Can a construction contractor that can't tell at the time of purchase whether materials will be installed into real estate or sold over the counter buy everything tax-free from its supplier and self-report a flat percentage of tax later?

Plain-English summary

A fencing, gates, and guard-rail construction contractor (identified only as COMPANY) based in Illinois wrote to the Illinois Department of Revenue as a follow-up to an earlier request for a Private Letter Ruling (PLR) about how to report its Retailers' Occupation Tax (ROT). The contractor explained that almost all of its end products become part of the real estate they are installed on for commercial, residential, and governmental customers (including highways and airports), and that it currently buys all materials from suppliers without paying sales tax because, at the time of purchase, it cannot tell whether a given batch of materials will end up going to an exempt governmental customer or a taxable one.

The contractor proposed a specific fix: it had analyzed its cost of merchandise for all jobs over the prior four years and calculated that 31% of that cost was the portion subject to ROT. It asked the Department to approve applying that flat 31% percentage to its applicable monthly Illinois taxable sales going forward to determine its ROT liability, re-calculating the percentage periodically using the most recent four years of data.

The Department responded with a GIL rather than a PLR (since the inquiry required directing the taxpayer to existing regulations rather than resolving a specific binding fact pattern) and explained the actual rule under 86 Ill. Adm. Code 130.2075(b): a contractor who also sells over the counter and genuinely doesn't know at the time of purchase how the materials will be used may buy all supplies for resale (i.e., tax-free from the supplier), but must then pay Retailers' Occupation Tax itself on everything -- on the selling price for items later sold at retail over the counter, and on the cost price for items installed into real estate. Critically, the Department noted that when tax is owed on the cost price of materials installed under 130.2075(b), the law requires "an actual accounting of costs of materials for each contract" -- the Department is not authorized to approve a flat, pre-set percentage method like the contractor's proposed 31% figure as a substitute for that actual accounting.

The GIL also laid out related exemptions that can apply to construction contractors: under 130.2075(d), a contractor incorporating property into real estate owned by an exclusively charitable, religious, or educational organization or a governmental body that holds a Department-issued exemption identification number ("E-number") can buy that property tax-free, so long as it gives its supplier the E-number and the certification required by 130.2075(d)(4). Items used by the contractor but not actually incorporated into the real estate (concrete forms, tools, fuel, lumber used for forms, and similar consumables) remain subject to Use Tax even on exempt-entity jobs, per 130.2075(d)(3). Separately, 130.2075(e) exempts property physically incorporated into public improvements that must be transferred to a unit of local government under a pre-development transfer requirement, with the transfer agreement taking one of the forms listed in 130.2075(e)(1-4). The Department pointed out that 130.2075(d)'s E-number mechanism does not give a contractor the same "buy everything tax-free and sort it out later" flexibility that 130.2075(b) provides when the use is genuinely unknown -- a contractor may use a client's E-number for supplies destined for that exempt client, but must pay use tax (to the supplier, or directly to the Department if the supplier isn't registered) on supplies destined for non-exempt clients.

What this means for you

Construction contractors who also sell over the counter

If you're a contractor who sometimes installs materials into real estate and sometimes sells the same materials at retail, and you genuinely cannot tell at the time of purchase which bucket a given purchase will land in, 130.2075(b) lets you certify to your supplier that you're buying for resale (tax-free at purchase) -- but the tradeoff is that you become responsible for self-reporting and paying ROT yourself on all of it: selling price for retail sales, cost price for installed materials. This GIL confirms the Department expects an actual, contract-by-contract accounting of those costs, not a single company-wide percentage applied to total sales, however well-supported that percentage might be by historical data.

Contractors working for exempt governmental, charitable, religious, or educational clients

Separate from the resale-uncertainty situation above, if you know in advance that a job is for an exempt client with an E-number, 130.2075(d) lets you buy the materials that will be incorporated into that real estate tax-free using the client's E-number (plus the required certification). But remember this exemption doesn't cover consumables you use but don't install (forms, tools, fuel) -- those still owe Use Tax under 130.2075(d)(3) even on an otherwise-exempt job.

