The Appellate Court of Illinois affirmed a lower court’s finding that a retailer’s sales of appliances were not exempt from retail occupancy tax despite the retailer’s installation of the appliances. When a customer purchases an appliance from the retailer, they have three options:
If the customer chooses either of the first two options, the retailer collects sales tax and remits sales tax. If the customer chooses the third option, whether the retailer collects sales tax depends upon – in the retailer’s opinion – “whether the installed appliance becomes part of the real property or retains its character as personal property.” If – in the retailer’s opinion – the installed appliance is “incorporated into, and permanently affixed to, real estate,” the retailer does not collect sales tax but rather treats itself as a construction contractor. In lieu of collecting sales tax on the selling price, contractors are liable for use tax on the cost of property installed into real property. It is not clear in the case if Best Buy had paid use tax on the cost of the appliances. Some of the appliances the retailer considers to be incorporated into and permanently affixed to real estate include the following: “built-in dishwashers, over-the-range microwaves, wall ovens, cooktops installed on counters, range hoods, built-in refrigerators, and gas range/gas dryers.”
The retailer argued that when it installs certain appliances it is a construction contractor and not a retailer and therefore not obligated to collect and remit sales tax on the appliances. The retailer also argued that sales tax liability on the appliances was unwarranted since the appliances are incidental to the installation contract and are incorporated into the real estate. The retailer additionally claimed that imposing sales tax on these types of transactions would violate the uniformity clause of the state constitution.
The appellate court found that the appliances have substantial value to a purchaser even without installation services. As such, the substance of the transaction test establishes that the taxpayer is a retailer, not a construction contractor. By that same logic, the sale of the built-in appliances is not merely incidental to a construction contract. The lower court correctly found that the built-in appliances are not permanently affixed to and an integral part of the real estate. The retailer’s installation contract specifies that for all installations, the customer must have an existing appliance that is being replaced. This undermines any characterization of permanency or integrality. The retailer’s assertion that its built-in appliances may be “bolted or bracketed” into the real estate does not alter this conclusion. As a result, the retailer’s transactions are subject to tax.
The imposition of the retail occupancy tax on the sales did not violate the uniformity clause of the state constitution since tax classification under the Retail Occupation Tax Act met both prongs of the Searle test. The appellate court found that there is a real and substantial difference between a retailer that primarily sells appliances to the end-user and whose installation services are merely incidental to the sale of the appliance and a construction contractor that provides a service for which the appliance is merely incidental. Additionally, the intent of the Retail Occupation Tax Act was to tax “the last transfer for a consideration,” which was not discriminatory in nature. As such, the imposition of the retail occupancy tax on the sales does not violate the uniformity clause of the state constitution. (Best Buy Stores, L.P v. Department of Revenue, Appellate Court of Illinois, First District, No. 1-19-1680, August 14, 2020)