Illinois: Sale and Installation of Home Appliances was Subject to Tax

An Illinois Appellate Court recently held that a retailer was not a considered a “construction contractor” when it sold and installed home appliances and was therefore required to collect sales tax. The taxpayer at issue was a retailer of consumer electronics and appliances. When a customer purchased an appliance, the taxpayer offered customers three options: (1) pick up the appliance themselves; (2) have the appliance delivered, but not installed by the retailer; or (3) have the retailer deliver and install the appliance. The taxpayer collected sales tax on the first two types of transactions. For the third option, whether the taxpayer collected sales tax depended on whether the installed appliance became part of the real property or retained its character as personal property. In other words, if the taxpayer believed the particular appliance (e.g., built in ovens, dishwashers and refrigerators) became part of the realty, it did not collect tax. Following an audit, the Department assessed sales tax on all the transactions the taxpayer deemed were not subject to sales tax because it considered the appliances to be affixed to real property. The retailer paid the assessment, but subsequently filed a complaint against the Department. After a circuit court held in favor the Department, the taxpayer appealed.

Under Illinois law, Retailer Occupation Tax (sales tax) is imposed on the occupation of retailing based on the retailer’s gross receipts from the sales of tangible personal property. However, tangible personal property used in construction contracts that involve the incorporation of tangible personal property into real estate are not subject to tax. A “contractor” is defined as “any person who is engaged in the occupation of entering into and performing construction contracts for owners. The taxpayer argued that it was a construction contractor and was not required to collect sales tax on the appliances it sold and installed. The taxpayer also argued that the purchase of the appliances was incidental to the installation contracts.  To be considered a construction contractor, the taxpayer had to establish that the tangible personal property it sold “had no value to the customers except as a result of services the taxpayer rendered.” In the court’s view, the appliances had substantial value even without the installation services, which was evident by the fact that customers could opt out of the installation services. The court also determined that the sale of appliances was not merely incidental to the construction contract because an appliance had value outside of the installation service. The court also determined that the appliances were not permanently affixed or incorporated into real estate; notably, the taxpayer’s contract required that the customer already have an existing appliance that was being replaced by the taxpayer’s appliance. The fact that the appliance was “bolted or bracketed” into real estate was immaterial. Finally, the court rejected the taxpayer’s argument that the imposition of tax violated the uniformity clause of the Illinois constitution. For more information on Best Buy Stores, L.P. v. Illinois Dep’t of Rev., please contact Drew Olson at 312-665-2897.