Illinois Sales Tax Clarified: Appellate Court Ruling on Appliance Sales and Installation

The Illinois Appellate Court decided in a case covering the period from 2009 to 2021 regarding the uncollected and unpaid sales tax on appliances sold to consumers in Illinois. The pivotal moment relating to this case happened in 2015 when the Illinois Department of Revenue (IDOR) issued a tax alert stating that the vast majority of retailers do not act as a construction contractor when selling home appliances.

In this case, Richard and Ralph Lindblom (The Lindbloms), owners of Advanced Appliance Service (AAO), brought the lawsuit against Lowe’s, their direct competitor.

Case Background and Final Ruling

The Lindbloms sued Lowe’s because they claimed there was unfair competition between the AAO and Lowe’s. The AAO, unlike Lowe’s, charged sales tax on the sale of dishwashers and microwaves. Since Lowe’s did not charge sales tax, it offered its customers lower prices than the AAO could.

Under Illinois laws, retailers like AAO and Lowe’s must collect and remit a 6.25% sales tax on gross receipts from sales of tangible personal property, such as dishwashers and microwaves. In addition to State sales tax, local sales taxes are also due on these sales.

In contrast to retailers, construction contractors are not subject to sales tax when they buy the products they install and permanently affix them to the property, providing construction service. The construction contractor is considered an end user of the product, meaning they must pay the State use tax. However, they are liable for sales tax when they sell home appliances to customers and install them as an additional service. 

In this particular case, Lowe’s claimed that they acted as construction contractors and not as retailers, so they considered themselves not liable for sales tax under Illinois law. They paid the state's use tax but never collected or remitted sales tax. 

In 2015, Lindbloms informed IDOR about Lowe’s practice, stating that for ten years, Lowe’s had an unfair competitive advantage and damaged state budgets by millions of dollars. The IDOR conducted research and concluded that Lowe’s and several other retailers incorrectly treated appliance sales as construction contracts, thus violating sales tax regulations. Following the investigations, the Compliance Alert letter was issued.

As Lowe’s continued its practice after Compliance Alerts was issued, the Lindbloms decided to sue Lowe’s under the Illinois False Claims Act.

After many years of court battles, the Illinois Appellate Court ruled that Lowe’s did not qualify as a contractor and that it was required to collect and remit sales tax on the sale of home appliances. However, the Court did not confirm that  Lowe’s knowingly violated the Illinois False Claims Act.

Conclusion

Two documents presented in this case, the Compliance Alert Letter and the Appellate Court Order, provide much-needed clarification on the difference between furnishing service as part of construction services and retail sales of home appliances.

There is a significant difference in the application of sales that depends on whether the primary activity is the sale or the installation of home appliances.

Source: Deloitte, Appellate Court of Illinois - First Judicial District Order, Compliance Alert Letter