Does Illinois sales or use tax apply when a contractor sells and plants trees and tree shelters for a landowner under a government-sponsored conservation program?

Plain-English summary

A company that sells trees and tree shelters to landowners for use in government-sponsored conservation programs (such as the Conservation Reserve Program) asked the Illinois Department of Revenue whether its sales are subject to Illinois sales tax, since the cost-share reimbursements landowners receive from agencies like the USDA typically do not cover sales tax.

The Department's answer: there is no exemption for tangible personal property sold for conservation purposes. Trees and tree shelters are ordinary tangible personal property, and absent some other applicable exemption, sales of them are subject to the Illinois Retailers' Occupation (sales) Tax, with Use Tax applying to the purchaser's use of the property.

However, the Department flagged an important wrinkle: if the company's contract includes not just selling the trees but also planting them pursuant to a conservation plan agreement, the transaction is instead analyzed as a construction contract, and the contractor is subject to Use Tax on the materials under 86 Ill. Adm. Code 130.1940, rather than Retailers' Occupation Tax on a retail sale. Separately, whether an installed tree shelter is taxable depends on an "intention test": whether the shelter becomes incorporated into the real estate or remains tangible personal property.

What this means for you

Conservation contractors and landscaping businesses

If you sell trees, tree shelters, or similar conservation materials to landowners, you generally must charge Illinois sales tax — there is no special exemption just because the sale supports a conservation program. But if your work includes planting the trees under a conservation plan agreement, you are instead treated as a construction contractor. In that scenario, you pay Use Tax on the cost of the materials (86 Ill. Adm. Code 130.1940) rather than collecting Retailers' Occupation Tax from the customer as a retail seller.

Landowners and conservation program participants (CUSTOMERS)

Because there is no conservation-purpose exemption, expect sales tax to be built into (or added onto) the cost of trees and tree shelters you buy, even though USDA, Illinois Department of Agriculture, or Illinois Department of Natural Resources cost-share reimbursements typically do not cover that tax.

Accountants and tax professionals

The key distinction here is between a retail sale (subject to Retailers' Occupation/Use Tax on the full sale) and a construction contract (where the contractor, as the ultimate consumer of materials, owes Use Tax under 86 Ill. Adm. Code 130.1940 and 130.1965(c)). Whether planting is included in the deal determines which regime applies. For tree shelters specifically, apply the Department's "intention test" (illustrated in ST 19-0003-GIL) to determine if the shelter has become part of the realty or remains personal property.

Common questions

Q: Is there a sales tax exemption for trees and tree shelters sold for conservation purposes?
A: No. The letter states plainly that "currently there is no exemption for sales of tangible personal property to be used for conservation purposes." See 86 Ill. Adm. Code 130.120 for the general list of nontaxable transaction types, none of which cover conservation use.

Q: Does it matter whether the contractor just sells the trees or also plants them?
A: Yes. If the contractor's work includes installing (planting) the trees pursuant to a conservation plan agreement, the transaction is treated as a construction contract, and the contractor — not the customer — is subject to Use Tax on the materials under 86 Ill. Adm. Code 130.1940.

Q: How is a "tree shelter" taxed if it's installed on the land?
A: It depends on whether the tree shelter becomes incorporated into the real estate or remains tangible personal property after installation. The Department applies an "intention test" to make that determination, as illustrated in ST 19-0003-GIL (02/27/2019).

Q: Does the fact that a government agency cost-shares or reimburses the purchase affect the tax treatment?
A: No. The ruling notes that agencies like the USDA, Illinois Department of Agriculture, and Illinois Department of Natural Resources typically reimburse the cost of the conservation materials and services but not the sales tax charged on them — reimbursement does not create a tax exemption.

Q: Is this GIL binding on the Department?
A: No. As a General Information Letter, it merely directs the requester to relevant regulations and is not a statement of Department policy; it does not bind the Department the way a Private Letter Ruling would.

