Taxation is the rule; tax exemption is the exception – Wacky Tax Wednesday

Taxation is the rule; tax exemption is the exception – Wacky Tax Wednesday

Why anyone would want to provide construction services is beyond me, and I’m a big fan of home renovation projects. Construction management is one of the most stressful jobs around. So why would a retailer opt to identify as a construction contractor?

Because of sales tax, of course.

Appliances are generally subject to sales tax in Illinois, but for several years, one retailer didn’t tax sales of certain appliances it delivered and installed in customers’ homes. It wasn’t an oversight: The retailer would tax the appliances if the consumer handled delivery and installation, or if the retailer delivered but didn’t install the appliances. Yet the retailer considered the sale exempt when it took care of the installation.

The Illinois Department of Revenue discovered the untaxed sales during an audit and held the retailer liable for the uncollected tax. Inevitably, the retailer requested a summary judgment.

While Illinois sales tax applies to “the occupation of retailing,” tangible personal property sold and installed (i.e., permanently affixed) by construction contractors is often exempt. The retailer assumed it was acting as a construction contractor when it sold and installed built-in dishwashers, over-the-range microwaves, wall ovens, and certain other appliances. It maintained the appliances weren’t subject to sales tax because they were “incidental to the installation contract and the appliances are incorporated into the real estate.”

The retailer provided the following evidence to support its claim:

  • The retailer meets the definition of a construction contractor
  • The sale of the built-in appliances is incidental to a construction contract
  • The built-in appliances are permanently affixed to and an integral part of the real estate

The Illinois Appellate Court disagreed, finding in favor of the Department of Revenue. It determined the retailer is not a construction contractor because it also sells appliances without installation services: “The substance of the transaction test establishes that [the retailer] is a retailer.” It found the appliances to be not incidental to a construction contract for similar reasons — the retailer sells the same products without installation services.

Finally, the court determined the built-in appliances were not permanently affixed or an integral part of the real estate. As evidence, it pointed to the retailer’s own installation contract, which says the customer “must have an existing appliance that [the retailer] is replacing.” The ruling reads, “The fact that the to-be-installed appliance is replacing a similar one would fatally undermine any characterization of either permanency or integrality.”

Remember the rule: Taxation not exemption

Like construction projects themselves, sales tax law can be messy. Sometimes honest mistakes happen; sometimes corners are cut to save money. Either way, someone usually finds out eventually.

When it comes to determining taxability in Illinois, it’s often best to err in favor of taxation. As the Appellate Court noted in its analysis, “In Illinois, taxation is the rule; tax exemption is the exception. … The party seeking the exemption must prove that it is entitled to it. This is a ‘very heavy’ burden.”

Better yet, request a ruling from the tax department. Or automate sales tax compliance, which helps ensure that what should be taxed get taxed.

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