Do Illinois Contractors Charge Sales Tax on Labor?

Construction work: you are the user of the materials

The regulation says a construction contractor "does not incur Retailers' Occupation Tax liability as to receipts from labor furnished and tangible personal property (materials and fixtures) incorporated into a structure as an integral part thereof." Instead, the contractor "incurs Use Tax on the cost price of the tangible personal property that is incorporated into real estate." In practice you pay tax at the supply house and your customer's invoice carries none.

Repairs count. The regulation defines "construct" as "build, erect, construct, reconstruct, install, plant, repair, renovate or remodel," and a structure includes any plumbing, heating, ventilating, refrigerating or air conditioning system, or any part of one. A plumber fixing a leak and an electrician replacing a breaker are performing construction contracts, and there is no repair exception to trip over.

The list of items that go in under these rules is long and specific: screen and storm doors and windows, weather stripping, insulation, Venetian blinds, window shades, awnings, built-in cabinets, carpet fastened with tacks, staples or tack strips, bathtubs, sinks, faucets, water heaters, water softeners, furnaces, boilers, ventilation and electrical systems, commercial refrigeration, brick, lumber, sheet metal and roofing materials.

Low-voltage installers get a rule of their own. A contract to engineer, install and maintain voice, data, video, security or telecommunication systems, sold at one specified contract price, is a Use Tax job for the contractor even for items that never become part of the building.

Your tools, fuel, supplies and form lumber are taxable to you whoever the customer is. If you buy materials from an out-of-state seller who charges no Illinois tax, or bring them across the state line yourself, you owe the Use Tax directly to the Department.

Source: 86 Ill. Adm. Code 130.1940, Construction Contractors and Real Estate Developers and 130.2075, Sales to Construction Contractors.

When installing still counts as selling

Some items stay personal property however carefully you put them in, and selling them is a retail sale even inside a construction contract. The regulation names furniture and furnishings, curtains, drapes, trade fixtures, and floor covering that is not cemented or otherwise permanently affixed. It also names finished stoves, refrigerators, washing machines and portable ventilating units, equipment that plugs into a building's systems "but which is not actually a part of any such system and is considered to remain personal property when installed."

Carpet shows where the line falls. Wall-to-wall carpet on tack strips is a construction material. An area rug, or carpet held down with only two-sided tape, is a retail sale.

When one of these items is part of a larger construction job, only the item is taxed. If you charge separately for it, tax is on that charge but never on less than your cost. If you do not, tax is on your cost.

On a straight retail sale with installation, the installation charge is taxable when it is part of the selling price, and itemizing it on the bill is not enough by itself. The regulation makes an exception "when the purchaser signs an itemized invoice so as to make it a contract," and installation charges agreed on separately from the price of the item are not taxed. Put installation on its own line and have the customer sign the quote or invoice.

If you also sell over the counter. A contractor who cannot tell at the supply house whether an item will be installed or resold may buy it all on a resale certification. The price of that convenience: you register for Retailers' Occupation Tax and pay it yourself, state and local, on the cost of everything that goes into real estate, with the local tax following the place of business that handles the job.

Source: 86 Ill. Adm. Code 130.1940(b), 130.450, Installation, Alteration and Special Service Charges and 130.2075(b).

Repairs to equipment and vehicles: parts are taxed, labor is not

Repair work on anything that is not real estate, such as a vehicle, a mower, a window air conditioner or a commercial kitchen appliance, falls under the Service Occupation Tax. The Department's bulletin on the 2026 changes puts it plainly: "The service component of a sale of service remains nontaxable." Only the parts and other property you hand over are taxed.

How you account for those parts depends on your cost ratio: what the parts you transfer cost you over a year, divided by your gross receipts from service work that year.

• 35% or more. Register, buy parts on resale certificates, and pay Service Occupation Tax on the selling price of the parts. If the invoice states the parts price, that is the taxable amount. If it does not, the taxable amount is 50% of the entire bill. Either way it can never be less than what the parts cost you. The regulation's example is an auto body shop.
• Under 35%, and registered because you also sell over the counter. Buy parts on resale certificates and pay Service Occupation Tax on your cost of the parts. The regulation's example is an air conditioning repairman who charges $85 to fix a window unit with $25 of parts, and pays tax on the $25.
• Under 35%, and not required to register. Pay Use Tax to your supplier when you buy the parts. You are the end user, so you may not charge your customer "tax." If you recover it on the bill, the line must be labeled as reimbursement of your Use Tax, and anything collected as tax is an overcollection you must refund or pay to the state.
• Under 35%, by choice. You can still register and pay on the selling price, the same way as a shop over 35%.

