What does Illinois General Information Letter ST 20-0028-GIL conclude about Construction Contractors?

Subject

Construction Contractors

Plain-English summary

A supplier who sells chemicals and supplies to a construction company asked the Illinois Department of Revenue whether it had to charge sales tax on those sales. The construction company argued the sales should be tax-free because it was repairing, installing, and maintaining terrazzo flooring at an airport under a governmental customer's exemption number and pointed the supplier to 86 Ill. Adm. Code 130.1940 and 130.2075 as its basis for not paying tax.

The Department explained that Illinois treats construction contractors as end users, not retailers, of the tangible personal property they buy and then permanently affix or incorporate into real estate. Because they are end users, contractors owe Use Tax on their own cost price for that property -- the same as any other consumer -- rather than collecting Retailers' Occupation Tax as a reseller would. This applies to general contractors, subcontractors, and specialty trades like landscape contractors alike.

Working for a governmental entity or a tax-exempt organization does not automatically wipe out that tax liability. Under 86 Ill. Adm. Code 130.2075(d), a construction contractor's purchases of materials to incorporate into real estate owned by an exempt organization or governmental body can be made tax-free, but only if that organization or entity holds an active "E" exemption number at the time of sale, and only if the contractor gives its supplier a certification identifying the exempt entity, the "E" number, and the date the construction contract was signed. Items like tools, fuel, and lumber for forms that are not incorporated into the real estate remain taxable no matter who the customer is.

The Department noted it could not give a binding opinion on whether the specific notice the supplier received from the contractor was adequate, since a GIL only points to the applicable rules rather than resolving a specific taxpayer's facts (that would require a Private Letter Ruling instead).

What this means for you

Suppliers selling to construction contractors

Don't assume a customer's claim of tax-exempt status is enough on its own. Before treating a sale to a construction contractor as exempt because the job is for a governmental or exempt entity, get the contractor's written certification (identifying the exempt organization or government body by name and address, the contract date, and that entity's active "E" number). Without that documentation, the sale is presumed taxable.

Construction contractors

You are generally the end user of materials you permanently incorporate into real estate, meaning you -- not your supplier -- bear the Use Tax liability based on what you paid for the materials. If you didn't pay Use Tax to your supplier, you must self-assess and remit it directly to the Department. The governmental/exempt-entity exemption only applies to materials that are actually incorporated into the real estate of an entity with a current "E" number; tools, fuel, and other consumables you use on the job stay taxable regardless of your customer.

Accountants and tax professionals

This GIL is a good refresher on the interplay between 86 Ill. Adm. Code 130.1940 (construction contractors generally) and 130.2075 (contractors working for exempt/governmental entities), plus the credit mechanics in 86 Ill. Adm. Code 150.130 and 150.310 for tax already paid to the Department or to another state. Remember a GIL is non-binding -- if a client needs certainty on a specific transaction, they should pursue a Private Letter Ruling under 2 Ill. Adm. Code 1200.110 instead.

Common questions

Q: If a construction contractor is working on a government building, are all the contractor's material purchases automatically tax-free?
A: No. The exemption only applies if the governmental entity (or exempt organization) holds an active "E" exemption number at the time of sale, and the contractor provides the supplier with a proper certification. Without both, the sale is taxable.

Q: Who owes the tax on materials a contractor incorporates into real estate -- the contractor or the supplier?
A: The construction contractor, as the end user, generally owes Use Tax based on the cost price of the materials. If the contractor didn't pay Use Tax to the supplier at the time of purchase, the contractor must register and self-assess the tax directly with the Department.

Q: Are tools and fuel used on a construction job also exempt when the job is for a tax-exempt customer?
A: No. Sales of tools, fuel, lumber for forms, and other items a contractor consumes rather than incorporates into the real estate remain taxable regardless of who the contractor's customer is. See 86 Ill. Adm. Code 130.2075(d)(3).

Q: Can a supplier just rely on a contractor's say-so that a sale is exempt?
A: The Department said it could not give a binding opinion on whether a specific notice from a contractor was adequate. The safer course is to obtain the certification described in 86 Ill. Adm. Code 130.2075(d)(4), including the exempt entity's name, address, "E" number, and contract date.