Accountants and tax professionals advising contractor clients

This GIL is a useful reminder that the Department will not pre-approve simplified or estimated tax-calculation methodologies (like a flat historical percentage) as a substitute for the actual-cost-accounting standard baked into 130.2075(b), even when a taxpayer has done real analytical work to derive the percentage. If a client wants a binding answer on their own specific facts and calculation method, they would need to pursue a PLR under 2 Ill. Adm. Code 1200.110 (as the taxpayer here originally tried to do) rather than rely on this non-binding GIL.

Common questions

Q: Did the Department approve the contractor's proposed 31% flat-percentage reporting method?
A: No. The GIL states that in cases where a construction contractor must pay ROT (including local taxes) on the cost price of materials installed into real estate under 130.2075(b), the Department is not authorized to approve any specific method of calculating those costs "other than an actual accounting of costs of materials for each contract."

Q: If I can't tell at purchase whether materials will be installed or resold, can I just buy everything tax-free?
A: Yes, conditionally. Under 130.2075(b), you may certify to your supplier that you're purchasing all materials for resale, but you then must pay Retailers' Occupation Tax yourself: on the selling price for items sold over the counter, and on the cost price for items installed into real estate.

Q: How do sales to tax-exempt governmental, charitable, religious, or educational entities work for a contractor?
A: Per 130.2075(d), a contractor incorporating property into real estate owned by such an exempt entity may purchase that property tax-free using the entity's E-number, along with the certification required by 130.2075(d)(4). Consumable items used but not incorporated into the real estate (forms, tools, fuel, lumber for forms) still owe Use Tax, per 130.2075(d)(3).

Q: What about materials for public improvements that will be transferred to a local government?
A: Per 130.2075(e), property physically incorporated into public improvements required to be conveyed to a unit of local government under a pre-development transfer requirement is exempt from Retailers' Occupation Tax and Use Tax, so long as the pre-development transfer agreement takes one of the forms described in 130.2075(e)(1-4).

Q: Why did the Department issue a GIL instead of the PLR the contractor originally sought?
A: The letter is a follow-up to an earlier PLR request regarding the contractor's ROT reporting. The Department determined the nature of the inquiry and information provided called for a GIL, which directs the taxpayer to applicable regulations rather than resolving the taxpayer's specific facts with a binding determination.

Citations and references

Regulations:

• 86 Ill. Adm. Code 130.2075(b) (resale certification and self-reporting when use is unknown at purchase)
• 86 Ill. Adm. Code 130.2075(d) (E-number tax-free purchases for exempt-entity real estate incorporation)
• 86 Ill. Adm. Code 130.2075(d)(3) (Use Tax on non-incorporated consumables, even for exempt jobs)
• 86 Ill. Adm. Code 130.2075(d)(4) (certification required to claim the E-number exemption)
• 86 Ill. Adm. Code 130.2075(e) (exemption for public improvements transferred to local government)
• 86 Ill. Adm. Code 130.2075(e)(1-4) (forms of the pre-development transfer agreement)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/st23-0029-gil.pdf

Original ruling text

ST-23-0029-GIL 09/25/2023 CONSTRUCTION CONTRACTORS
Where it is impractical, at the time of purchase, for a contractor to determine how
the materials purchased will be used (i.e., either incorporated into real estate or
sold over the counter), the contractor may provide its supplier with a certification
that the contractor is purchasing all materials for resale purposes and will
assume responsibility for reporting and paying the proper tax upon the item’s
disposition. Sales of materials to construction contractors for incorporation into
real estate owned by exclusively charitable, religious, or educational institutions
or organizations, or for incorporation into real estate owned by governmental
bodies, may be purchased using the exempt organization’s E-number. See 86
Ill. Adm. Code 130.2075(b). (This is a GIL.)
September 25, 2023

NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated July 31, 2023, 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:

This letter is in follow-up to a previous letter (your response attached)
written to the Department regarding a request for a PLR regarding the
reporting of our Retailer’s Occupation Tax.
We are a INDUSTRY Construction Corporation located in CITY, IL, we
primarily provide and install fencing, gates, guard rails etc. to Commercial,
Residential and Governmental (Highways, Airports etc.) customers.
Almost all our end products become part of the Real Estate they are

