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A. How sales & use tax is imposed in general in Illinois.

The Retailer’s Occupation Tax (ROT) and the Service Occupation Tax (SOT) are imposed upon persons engaged in the business of selling tangible personal property (TPP) at retail in Illinois or making sales of services in Illinois. Assuming sufficient nexus exists, the legal incidence of these taxes falls on the vendor, which generally collects UT (below) or SUT (below) from the purchaser as reimbursement. The SOT is not imposed on the service itself, but rather on the transfer of TPP incidental to rendering the service. Generally, whether the ROT or SOT applies is determined by the relationship of the TPP to the service provided. A “sale at retail” is any transfer of the ownership of, or title to, TPP to a purchaser, for use or consumption and not for resale in any form as TPP, for a valuable consideration. The ROT/SOT are measured by the “gross receipts” or selling price received from sales of TPP. The Use Tax (UT) and the Service Use Tax (SUT) complement the ROT and SOT, respectively, and are imposed on the privilege of using in Illinois TPP purchased anywhere at retail from a retailer or serviceman and are measured by the cost price paid for such TPP. UT and SUT are not imposed if the seller would not be subject to ROT or SOT despite all elements of the saleoccurring in Illinois. SOT and SUT are not imposed if the underlying sale has been subject to ROT or UT.

Generally - 35 ILCS 105/1 et seq., 110/1 et seq., 120/1 et. seq., 115/1 et seq. and 86 Ill. Admin Code 130.101, 130.201, 140.120, 150.101, 150.130, 160.101, 160.105

B. How sales & use tax is imposed on contractors in Illinois

Construction contractors are deemed end users of TPP incorporated in real property. TPP, Retailers selling TPP to contractors are subject to ROT (not SOT) and

contractors incur UT (not SUT) based on their cost of TPP. . However, the contractor's customer does not incur UT and the contractor does not collect UT from the customer.

Rather, the contractor recovers the UT it paid to suppliers through the commercial terms of the contract, typically as an itemized reimbursement of its tax or bundled into the aggregate sales price for the finished product. However, when the construction contractor acts as a retailer or serviceman by selling items over-the-counter or selling items that remain TPP, the contractor's purchases will not be taxable, but its sales of TPP will be subject to ROT or SOT depending on the nature of the transaction.. Generally, 86 Ill. Admin. Code 130.1940, 130.2075, 140.125(j), 150.1201

II. Imposition on Contractors

A. How to handle sales and use tax on purchasing materials and supplies for use in a construction project.

When the purchasing construction contractor (whether he is the prime contractor or the subcontractor) buys TPP that he will convert into real estate in finished form, the tax base is what such construction contractor pays for the item. When contractors buy building materials that will be incorporated into real estate from suppliers outside Illinois or who otherwise are not registered for ROT or collection of UT,, the contractor must self-assess UT and pay it directly to the Department.

B. Is there any exemption allowed on purchases of material; resale; direct permit authority; exempt organization project; other? What are

documentation requirements?

RESALE - When contractors act both as contractors and retailers of building materials, they can give a certification to suppliers that they, the contractors, will self-assess and pay tax if they do not know at the time of purchase how they will use the tangible personal property. 130.2075(b)(1) & (2) When the purchaser of TPP may use such property by converting it into real estate, but may resell such property “over-the- counter” apart from acting as a construction contractor, and where it is impracticable, at the time of purchasing such TPP, to determine in which way he will dispose of the property, such purchaser may “certify” to his vendor that he is buying all of such TPP for resale and thereafter account to the Department for the tax on disposing of such property. To give such certification the purchaser must agree to and assume the

liability for reporting and paying the tax in the same form (ROT & local ROT) in which the supplier would have reported and paid such tax. This means that if the purchaser used the TPP by converting it into real estate, he must include the cost price in his reported taxable receipts on his return form and must pay the State ROT & local ROT. The local ROT would be paid based on the business location in which the contractor handles the transaction. When the item is sold “over-the-counter”, the tax is based on the full selling price of the TPP. 130.1940(b)(4) When the item is sold with installation, pursuant to a construction contract, and a separate charge is made for the TPP, the tax is based on the amount charged for such property, but not less than the cost of such property to the construction contractor. If no separate charge is made, the value of

such property for computing the ROT is the cost of such property to the construction contractor.