Q: Is this letter binding on the Department?
A: No. This is a General Information Letter (GIL), which only points to the relevant regulations; it is not a statement of Department policy and does not bind the Department the way a Private Letter Ruling would.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition of tax)
• 35 ILCS 105/3 (Use Tax Act imposition of tax)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)
• 86 Ill. Adm. Code 150.130 (credit against Use Tax for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 130.1940 (construction contractors)
• 86 Ill. Adm. Code 130.2075, including 130.2075(d), (d)(3), (d)(4) (construction contractors and sales to governmental/exempt entities)
• 86 Ill. Adm. Code 150.310 (credit for tax paid to another state)
• 86 Ill. Adm. Code 130.2007 (sales to exempt organizations)
• 86 Ill. Adm. Code 130.2080 (sales to governmental bodies)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0028-gil.pdf

Original ruling text

ST 20-0028-GIL 10/20/2020

CONSTRUCTION CONTRACTORS

This letter discusses the rules regarding sales of tangible personal property to construction
contractors for incorporation into real estate owned by a governmental entity. See 86 Ill. Adm.
Code 130.1940, 86 Ill. Adm. Code 130.2075(d).

October 20, 2020

Dear Xxxx:
This letter is in response to your letter dated January 16, 2020, 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:
Please note below and attached correspondence from the referred-to-below customer.
We would appreciate receiving a written ruling regarding same
Feedback has been submitted on the topic of Business/Withholding Income Tax on 1/15/20XX
11:56:55 AM.
We sell supplies and chemicals to a construction company who repairs, installs, and
maintains terrazzo floors at AIRPORT. They maintain that they are not liable for sales
taxes using Code Nos. 130.2075 and 130.1940 and CITY EXEMPTION NUMBER as basis.
They claim “Please accept this notice not to ‘charge’ sales taxes in relation to purchases
made by COMPANY for supplies and other tangible personal property for the use or
consumption that are intended for the purposes to convert such items into real estate.”
=====Please issue ruling regarding this issue====
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 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State,

ST 20-0028-GIL
Page 2

any kind of tangible personal property that is purchased anywhere at retail from a retailer. See 35 ILCS
105/3; 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 reduce the amount of Use Tax they must remit by
the amount of Retailers' Occupation Tax liability which they are required to and do pay to the
Department with respect to the same sales. See 86 Ill. Adm. Code 150.130.
CONSTRUCTION CONTRACTORS
Illinois law treats construction contractors as end users for Retailers’ Occupation and Use Tax
purposes. 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. The tax
liabilities regarding construction contractors in Illinois may be found at 86 Ill. Adm. Code 130.1940 and
130.2075 on the Department’s website. 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 he or
she will permanently affix to or incorporate 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 register and
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. If a manufacturer is also a construction contractor,
the manufacturer will incur Use Tax on its cost price of the materials used in making the item
incorporated into the real estate.
SALES TO GOVERNMENTAL ENTITIES
Sales to exempt organizations (organizations that qualify as exclusively religious, charitable, or
educational) and governmental entities are subject to tax unless the exempt organization or
governmental entity has obtained an active exemption identification number ("E" number) from the
Department. See 86 Ill. Adm. Code 130.2007 and 130.2080. Persons or businesses selling tangible
personal property to these organizations or governmental entities must be provided with an "E" number
for the sales to be tax exempt, unless another exemption can be documented. It is important to note
that only sales of tangible personal property invoiced to the organization or governmental entity itself
are exempt. Sales made to an individual member or client of an exempt organization or entity are
generally subject to tax. Purchases of tangible personal property by a construction contractor for
incorporation into the real estate owned by an exempt organization or governmental entity that
possesses a valid “E” number at the time of sale may be made free of Illinois Retailers’ Occupation Tax
and Use Tax under the provisions of 86 Ill. Adm. Code 130.2075(d).
Sales of tools, fuel, lumber for forms and other end use or consumption items to construction
contractors who do not incorporate these items into real estate are taxable sales regardless of who the
contractor's customer may be. 86 Ill. Adm. Code 130.2075(d)(3).

ST 20-0028-GIL
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In claiming the exemption from tax, the construction contractor must provide his/her supplier with
a certification stating that his/her purchases are for conversion into real estate under a contract with an
exempt organization or governmental entity, identifying the organization or entity by name and address
and stating on what date the contract was entered into. The construction contractor must also provide
the “E” number issued by the Department to the organization or entity for which the purchasing
contractor is acting. See 86 Ill. Adm. Code 130.2075(d)(4).
The Department cannot provide a binding opinion on the adequacy of the notice you received
from the contractor. However, as noted, the exemption is not unlimited. The items must be
incorporated into the real estate to qualify. Supplies that are not incorporated into the real estate do
not qualify for the exemption.
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,

Debra M. Boggess
Associate Counsel
DMB:bkl