Are Both Products and Services Subject to Illinois Sales Tax?
Question:
Why is it that when Nancy buys nail polish she pays sales tax, but when she gets a manicure she does not have to pay sales tax?
Answer:
In the first scenario, Nancy is buying a product, so the store owner is responsible for collecting sales tax on the good sold and Nancy is obligated to pay the tax; however, in the second scenario, neither the customer nor the store owner are responsible for sales tax because a service is being purchased by the buyer and the vendor is solely selling a service.
Question:
When would Nancy be liable for Illinois sales tax?
Answer:
If Nancy purchased a nail with nail polish on it, or she purchased the nail and then the salon painted the nail, then in both cases, the entire purchase would be subject to sales tax.
Real-World Example: Product with Associated Service
In a similar case, a door building company was caught in a predicament. ABC Doors Inc. was in the business of building doors. After the point of sale (when a consumer would purchase the door), ABC would offer them services to customize the door.
- ABC was right to charge sales tax on the purchase of the door
- However, they did not realize that the service (customization of the door) was a part of the end sale
- Since they did not charge sales tax on the entire order, they were held responsible for sales tax on the percentage of the sales of customization
Bottom Line: When Is Sales Tax Required?
When you sell a product, all revenues generated through services associated with the sale of the product are subject to Illinois sales tax.
Important Distinction
Note the difference between:
- Selling a car and then offering an oil change three months later
- The oil change is maintenance
- It does not affect the original state of the product
- It has no correlation to the sale
Need Help?
If you have been audited for under reporting sales tax in Illinois, contact our office to discuss your options:
(888) 577-1482
Frequently Asked Questions
Why is there no sales tax on services like manicures in Illinois?
Sales tax in Illinois applies to the sale of tangible goods, not services. When Nancy buys nail polish (a tangible product), the retailer must collect sales tax. However, when she pays for a manicure (a service), no sales tax applies because services are not taxed unless explicitly stated by law.
When does a combination of products and services become taxable in Illinois?
If a service is tied to a product sale, such as purchasing a nail and having it painted, the entire transaction is taxable. Illinois considers services that are directly related to the sale of a product as part of the taxable sale.
How does Illinois tax services that modify a purchased product?
Illinois sales tax applies to any services that modify or customize a product after the sale, because those services are considered part of the final sale price. For example, a door company must charge sales tax on both the door and any post-sale customization services, as they form part of the complete transaction.
Are maintenance services taxed the same as product sales in Illinois?
No, maintenance services like an oil change months after buying a car are not taxed as part of the original sale. These services are separate and not related to the condition of the item at the time of sale, so they are not included in the original sales tax calculation.
What should a business do if audited for unpaid Illinois sales tax?
If audited for underreporting sales tax, it’s important to consult a tax attorney familiar with Illinois regulations. Misunderstandings about taxable services and products can lead to liability. Contact an experienced professional, such as Mansoor Ansari, to evaluate your options and protect your business.