EXEMPT ENITITY – 130.2075(d)(4) Sales of TPP to a construction contractor pursuant to a construction contract with a charity, religious or educational organization or government body is exempt from ROT. A supplier claiming exemption shall maintain certification from the contractor stating that his purchases are for conversion into real estate under a contract with an exempt entity,, identifying the entity that is involved by name and address and stating on what date his contract was entered into. The supplier shall also have among his records the active exemption number issued by the Department to the exempt organization for which thecontractor is acting.

Temporary Storage - 35 ILCS 105/3-55, 86 Ill. Admin. Code 150.310(5) - Combination retailers and construction contractors may temporarily store building materials and fixtures in Illinois for subsequent incorporation into real estate outside Illinois without incurring UT regardless of whether the TPP is acquired in Illinois or outside.

III. Improvements to Realty

A. Sales and use tax implications of improving realty; factors to determine whether installation of property constitutes capital improvement.

A construction contractor pays UT on the purchase of TPP pursuant to a construction contract since he is treated as the end user of the TPP and subsequent sales of the finished product to the customers are not subject to ROT/UT. . While specific factors are not listed to determine the qualitative characteristics of installation or incorporation of TPP into real property, the TPP must be permanently affixed or incorporated into real property so that such items are taken off the market as TPP. E.g., 86 Ill. Admin Code 130.2075, Material Service Corporation, 25 Ill. 2d 137 (1962) and ST-02- 0017-GIL.

The sale and installation of screen doors, storm doors and windows, weather stripping, insulation materials, Venetian blinds, window shades, awnings, floor coverings cemented or permanently affixed to a structure, plumbing systems, heating systems, and electrical systems are examples of items not subject to ROT. However, sales of TPP by contractors are subject to the ROT/SOT when sold without installation (86 Ill. Adm. Code Sec. 130.1940(b).

Certain sales of TPP that retain their character as personal property are subject to ROT/SOT regardless of whether the items are installed by the contractor or furnished pursuant to a construction contract. Such items as furniture, curtains, drapes, floor coverings not permanently affixed to a building, stoves, refrigerators, washing machines, portable ventilating units, and like items that are considered to remain the personal property of the purchaser even when installed (86 Ill. Adm. Code Sec. 130.1940(b). The distinction between nontaxable and taxable items is whether the item installed is

permanently affixed to the structure. When it is permanently affixed, the item changes from TPP to real property.

IV. Repair and Maintenance Contracts / Services

A. Sales and use tax on repair and maintenance contracts (list tax base). Contractors are deemed the end users of TPP purchased for incorporation into real property. Therefore, contractor ir purchases are subject to

ROT/UT based upon cost price of the TPP. This is also true when TPP is transferred by a contractor in connection with a repair or maintenance contract as long as such contract qualifies or is incidental to a construction contract. When the construction contractor acts as a retailer or serviceman, by selling items over-the-counter or selling items that remain TPP when installed, the contractor and his customer will be subject to ROT/UT (SOT/SUT)..

B. Taxable services related to the use of contractors.

Illinois does not tax services (i.e., labor), only TPP when transferred in connection with service (i.e., SOT/SUT). Therefore, the issue of taxable services is not raised for contractors.

V. Use Taxes

A. What happens when material, supplies and services purchased outside the state and used within the state?

Contractors are deemed the end users of tangible personal property purchased for incorporation into real property. Therefore, a contractor is subject to UT on purchases of material and supplies from nonresident vendors.

A. Does the state address different types of contracts? Are there different rules to different types of contracts? Are there specific elements of contracts that are looked to by the state?

Illinois does not address different types of contracts. The taxability of the construction contract is not affected by whether the contract is a lump-sum, separated, or a cost-plus contract.

Does exemption exist for transfer of TPP from contractor to customer, which allows use of a split contract?