The 50% rule is where itemizing pays. Take a $600 repair with $240 of parts. Listed separately, tax is on $240. Written as one line, tax is on $300. At the 6.25% state rate alone that is $15.00 against $18.75, on every job, all year.

The method is chosen for the whole year, not job by job. Guess your ratio low, pay tax to suppliers, and finish the year at 35% or more, and you owe Service Occupation Tax on your selling price, with credit for what you paid suppliers and possible penalties and interest.

Keep the line between this and construction clear. The same technician repairing a central air system is on a construction contract. Repairing a window unit, the technician is a serviceperson.

Source: 86 Ill. Adm. Code 140.106, 140.108, 140.109 and IDOR Bulletin FY 2026-13, Service Occupation Tax Changes.

Cleaning, lawn care and landscaping

These are services, and Illinois does not tax services. House cleaning, janitorial routes, mowing and snow plowing carry no sales tax on the customer's bill. That puts Illinois on the opposite side from Pennsylvania and Ohio, which both tax cleaning and lawn care. You pay tax on the supplies and equipment you buy and use up.

Landscaping that plants something is construction work. A landscape contractor is named in the regulation, and selling and installing "trees, shrubs, seedlings, sod and grass seed when planted in the ground, including fertilizer, mulch and soil incorporated into the ground in connection with such planting" is not a retail sale. You pay tax on the cost of the plants and the materials worked in, and the customer pays none. Plants sold in pots or containers without being planted by you are a retail sale and taxable.

The regulation's planting rule covers fertilizer and mulch that go in with a planting. It does not address a standalone treatment visit. If your route applies fertilizer or weed control on its own, ask your accountant how the product should be treated.

Source: 86 Ill. Adm. Code 130.1940(a) and (c)(2) and IDOR: Does Illinois tax sales of service?

Churches, schools, charities and government: the exemption reaches you

This is where Illinois is kinder than Pennsylvania. Sales of materials to construction contractors for incorporation into real estate owned by exclusively charitable, religious or educational organizations, or by governmental bodies, are exempt. The regulation says the intent was to relieve those owners of tax "whether the purchases are made directly or indirectly," so the exemption travels through your purchase. Certain not-for-profit organizations run mainly for the recreation of people 55 and over qualify too.

The paperwork sits with your supplier. You give them a certification that the purchases are for conversion into real estate under a contract with that organization, naming it with its address and the date the contract was entered into. The supplier keeps the organization's active exemption number on file.

Three limits. Tools, fuel, form lumber and anything else you use up stay taxable. Real estate owned by a bank or savings and loan does not qualify, even for its own offices. And materials for public improvements such as roads, sidewalks and sewers that must be handed over to a local government on completion are exempt under their own rule, with the government unit's registration number on the supplier's file.

Repair businesses paying Use Tax on parts under the under-35% method can use an exempt customer's "E" number as well, either handed to the supplier at purchase or with a claim for credit afterward.

Source: 86 Ill. Adm. Code 130.2075(d) and (e), 130.2085, Sales to Banks and 140.108(a)(2).

Which rate applies

The state rate is 6.25%. Municipalities, counties and transit districts add their own occupation taxes on top, so the total on a real job is higher and changes from town to town. The Department does not publish a single list of combined rates and points businesses to its Tax Rate Finder for a specific address.

On construction work you pay whatever your supplier charges at the counter, or Use Tax directly when no Illinois tax was charged. A serviceperson paying Service Occupation Tax owes the local tax "based upon his location," and the regulation warns that paying tax to suppliers instead of giving resale certificates can overpay local tax at the supplier's location and underpay it at yours.

One change took effect January 1, 2026. When a sale of service to an Illinois customer by a serviceperson with an Illinois place of business would otherwise be sourced outside the state, the parts are taxed at the rate for the Illinois location they are delivered to. If the location information is not supplied with the return, the Department imposes tax at 15%. Most in-state trades never meet this, but a shop near a state line should raise it with an accountant.

Source: IDOR: What are the retailers' occupation and use tax rates in Illinois?, 86 Ill. Adm. Code 140.106(c) and IDOR Bulletin FY 2026-13.