs for PRODUCT purchased from
SUPPLIER. Both installation and product costs include a profit markup.
Disassembly and removal of PRODUCT is performed by reversing the steps used
in the original installation. Should CUSTOMER desire to remove PRODUCT
from its placement in the future, damage to the realty would be limited to two
screw holes for each anti-tipping bracket installed and any small holes from
finishing nails used to secure rear paneling.
AUTHORITY
Receipts from the retail sale of tangible personal property are generally subject to
sales tax.
A retailer of tangible personal property who installs it for a buyer is liable for
sales tax on the gross receipts of the installation regardless of whether the
installation charges were separately stated unless the seller and buyer agree on an
installation charge separately from the price of the property sold.1
Sellers who permanently affix tangible personal property to real estate are
considered construction contractors and incur use tax.2
Sales of furniture and furnishings, drapes, floor coverings, trade fixtures, and
machinery by a contractor 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 are taxable.3

ISSUE
TAXPAYER is in the business of selling home organizational products, including
shelving and closet organization systems, at retail which is taxable.

1

Ill. Admin. Code 86 § 130.450
Ill. Admin. Code 86 § 130.2140.
3
Ill. Admin. Code 86 § 130.1940(b)(2).
2

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PRODUCT, although custom designed, is not affixed to the realty in any way that
causes substantial damage to the realty or PRODUCT upon removal. In any given
PRODUCT installation, certain freestanding components may not be connected to
walls with anti-tip brackets at all. As previously mentioned, when connected to
walls, generally one anti-tip bracket per wall is installed using two screws. Any
rear paneling placed between PRODUCT and wall is secured using either two or
four finishing nails. Additionally, PRODUCT rests unattached to the floor.
Taxpayer has determined based upon relevant authority that the sale of
PRODUCT should be treated as the sale and installation of tangible personal
property for Illinois sales and use tax purposes. The sale and installation of
PRODUCT does not constitute an improvement to realty or a real property
contract performed by TAXPAYER. This treatment applies to the sale and
installation of PRODUCT in both existing structures and installation during new
construction since the minimal connection to walls and the ease of removal
without substantial damage is the same in both instances.
TAXPAYER hereby requests technical assistance in confirming that the treatment
of PRODUCT will be considered taxable as the sale of tangible personal property
and the separately stated installation of PRODUCT will be excluded from the
sales price in both existing and newly constructed structures. We respectfully
request a phone conference to discuss the relevant facts and issues contained
herein prior to the issuance of a final determination.
Should you have any questions regarding this request, please contact me.
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.

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See 86 Ill. Adm. Code 130.1940 and 130.2075. 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. 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.
For purposes of the Illinois sales tax laws, the Department uses an intention test to
determine whether items remain tangible personal property after installation or become part of
realty. If circumstances indicate that the parties obviously intended that the item remain with the
realty, we give effect to that intention. If an obvious intent is not apparent, we look to the extent
to which the item has been affixed. If the item cannot be removed without damage to the item or
to the real estate, that is an indication that the parties intended that the item become part of the
realty. In general, if an item is attached to a wall using only an anti-tip bracket attached with two
screws, it seems likely that that item could be removed without damaging the item or the real
estate. This is likely also the case for rear paneling that rests on the floor and is secured to the
walls using finishing nails.

Stock or Standard items

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When a person sells items that are produced on special order and that serve the same
function as stock or standard items sold at retail, the sale is subject to Retailers' Occupation Tax.
No deduction can be taken for the cost of labor involved in producing the finished item for sale.
This principle is explained in the Department's rules at 86 Ill. Adm. Code 130.2140. Generally
(assuming that the transaction does not involve a construction contract as discussed above), the
custom floor-based closet products described in this letter, although produced on special order
for customers, serve substantially the same function as stock or standard floor-based closet
products that can be purchased from other retailers. As a result, custom produced floor-based
closet products as described in this letter are generally subject to Retailers' Occupation Tax.
Design and labor costs for producing these custom floor-based closet products would also be
subject to tax, even if stated separately from the cost of materials.
Installation Charges:
In Illinois, when a seller engages in the business of selling tangible personal property
personal property at retail, and such tangible personal property is installed by the retailer, the
receipts from such installation charges must be included in the gross receipts upon which his
Retailers’ Occupation Tax liability is measured if such installation charges are included in the
selling price of the property being sold. If, however, the seller and buyer agree upon the
installation charges separately from the selling price of the tangible personal property which is
sold, then the receipts from the installation charges are not a part of the "selling price" of the
tangible personal property which is sold. Instead such charges constitute a service charge,
separately contracted for, which need not be included in the figure upon which the seller
computes his Retailers’ Occupation Tax liability. See 86 Ill. Adm. Code 130.450. If, for
instance, the purchaser cannot get the items without agreeing to installation as well, this is
considered to be included in the price and, therefore, taxable.
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,

Samuel J. Moore
Associate Counsel
SJM:elh