What is Service Occupation Tax?
In Illinois, the Service Occupation Tax applies when a service professional, such as a doctor, dentist, plumber, or mechanic, transfers tangible personal property during a service. These types of professionals are referred to as “servicemen”. For instance, a plumber provides services and will sometimes transfer personal property such as a valve to repair a bathroom appliance. Illinois provides servicemen guidance for how to handle the sales tax implications for the property transferred.
How is Service Occupation Tax treated?
If you qualify as a serviceman, your sales tax must be calculated based on a cost ratio. You should determine the cost ratio between annual aggregate costs of tangible personal property transferred to sales of service and the annual gross receipts from all sales of service. Items that must be excluded when determining the cost ratio include the cost of materials that are not transferred to customers during the service, such as those sold at retail, removed from inventory for use, or incorporated for repairs of real estate. In addition, you should make the determination of cost ratio based on current fiscal year numbers as prior year ratios cannot be relied on for this purpose.
What You Need to Do if Your Cost Ratio is Greater than 35% (Greater than 75% if transferring prescription drugs or engaged in graphic arts production):
If the cost of materials transferred compared to sales is over 35%, you are required to register and remit Service Occupation Tax on your selling price. The Service Occupation Tax incurred is based upon 6.25% of the selling price of the tangible personal property transferred to sales of service. In addition, a serviceman can incur local service occupation tax based on location. As a result, the total tax liability consists of the 6.25% state rate plus any additional local rates.
As a serviceman, you may determine selling price in two ways:
- Separately stated selling price – if the selling price of the tangible personal property transferred to the service is separately stated, then the Service Occupation Tax Liability is based upon this price.
- Fifty percent base– if the selling price of the tangible personal property transferred incident to the service is not separately stated, then the Service Occupation Tax Liability is based upon 50% of the entire customer bill.
In both circumstances, Service Occupation Tax cannot be based upon an amount that is less than the cost price of the tangible personal property being transferred.
A serviceman who incurs Service Occupation Tax on his selling price should provide Certificates of Resale to his suppliers when purchasing tangible personal property that will be transferred to service customers. If a serviceman fails to provide suppliers with Certificates of Resale and instead pays tax to suppliers, the consequence could be underpayment of local Service Occupation Tax, with resulting liabilities for tax, penalty and interest. Any tax collected over the amount due must be refunded to the service customer, or if not refunded to the service customer, paid to the Department of Revenue.
What you need to do if cost ratio is less than 35% (less than 75% if transferring prescription drugs or engaged in graphic arts production):
If your serviceman’s cost of materials to sales of service is less than 35% (or less than 75% in the case of servicemen transferring prescription drugs or engaged in graphic arts production), you are considered a “de minimis” serviceman. There are two circumstances to consider as a de minimis serviceman:
- A de minimis serviceman should remit Use Tax to Illinois registered suppliers at the time of purchase as he is considered end user of the tangible personal property transferred to service customers.
- If the supplier is not registered to collect Use Tax, the de minimis serviceman must register with the Department for the limited purpose of self-assessing and remitting his Use Tax liability.
The de minimis serviceman should not provide Certificates of Resale to suppliers, even though you may possess a resale or registration number because the resale exemption is not available to de minimis servicemen incurring a Use Tax liability.
If you pay Use Tax to your suppliers in the expectation that your cost ratio will be less than 35% (or less than 75%, if applicable), but the actual ratio is 35% or more (75% or more, if applicable), you would be able to take credit for taxes paid to your supplier but would still be liable for Service Occupation Tax (including applicable local taxes). You may also be liable for penalties and interest. You should register with the Department of Revenue immediately and begin remitting Service Occupation Tax on your selling price.
How DHJJ Can Help
If you have any questions or concerns with regards to your Service Occupation Tax please contact our State and Local Tax (SALT) Group at 630-420-1360 or contact us below.