No, when a contractor transfers TPP to customer (as opposed to or in addition to a structure), he is considered a retailer or serviceman with respect to such TPP and not a a construction contractor. When the contractor sells TPP with a separate charge within a construction contract, the amount charged for the taxable items, but not less than the cost, is subject to ROT/SOT. [This last sentence is confusing -- not sure how to apply it -- I don't find it helpful and suggest deleting it].

B. Are there specific contractor regulations?

Ill. Admin. Code 86 § 130.2075; 130.1940; 130.2140; 140.125(j) , 150.310(5), 150.1201 C. Other definitions or terms of contracts addressed in statutes and regulations:

Ill. Admin. Code 86 § 130.1940 a) Definitions

1) “Construction Contractor.” The word “construction contractor” when used in this Subpart includes general contractor, subcontractor and specialized contractor such as a landscape contractor. “Contractor” means any person who is engaged in the occupation of entering into and performing construction contracts for owners.

2) “Owner” means any person who enters into a contract with a contractor relative to the construction of a structure.

3) “Construct” means build, erect, construct, reconstruct, install, plant, repair, renovate or remodel.

4) “Structure” includes any building, house, edifice, tunnel, sewer, highway, road, bridge or any other type of structure, or any part thereof (including any system of plumbing, heating, ventilating, refrigerating, air conditioning, or any part thereof), or any other improvement to real estate.

5) “Materials” means all of the tangible personal property, including fixtures, which enter into a structure or otherwise become incorporated into real estate.

6) “Construction Contract” means a contract, written or oral, to “construct” (as that term is defined in subsection (a)(3) above), a “structure” (as that term is defined in subsection (a)(4), above) or to otherwise incorporate tangible personal property into real estate.

7) “Real Estate Developer” means any person engaged in the business of transferring title (legal or equitable) to real estate to others. The term does not include an isolated or occasional sale of real estate by a person not engaged in the business of selling real estate, and the term does not include a person who acts merely as agent for a commission to bring sellers and buyers of real estate together without ever actually taking either the legal or the equitable title to the real estate.

D. Tax obligations of subcontractors.

The term contractor encompasses general contractor, subcontractor, and specialized contractor such as a landscape contractor.

VII. Machinery & Equipment Exemption and Contractors

Is there an M&E exemption for M&E to produce TPP? Any permits or certificates which must be obtained to qualify for the exemption

Yes, generally, the sale of machinery and equipment used primarily (over 50%) in the

manufacturing or assembling of TPP for subsequent sale or lease is exempt. 35 ILCS 105/3- 5(18); 86 Ill. Admin. Code 130.330. The purchaser must provide its registration/resale number (if available) or alternatively, an exemption certificate (Form ST-587) stating the facts supporting the exemption and the vendor must submit Summary Schedule RR-586 with the ROT/UT return.

A. Is there specific state exemption for contractors to take advantage of M&E exemption?

No, equipment used primarily by a construction contractor for its own use in completing construction contracts would not be exempt as manufacturing machinery and equipment. Under the Retailers' Occupation Tax Act, the manufacturing machinery and equipment exemption is available for machinery and equipment used primarily (over 50% of the time) in the manufacturing or assembling of tangible personal property for wholesale or retail sale or lease. Construction contractors are generally considered to be end users of tangible personal property purchased for incorporation into real property and thus owe UT upon their

B. How can customer take advantage of M&E exemption when using a contractor?

If a contractor purchases qualifying M/E to be incorporated into real property pursuant to a construction contract,, the contractor must provide the vendor with certification that the M/E will be transferred to the customer as manufacturing M/E in performance of the contract...

C. What are rules for obtaining exemption certificate?

A buyer who has an active resale or registration number must give that number to the seller at the time of purchase. A buyer who does not have an active resale or registration number must give the seller an exemption certificate [Form ST-587] for each transaction, stating facts establishing the exemption.

VIII. General Planning Suggestions

A. Any planning opportunities or methods to reduce sales and use tax exposure.

Not aware of any planning ideas related to Illinois construction projects aside from setting up wholly-owned purchasing companies to defer UT on stored construction supplies.

IOWA