Best Buy Owes Illinois Sales Tax on Installation Contracts

An Illinois Court of Appeals decision concluded that just because Best Buy enters into contracts with customers to install appliances purchased in the stores does not turn the entire transaction into a nontaxable service.

By: Jess Johannesen, SALT Manager

On August 14, 2020, the Illinois Appellate Court issued an opinion upholding a lower court’s ruling that certain sales by Best Buy were not exempt from sales tax.[1]

When Best Buy sells consumer appliances, the customers have three purchase options: (1) pick up the appliance at the store and handle transportation and installation themselves, (2) Best Buy delivers the appliance but does not install it, or (3) Best Buy delivers and installs the appliance.  When customers in Illinois chose option (1) or (2), Best Buy charged sales tax. However, when Illinois customers chose option (3), Best Buy would not charge sales tax if Best Buy considered the appliance to be, “incorporated into, and permanently affixed to, real estate.”  This included the purchase and installation of built-in dishwashers, over-the-range microwaves, wall overs, cooktops installed on counters, range hoods, built-in refrigerators, and gas range/gas dryers.

Following an audit, the state assessed a sales tax liability against Best Buy related to the installation contract transactions for which Best Buy did not collect sales tax. Best Buy paid the tax liability under protest and this litigation ensued.

Best Buy argued that for these installation contracts, Best Buy should be considered a construction contractor as opposed to a retailer.  As a construction contractor, it would not be required to collect sales tax since the installed appliances were incidental to the construction (i.e., installation) contract.

The Court rejected this argument, explaining that the “primary” or “real” occupation of a taxpayer determines the sales tax treatment, and such primary occupation is based upon a “substance of the transaction” test. This test considers whether the property sold to a customer has value to the customer independent of any services that a seller renders. If so, then the seller is engaged in business as a retailer. In Best Buy’s case, the fact that a customer can choose option (1) or (2) when purchasing these appliances establishes that the appliances are valuable to the customer regardless of whether installation is included. Therefore, Best Buy’s primary occupation is a retailer as opposed to a construction contractor. For the same reason, the Court did not consider the appliance to be merely incidental to the installation contracts.

Best Buy also argued that sales tax was not charged because the appliance was permanently affixed to and an integral part of the real estate. Illinois rejected this argument, citing Best Buy’s installation contract terms which specified that for all installations, the customer must have an existing appliance that Best Buy is replacing. Since the new appliance is replacing a similar appliance, the appliance cannot be characterized as permanent affixed to or an integral part of the real property. In addition, the fact that an appliance may be “bolted or bracketed” into the real property does not alter this conclusion.

This case illustrates the various rules that come into play when a business sells and installs tangible goods, and states are not uniform with respect to the taxability of installation charges. Aprio’s SALT team has experienced these issues and can assist your business to ensure that it is compliant with its sales tax obligations and does not incur unexpected tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Manager at Jess.Johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2020 SALT Newsletter.

[1] Best Buy Stores, LP v. Illinois Dept. of Revenue, 2020 IL App (1st) 191680, 06/30/2020.

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