Citations and references

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 130.120 (nontaxable transactions — no conservation-purpose exemption)
• 86 Ill. Adm. Code 130.1965(c) and 130.1940(c)(2) (tax treatment of selling and installing plants such as trees; construction contractors)
• ST 19-0003-GIL (02/27/2019) (intention test for whether installed items remain tangible personal property or become realty)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0019-gil.pdf

Original ruling text

ST-22-0019-GIL 07/19/2022 CONSTRUCTION CONTRACTOR
A contractor who plants trees pursuant to a conservation plan agreement is
subject to Use Tax. See 86 Ill. Adm. Code 130.1940. (This is a GIL.)
July 19, 2022
NAME/ADDRESS
Dear Mr. XXX:
This letter is in response to your letter dated August 25, 2021, 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:
Subject: Regulations of Sales Tax on Materials Sold to CUSTOMER for
Conservation Purposes
Dear Sir or Madam:
COMPANY is an STATE Limited Liability Company with offices in STATE1
and STATE2. COMPANY provides products and services to CUSTOMERS to
enhance agricultural and conservation goals on their land.
Our work involves being contracted by CUSTOMERS to establish
conservation practices on their land. These conservation practices are
typically enrolled in programs sponsored by the US Department of
Agriculture, the Illinois Department of Agriculture, or the Illinois Department of
Natural Resources (e.g. the Conservation Reserve Program). These
agencies "cost share" the conservation practices by providing to
CUSTOMERS a reimbursement of the costs to establish and manage the
practice (i.e. the cost of our products and services). However, these agencies
typically do not reimburse the costs of any sales tax charged to
CUSTOMERS.

COMPANY/NAME
Page 2
July 19, 2022
One significant issue that we have come across is the lack of specificity in state
regulations regarding sales tax on materials sold to CUSTOMERS for
conservation purposes. Specifically, our central question is: Should sales tax be
charged on trees and tree shelters when sold to CUSTOMERS for the
purposes of establishing conservation practices?
Regarding PRODUCT1, the Illinois Department of Revenue issued a letter on
April 4, 2014 (written by Cara Bishop, Associate Council) concluding that
PRODUCT1 are not considered "farm machinery or equipment used in
production agriculture”, and are therefore not exempt from sales tax under 86
Ill. Adm. Code 130.305. However, the question now at hand does not relate to
PRODUCT1 used in " production agriculture" but to PRODUCT1 used for
conservation purposes.
PRODUCT2 are plastic tubes or mats that protect PRODUCT1 from deer,
weeds, and other pressures while PRODUCT1 are small. They are essential
for successful establishment of conservation practices, and, just like the
PRODUCT1 themselves, are "cost-shared" by the government agencies
listed above.
I request a written ruling on the topic presented above. Furthermore, if the
PRODUCT1 and PRODUCT2 are exempt from sales tax, what steps must a
business take to ensure proper documentation of the tax-exempt sales?
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, 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.
Purchases of tangible personal property are subject to Illinois sales tax unless a
purchase qualifies for an exemption under Illinois law. Although there are numerous
sales tax exemptions available, currently there is no exemption for sales of tangible
personal property to be used for conservation purposes. See 86 Ill. Adm. Code 130.120
for information on types of nontaxable transactions.
While it is unclear from your ruling request whether the sales of trees pursuant to
a conservation plan includes planting the trees, we want to make you aware of a
different tax result which could apply in such case. Please see 86 Ill. Adm. Code
Section 130.1965(c) and 86 Ill. Adm. Code 130.1940(c)(2) which address the applicable
tax when selling and installing plants such as trees.

COMPANY/NAME
Page 3
July 19, 2022
As to the tax consequences of a “tree shelter“ even if installed, would depend on
whether it is incorporated into the real estate or remains tangible personal property and
thus, be subject to the Retailers’ Occupation Tax. 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. See for example ST 190003-GIL (02/27/2019).
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,

Thomas Grudichak
Associate Counsel
TG:rkn