How did Illinois tax a security-system contract that included permanently installed components and movable clip-on cameras?

Plain-English summary

A security-system installer permanently incorporated wiring, controls, and other primary components into buildings but also supplied cameras that clipped on and could be moved.

Normally, a construction contractor was the end user of materials permanently incorporated into real estate and owed Use Tax on cost. The customer owed no Use Tax, and the contractor could recover its cost through price or a contractually stated tax reimbursement, but not as "sales tax."

Security systems had a special rule. When engineering, installation, and maintenance of voice, data, video, security, or telecommunications systems were sold for one specified contract price, the contract was not treated as retail selling. The rule covered all system items even when they were not incorporated into real estate.

IDOR therefore said the installer could pay Use Tax to suppliers on all security-system equipment and supplies, including the movable cameras, when the system was packaged at one contract price.

What this means for you

The one-price requirement mattered. Security installers should document a single specified contract price before applying the construction-contractor treatment to movable devices.

Common questions

Did movable cameras have to become real estate? No, under the one-price security-system rule.

Could the installer bill its customer "sales tax"? No.

Citations and references

• 35 ILCS 120/1.
• 86 Ill. Adm. Code 130.1940(c)(3).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0007-gil.pdf

Original ruling text

ST 16-0007-GIL 02/02/2016 CONSTRUCTION CONTRACTORS
This letter concerns installation of security systems. See 86 Ill. Adm. Code
130.1940. (This is a GIL.).

February 2, 2016

Dear Xxxxx:
This letter is in response to your letter dated December 21, 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 have a client that sells and installs security systems. In the past, all of
the components of the installed system became realty, therefore, they
handled their sales/use tax responsibilities based on construction
contractor rules unless a state had special provisions for security system
installations.
They now have a new customer request whereas, they install the primary
system and contracts into realty as before, however, the cameras are now
mobile. Mobile meaning they “clip on” at a location and can be moved
around as needed.
Please advise as to how the client should handle the following situations:
 Sale and installation of main security system components (wiring,
controls, etc.)


Sale of installation of mobile cameras (not affixed permanently to
realty)



Does it matter if they handle as a lump sum v. time & material
contract?

We appreciate your assistance with this matter. Please mail or email us
your reply and/or contact us via email for any additional information.

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 a business agrees to sell and install a security system so as to make it a
permanent part of a building, the business is acting as a construction contractor. A
construction contractor is deemed to be the end user of the materials which it takes off
the market and incorporates into real estate. The construction contractor will incur Use
Tax on its cost price of the tangible personal property incorporated into real estate.
When a construction contractor subsequently sells and installs property in a fashion that
makes the property a real estate improvement, there is no sales tax due because sales
tax does not apply to sales of real estate improvements. The contractor simply
discharges the tax liability "up front" by paying tax at the time he buys the materials.
See 86 Ill. Adm. Code 130.1940.
When a business sells and installs a security system, the customer incurs no Use
Tax and, as a construction contractor, the business has no authority to collect Use Tax
from the customer. 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 its 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 its price is a business decision on the construction contractor’s part.
In the specific case of installers of security systems, Section 1 of the Retailers’
Occupation Tax, 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.” See 35 ILCS 120/1. “This provision applies to all of the items . . . even
if they are not incorporated into real estate.” 86 Ill. Adm. Code 130.1940(c)(3).
As a result of the statutory and regulatory language, installers of security systems
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, such as the cameras that you
mention in your letter. This provision applies if the sale and installation of the security
systems are packaged for one specified contract price.
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

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