I sell and install manufactured product elements for customers -- how do I know whether Illinois taxes it as tangible personal property (sales tax) or as a real estate conversion (use tax on me as a contractor)?

Plain-English summary

A company that buys finished "PRODUCT" elements from a manufacturer and hires a third party to install them for its dealers and general-contractor customers asked the Illinois Department of Revenue for a Private Letter Ruling on one core question: is PRODUCT "real property" or "tangible personal property" for Illinois sales and use tax purposes, and how does tax apply either way? The taxpayer's only supporting detail was a manual and a link to a short demonstration video showing the elements being installed -- it never described in the letter itself what PRODUCT actually is.

The Department did not classify PRODUCT. Because the facts submitted were too vague or generic to pin down the item's specific nature, the Department did not -- and could not -- rule on whether this particular taxpayer's PRODUCT is real property or tangible personal property. Instead of a binding Private Letter Ruling, the taxpayer received this non-binding General Information Letter (GIL) restating the general legal framework that governs items like signs and other property that could end up built into real estate.

The framework, as the Department laid it out: A vendor who sells a sign with "commercial value" -- meaning it has value to someone other than the buyer, such as a generic sign reading "real estate," "insurance," or "hamburgers" that doesn't spell out the purchaser's own name or brand -- incurs Retailers' Occupation Tax (sales tax) liability on the sale, even if the sign was custom-made to special order (86 Ill. Adm. Code 130.2155). If that sign is also installed, the installation charge is subject to Retailers' Occupation Tax too, unless there's a separate agreement and charge for the installation (86 Ill. Adm. Code 130.450).

If instead the sign is so specialized that it would have no commercial value to anyone but the customer who ordered it, the vendor does not incur Retailers' Occupation Tax. That transaction instead falls under the Service Occupation Tax Act, with the vendor treated as a "serviceman" (86 Ill. Adm. Code 140.101).

All of that assumes the item stays tangible personal property after installation. If the item instead becomes permanently affixed as real estate, the rules change entirely: the person who takes tangible personal property off the market and converts it into real estate is a "construction contractor" and is treated as the legal end-user of that property. As end-user, the construction contractor owes Illinois Use Tax when buying property that will become part of real estate from a registered Illinois supplier -- and if the supplier didn't collect the tax, the contractor must self-assess and remit Use Tax based on the property's cost price (86 Ill. Adm. Code 130.1940 and 130.2075).

What this means for you

If you sell signs or similar custom-made items

Whether you owe Retailers' Occupation Tax turns on "commercial value," not on whether the item was custom-made. A sign built to special order can still be commercially valuable -- and taxable at sale -- if it's generic enough that it could be resold or reused by someone other than your customer (e.g., a stock "hamburgers" sign). Only truly one-off items with no value to anyone but the customer who ordered them shift you into Service Occupation Tax treatment as a serviceman.

If you install what you sell

Bill installation separately if you want it treated separately. When a commercially valuable sign (or similar item) is sold and installed, the installation charge rides along with Retailers' Occupation Tax unless you have a separate agreement and separately stated charge for installation.

If what you're selling might become part of real estate

Once tangible personal property is permanently affixed as real estate, sales tax analysis for signs no longer applies. Instead, whoever converts the property into real estate is a construction contractor and the legal end-user, responsible for Illinois Use Tax on that property -- self-assessing it themselves if their supplier didn't already collect it.

Common questions

Q: What makes a sign (or similar item) have "commercial value"?
A: Commercial value means the item has value to someone other than the purchaser -- for example, a generic sign reading "real estate," "insurance," or "hamburgers" that doesn't spell out the purchaser's own name or brand and isn't otherwise individualized to that buyer. Under 86 Ill. Adm. Code 130.2155, a vendor selling such an item owes Retailers' Occupation Tax even if it was produced on special order.

Q: Why didn't the Department just tell this taxpayer whether PRODUCT is real property or tangible personal property?
A: The taxpayer's letter didn't describe PRODUCT's specific nature -- it pointed to an attached manual and a video link instead. Because the Department couldn't work from concrete, specific facts about what PRODUCT actually is, it could not classify it and instead explained the general rules that would apply depending on the answer.

Q: Who pays tax if I install something that becomes part of the building (real estate)?
A: The installer who converts tangible personal property into real estate is treated as a "construction contractor" and is the legal end-user of that property. The contractor owes Illinois Use Tax on the property -- paid to a registered Illinois supplier at purchase, or self-assessed and remitted to the Department (based on the property's cost price) if the supplier didn't collect it. See 86 Ill. Adm. Code 130.1940 and 130.2075.

