Illinois Sales Tax on home renovations

Illinois Sales Tax on home renovations
By:  Mansoor Ansari J.D., LL.M. (TAX)
With summer time around the corner, a lot of our clients have been asking us about the sales tax that they need to collect from their clients. For example, a client of ours that sells kitchen cabinets might want to know if they need to collect sales tax on the merchandise that they sell to their own clients.
The issue boils down to the difference between tangible personal property and real property improvement.
The cabinets are tangible property when they are purchased, so they are taxed. But if a company sells and installs cabinets in a customer’s home, they are property improvements and therefore not taxed.
The same is true of many of the major upgrades to your home. If it’s not something you can’t remove without causing permanent damage to the home, then it’s an improvement. Think central air conditioning versus a window unit or wall-to-wall carpeting versus a throw rug.
Protect yourself as a contractor:  Contractors who do real property improvements are supposed to pay sales tax on their materials and are not allowed to charge sales tax to their customers. They may purchase cabinets for resale and not pay sales tax. Or they could build the cabinets in their shop and not pay tax on the labor and materials used to make them. They then charge the customer the tax on the cost of the cabinets and send what’s collected to the state.
From a customer’s perspective:  A customer that pays sales tax when they shouldn’t can ask the contractor for a refund. Or they can file for a refund from the Department of Revenue. In an extreme situation customers can sue. This is most important to understand for a contractor, as a client will most likely seek punitive damages and attorney’s fees.
A second consequence of this mistake is that when the state audits, as they often do with cabinet and remodeling companies, The contractor will end owing sales and use tax – even though the business owner sent in tax money collected from customers.
Call any of our offices in the Midwest to discuss your sales and use tax audit.