If I sell modular homes bought from out-of-state factories and have contractors permanently install them, do I owe Illinois sales/use tax, and do I need to file monthly sales tax returns?

Subject

Construction Contractors

Plain-English summary

A taxpayer who had recently formed an S corporation to sell modular homes wrote to the Illinois Department of Revenue asking about their sales tax liability. The taxpayer purchases homes from factories in two other states and pays sales tax to those states at the time of purchase. When the taxpayer sells a home, all of the work of placing it is contracted out to contractors who pay their own sales tax on materials. After forming the S corporation, the taxpayer received an Illinois Business Authorization and was contacted by the Department about being in collections for not filing sales tax forms; the taxpayer, after talking with an accountant and a Department representative, believed no monthly filing obligation existed and asked the Department to clarify.

The Department explained that in Illinois, construction contractors are treated as the end users of building materials (including modular homes) that they permanently affix to real estate. Contractors owe Use Tax on their own cost price of the materials they permanently affix, while an Illinois retailer who sells the building materials to that contractor owes Retailers' Occupation Tax on its gross receipts from that sale. In this arrangement, the contractor's own customer owes no tax, and the contractor has no authority to collect tax from that customer. If the contractor doesn't pay this tax to an Illinois-registered supplier, the contractor must register, self-assess, and remit the Use Tax directly to the Department (86 Ill. Adm. Code 130.2075).

By contrast, if an Illinois seller of modular homes has no contractual obligation to permanently affix the home to real estate, that seller does not act as a construction contractor. Instead, the seller acts as a retailer, owes Retailers' Occupation Tax, and must collect the corresponding Use Tax from its purchaser — unless an exemption applies, such as a sale for resale to a contractor.

The Department told the taxpayer directly that it could not tell from the letter whether the taxpayer was contractually obligated to permanently affix the modular home (or to obtain contractors on the purchaser's behalf). The Department said that if the taxpayer is obligated to permanently affix the home as part of the sale agreement, the taxpayer is acting as a construction contractor and owes Use Tax on the cost price of the modular home. The Department also noted that the other states' sales taxes are not remitted to Illinois, but if the out-of-state factory sellers are themselves registered with Illinois to collect and remit Use Tax on sales to Illinois purchasers, the taxpayer may have no further Illinois Use Tax liability; if not, the taxpayer must register, self-assess, and remit the Use Tax. The Department added that a credit against Illinois Use Tax may be available for tax properly paid to another state (86 Ill. Adm. Code 150.310).

What this means for you

Sellers of modular homes or similar structures

Whether you're a "construction contractor" (owing Use Tax on your own cost) or a "retailer" (owing Retailers' Occupation Tax and required to collect Use Tax from your customer) turns on whether your contract with the customer obligates you to permanently affix the home to real estate. The Department expressly said it could not determine this from the taxpayer's letter alone — it depends on the specific terms of your sales/installation agreements. Review your contracts to see whether affixation is your obligation or a separate arrangement your customer makes with a contractor.

Businesses that pay sales tax to an out-of-state factory

Paying sales tax to the state where you purchased a modular home does not automatically satisfy your Illinois Use Tax obligation, because that other state does not remit its tax to Illinois. The Department said you may avoid further Illinois liability only if the out-of-state seller happens to be registered with Illinois and collects/remits Illinois Use Tax on the sale. Otherwise, you must register, self-assess, and remit Illinois Use Tax yourself, though you may be able to claim a credit for tax properly paid to the other state under 86 Ill. Adm. Code 150.310.

Anyone relying on this letter

This is a General Information Letter, not a Private Letter Ruling — it is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120). The Department did not squarely resolve the taxpayer's question about whether they owe monthly sales tax filings; it instead explained the two possible classifications (contractor vs. retailer) and said the answer depends on facts the Department could not determine from the letter. A taxpayer wanting a binding answer on their specific facts would need to request a Private Letter Ruling.

Common questions

Q: I sell modular homes and pay sales tax to the factory's state. Do I still owe Illinois tax?
A: Possibly. The other state does not forward its tax to Illinois. If the out-of-state seller isn't registered with Illinois to collect and remit Use Tax on the sale to you, you must register, self-assess, and remit the Illinois Use Tax yourself, though you may qualify for a credit for tax properly paid to the other state under 86 Ill. Adm. Code 150.310.

Q: Am I a "construction contractor" or a "retailer" under Illinois law?
A: It depends on your agreement with the buyer. If you're contractually obligated to permanently affix the modular home to real estate, you're a construction contractor and owe Use Tax on your own cost price of the home. If you have no such obligation, you're a retailer, and you owe Retailers' Occupation Tax and must collect Use Tax from your purchaser (unless an exemption like resale applies).

