Illinois Sales Tax and Construction Contractors
When Are Sales to Construction Contractors Taxable?
Anybody that has a profit-seeking motive in the construction business will be interested in knowing when sales tax applies to construction contractors.
Persons who engage in selling tools, equipment, fuel, supplies, and other tangible personal property to construction contractors, real estate developers, or speculative builders for use or consumption incur a sales tax obligation.
Anybody that has a profit-seeking motive in the construction business.
Also, persons who—apart from acting as construction contractors themselves—engage in selling building materials, fixtures, plants, and other tangible personal property to construction contractors, speculative builders, or real estate developers, who convert such items into real estate so as to take such items off the market as tangible personal property, incur Retailers’ Occupation Tax liability when making such sales.
Determining the Tax Base
When the purchasing construction contractor (whether prime or subcontractor) buys the item that will be converted into real estate in finished form:
The tax base is what the construction contractor pays for the item.
When the construction contractor-installer is also the manufacturer of the finished item that will be incorporated into real estate for a customer:
The tax base includes:
- Cost of materials used in the finished item
- Cost of nails, screws, or other items of tangible personal property incorporated into real estate during installation
Non-Taxable and Taxable Scenarios
Not Taxable:
- Sales of tangible personal property to construction contractors, real estate developers, or speculative builders who resell such property in the form of tangible personal property.
Taxable:
- In the above case, the contractor, developer, or builder becomes the seller and must collect sales tax on the resale of the tangible personal property.
Frequently Asked Questions
What is considered a taxable sale to a construction contractor in Illinois?
Sales to construction contractors are taxable when the items sold—such as tools, equipment, or materials—are intended for use or consumption, not resale, in the construction process. This includes cases where items are incorporated into real estate, effectively removing them from the market as tangible personal property.
When does a contractor incur Retailers’ Occupation Tax?
A contractor incurs Retailers’ Occupation Tax when they sell building materials, fixtures, or other tangible items that will be incorporated into real estate and are not resold as tangible personal property. This tax applies because the items are effectively used up in the construction process.
How is the tax base determined for purchased items?
If the contractor purchases a finished item to be installed into real estate, the tax base is the purchase price. However, if the contractor manufactures the item, the tax base includes the cost of raw materials and any tangible components like nails and screws used during installation.
Are resale transactions by contractors taxable?
Yes. If a contractor, developer, or builder resells tangible personal property without incorporating it into real estate, they become the retailer. In that case, they must collect and remit sales tax on the resale.
Are all contractor purchases subject to sales tax?
No. Purchases made for resale in the form of tangible personal property are not subject to sales tax. The sales tax applies only when the property is used or consumed in a way that converts it into real estate.