COMPANY/ NAME
Page 2
September 25, 2023
affixed to. We currently purchase all materials from Suppliers without
Sales tax as we are unable to determine at the time of purchase whether
the materials will be used for an exempt (Governmental body) or taxable
entity.
We would like your approval to calculate our ROT as follows: We have
analyzed our Costs of Merchandise for all jobs for the last (4) four years
and have determined the Merchandise Cost of Goods (subject to ROT tax)
is 31%. Effective immediately, we would like to use this Percentage
applied to applicable monthly Illinois taxable sales to determine our ROT
liability. Going forward, as soon as reasonably possible after the year end
we will re-determine this percentage based on the most current (4) four
years of data and apply this new percentage to applicable Sales.
We feel this is the most accurate way to report and pay the ROT liability to
the Department and fully complies with our responsibility under ILL.
Admin. Code tit. 86, 130.2075(b).
We thank you in advance for your consideration.
DEPARTMENT’S RESPONSE:
Under 130.2075(b), persons who act as both construction contractors and overthe-counter sellers and who do not know at the time of purchasing supplies the purpose
for which the supplies will be used, are authorized to buy all supplies for resale – but
then must pay retailers’ occupation tax on all items – both those sold at retail and those
installed into real estate. For items sold over the counter at retail, retailers’ occupation
tax, including any applicable local tax, is due on the selling price of the items. For items
installed into real estate, retailers’ occupation tax, including any applicable local tax, is
due on the cost price of the items installed into real estate.
Section 130.2075(d) states that if construction contractors permanently affix
tangible personal property into real estate owned by an exclusively charitable,
educational, or religious organization or governmental body that has an exemption
identification number (“E” number) issued by the Department, the contractors can
purchase that tangible personal property tax free. In claiming this exemption, the
construction contractors must provide their suppliers with the E number of the
organization or governmental body owning the property into which the tangible personal
property will be incorporated and must also provide the certification described in Section
130.2075(d)(4).
In addition, Section 130.2075(e) provides that tangible personal property that will
be physically incorporated into public improvements, the ownership of which is required
to be conveyed to a unit of local government pursuant to a pre-development transfer
requirement, is exempt from Retailers’ Occupation Tax and Use Tax. To claim the

COMPANY/ NAME
Page 3
September 25, 2023
exemption, the contractors must provide their suppliers with the exemption number of
the governmental unit to which the public improvements will be transferred upon
completion. The pre-development transfer agreement may take any of the forms
contained in Section 130.2075(e)(1-4).
Many types of property are used in building construction that do not become a
part of the real property and are taxable to the contractor working on behalf of exempt
entities. For example, concrete forms, tools, fuels, lumber for forms and supplies are
types of property used by construction contractors but not incorporated into the tangible
personal property. The contractors owe Use Tax when purchasing these and other end
use or consumption items even though the contractors are acting under construction
contracts with exempt entities. See Section 130.2075(d)(3).
Notably, however, 130.2075(d) does not authorize tax-free purchases in the
same manner that 130.2075(b) does when it is unknown whether the supplies will be for
resale over the counter or installation as part of a construction contract. As such,
unless the purchase of supplies meets the conditions of 130.2075(b), a construction
contract may not purchase all supplies tax free just because it is unknown whether the
materials will be installed for an exempt client. Instead, the contractor may purchase
supplies that will be installed for an exempt client tax free using the client’s E-number,
but must pay use tax to its supplier or directly to the Department, if the supplier is not
registered to collect use tax, for items that will be installed for non-exempt clients. In
cases where a construction contractor is required to pay retailers’ occupation tax,
including local taxes, on the cost price of materials installed into real estate under
130.2075(b), the Department is not authorized to approve any specific method of
calculating costs on which the retailers’ occupation tax is imposed on materials
transferred under a construction contract other than an actual accounting of costs of
materials for each contract.
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,

Kimberly Rossini
Associate Counsel
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