Q: Can I collect tax from my customer if I'm acting as a construction contractor?
A: No. The Department stated that when a contractor incurs Use Tax on materials permanently affixed to real estate, the contractor's customer has no tax liability, and the contractor has no authority to collect tax from that customer.

Q: Does this letter tell me whether I need to file sales tax forms monthly?
A: Not directly. The Department did not resolve that specific question. It explained the contractor-versus-retailer distinction and said the taxpayer's own filing/registration obligations depend on which category applies to their contracts — something the Department said it could not determine from the letter alone.

Q: What if the contractors I hire already pay sales tax on their materials?
A: The letter does not say this relieves the modular-home seller of tax liability. The Department's analysis focuses on whether the seller itself is obligated to permanently affix the home; it does not state that tax paid by hired contractors on their own materials substitutes for the seller's own Use Tax or Retailers' Occupation Tax obligations.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter, which by regulation is not a statement of Department policy and is not binding on the Department. A taxpayer who wants a binding determination on their specific facts must request a Private Letter Ruling instead.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0034-gil.pdf

Original ruling text

ST 18-0034-GIL 11/30/2018 CONSTRUCTION CONTRACTORS
Persons who permanently affix tangible personal property to real estate act as construction
contractors and incur Use Tax liability on their cost price of tangible personal property they
physically incorporate into realty. 86 Ill. Adm. Code 130.1940. (This is a GIL.)

November 30, 2018

Dear Xxxxx:
This letter is in response to your letter, in which you requested 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 are requesting clarification on our sales tax liability to the state. We are in the
business of selling modular homes. We purchase homes from a factory in STATE and
a factory in STATE 1. When we purchase a home we pay sales tax to the factory. We
have been advised that because we are paying sales tax when purchasing the home,
that tax is paid by STATE and STATE 1 to Illinois, and we are not under further
obligation to pay more sales tax. When we sell a home we contract all of the work
involved in placing that home. That work is completed by contractors who pay sales tax
for their materials as well.
When we formed our S. Corporation, in MONTH of this year, we filled out forms that
resulted in receiving an Illinois Business Authorization for COMPANY. I suppose this is
why we are registered as a retailer and the IDOR is contacting me by phone to tell us
our company is in collections because we have not filed the forms needed to report our
sales tax. However after conversations with our accountant and the companies we am
doing business with, along with a representative of the IDOR we do not think we have
an obligation to file a form monthly to report sales tax.
Please advise us on how we should proceed.
DEPARTMENT’S RESPONSE:

ST 18-0034-GIL
Page 2

In Illinois, construction contractors are deemed to be end users of building materials (including
modular homes) that they take off the market and permanently affix to real estate. Contractors incur a
Use Tax liability on their cost price of the materials permanently affixed to real estate. Illinois retailers
making such sales also incur Retailers’ Occupation Tax on the gross receipts from the sales of these
building materials to the contractor. Thus, contractors having contracts with customers to sell and
permanently affix modular homes incur a Use Tax liability on their cost price of materials permanently
affixed to real estate. In these situations, the contractors’ customers incur no tax liability, and the
contractors have no authority to collect tax from them. If the contractors do not remit this tax to Illinois
registered suppliers, the contractors must register, self-assess and remit the Use Tax to the
Department. 86 Ill. Adm. Code 130.2075 is the Department’s regulation concerning the taxation of
construction contractors.
In contrast, if Illinois sellers of modular homes do not have contracts with the purchasers to
permanently affix the home to real estate, they do not act as construction contractors and do not incur
a Use Tax liability. Rather, they act as retailers in retail transactions and incur a Retailers’
Occupation Tax liability and must collect the corresponding Use Tax from their purchasers unless an
exemption applies (e.g., a sale for resale occurs if the purchaser buys the home for resale to a
contractor).
It is unclear from your letter whether you are required as part of your agreement with the
purchaser to permanently affix the modular home or obtain contractors on behalf of the purchaser.
However, if you are obligated to permanently affix the modular home as part of your agreement with
the purchaser, you are acting as a construction contractor and owe Use Tax on your cost price of the
modular home.
The States of STATE 1 and STATE do not remit to Illinois any tax you may have paid to them
on the purchase of the modular home. However, there is a possibility that the sellers of the modular
homes are registered with the State of Illinois to collect and remit Use Tax on sales to Illinois
purchasers. If this is the case, you may not have any further Use Tax liability on the purchase of the
modular home. If the sellers are not collecting and remitting Use Tax to Illinois on the purchase of
the modular homes, you must register, self-assess and remit the Use Tax to the Department. Lastly, I
would also note that if you paid a tax in another state regarding the purchase or use of the modular
homes, you may be entitled to a credit against your Illinois Use Tax liability to the extent that you have
paid tax that was properly due to another state. See 86 Ill. Adm. Code 150.310.
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

RSW:bkl