Q: What if my custom item has no commercial value to anyone but my customer?
A: Then you don't incur Retailers' Occupation Tax as a seller of tangible personal property. Instead, the transaction is subject to the Service Occupation Tax Act, and you're treated as a "serviceman" under 86 Ill. Adm. Code 140.101.

Citations and references

Statutes and regulations cited:

• 86 Ill. Adm. Code 130.2155 (tax liability of sign vendors)
• 86 Ill. Adm. Code 130.450 (installation charges subject to Retailers' Occupation Tax absent a separate agreement)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax for specialized items with no commercial value)
• 86 Ill. Adm. Code 130.1940 (construction contractors and real estate developers)
• 86 Ill. Adm. Code 130.2075 (sales to construction contractors, real estate developers, and speculative builders)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0012-gil.pdf

Original ruling text

ST 19-0012-GIL 07/08/2019 CONSTRUCTION CONTRACTORS
Persons who sell signs may incur a Retailers’ Occupation Tax, Service Occupation Tax or Use
Tax liability, depending upon the circumstances of the particular sale. See 86 Ill. Adm. Code
130.2155 (Tax Liability of Sign Vendors); 86 Ill. Adm. Code 140.101 (Basis and Rate of the
Service Occupation Tax); 86 Ill. Adm. Code 130.1940 (Construction Contractors and Real
Estate Developers) and 86 Ill. Adm. Code 130.2075 (Sales To Construction Contractors, Real
Estate Developers and Speculative Builders). (This is a GIL.)

July 8, 2019

Dear Xxxx:
This letter is in response to your letter dated May 10, 2019, 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:
Could you please forward me a Private Letter Rulings on whether the PRODUCT would be
considered Real Property or Tangible Personal Property and clarification of how taxes are to
be applied?
There is a manual (see attached) and helpful link to a short video demonstration that shows
these elements being installed at LINK that may help with the understanding of what
PRODUCT are whether they should be considered Real Property or Tangible Personal
Property.
COMPANY is purchasing these PRODUCT elements as finished goods from the
manufacturer and hiring a third party to install them for us. We are then invoicing the dealers
directly or the general Contractors for the Supply, Install and Freight Time and Material.
Issues:

1. Whether PRODUCT should retain its character as “tangible personal property” or should
   be [sic] constitute “real property” for Illinois Sales & Use Tax purposes.

ST 19-0012-GIL
Page 2

2. What are the Illinois State and Local sales & use tax consequences of the sale, installation
   and repair of the PRODUCT that qualifies as tangible personal property to COMPANY and
   its customer?
3. What are the Illinois State and Local sales & use tax consequences of the sale, installation
   and repair of PRODUCT that qualifies as real estate to COMPANY and its customer?
   DEPARTMENT’S RESPONSE:
   The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
   business of selling tangible personal property at retail to purchasers for use or consumption. See 86
   Ill. Adm. Code 130.101. 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.
   A person who sells signs that have commercial value (i.e., value to persons other than the
   purchasers) incurs Retailers’ Occupation Tax (sales tax) liability when making such sales, even if
   such signs are produced on special order for the purchaser. Examples of signs having such
   commercial value would be ones that spell out “real estate,” “insurance,” or “hamburgers,” and which
   do not spell out the name of the purchaser nor the brand name of the purchaser’s product and which
   are not otherwise similarly individualized. See 86 Ill. Adm. Code 130.2155 regarding vendors of
   signs. When a sign that has commercial value is sold and installed, the installation charge is also
   subject to Retailers’ Occupation Tax unless there is a separate agreement for the installation charge.
   See 86 Ill. Adm. Code 130.450.
   If the sign vendor produces a sign on special order of the customer and the sign is so
   specialized that it would have no commercial value to anyone other than the customer who placed the
   order, the sign vendor would not incur Retailers’ Occupation Tax liability. These transactions would
   be subject to liability under the Service Occupation Tax Act, and the sign vendor would be considered
   a serviceman. See generally, 86 Ill. Adm. Code 140.101.
   The above assumes that the signs remain tangible personal property after installation. If the
   signs were permanently affixed structurally as real estate, then there would be different tax
   consequences. Under Illinois law, a person who takes tangible personal property off the market and
   converts it into real estate is deemed a construction contractor and is the legal end-user of the
   tangible personal property. The construction contractor, as the user, incurs Illinois Use Tax when the
   tangible personal property that will be converted into real estate is purchased from registered Illinois
   suppliers. If such items were purchased from suppliers that did not collect the tax, the person who
   converts the tangible personal property into real estate is required to self-assess and remit the Use
   Tax to the Department based upon the cost price of the property. For information on construction
   contractors, see 86 Ill. Adm. Code 130.1940 and 130.2075.

ST 19-0012-GIL
Page 3
I hope this information is helpful. If you have further questions related to the Illinois sales tax
laws, 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:rkn