Illinois contractors operate under a contractor tax model that treats them as either consumers or retailers of materials depending on their contract type. Understanding this distinction determines whether you pay tax when buying materials or collect it from your customer.

Lump-Sum vs. Separated Contracts in Illinois
Lump-Sum Contract (most common for residential)

You agree to complete the job for a single price. Under Illinois law, you are treated as the consumer of all materials. You pay Illinois sales tax when you purchase the materials, and you do NOT separately charge the customer sales tax.

Your invoice to the customer shows one price — no tax line item for materials.

Separated (Time-and-Materials) Contract You bill separately for your labor hours and the cost of materials. Under a separated contract, you act as a retailer of the materials. You collect Illinois sales tax from your customer on the materials. You do not charge tax on installation labor (real property improvement labor is generally non-taxable in Illinois).

The Home Rule Municipality Tax Trap

Illinois allows home rule municipalities to impose additional local taxes beyond the state's 6.25%. In Chicago, the combined rate can be significantly higher. The applicable rate is based on where the materials are delivered or installed, not where you purchased them.

Always check the local rate for the job-site city/municipality before purchasing materials or invoicing the customer.

Installation Labor — Generally Non-Taxable

For real property improvement work (construction, remodeling, repair of real estate), installation labor is generally not taxable in Illinois. This applies to plumbers, electricians, HVAC, roofers, painters, and carpenters doing real property work.

Exception: Fabrication labor (building custom items, custom metalwork, custom cabinetry off-site) is taxable.

Illinois Invoice Requirements

1. Business name, address, and Illinois Business Authorization number 2. Customer name and job-site address 3. Contract type (lump-sum or separated) — affects your tax documentation 4. Itemized labor and materials (especially important for separated contracts) 5. Illinois sales tax on materials (separated contracts only) 6. Sequential document number and date