# Illinois Contractor Taxes and Licensing: Use Tax, Service Occupation Tax and State Licenses

Illinois treats construction contractors as end users of the materials they incorporate into real property, so they owe tax on their cost and don't charge sales tax on the contract. Repair work is different: servicemen owe service occupation tax on parts, but the service labor itself remains nontaxable. The state rate is 6.25%, plus local taxes.

## Key takeaways

- Construction contractors are "deemed end users" of materials and owe use tax on their cost price.
- On repair and service jobs, only the transfer of parts is taxed; the service component stays nontaxable.
- Servicemen can pay service occupation tax on parts' selling price or on 50% of the entire bill, among other methods.
- The state licenses plumbing (IDPH) and roofing (IDFPR); electrical, HVAC and general contracting are licensed locally.
- One employee, even part-time, triggers the workers' comp requirement.

## Do contractors charge sales tax in Illinois?

Not on construction contracts. The Illinois Department of Revenue's audit manual says "construction contractors are deemed end users of tangible personal property purchased for incorporation into real property," and "as end users of such tangible personal property, contractors incur Use Tax liability for such purchases based upon the cost price." The same chapter notes construction contracts fall under the retailers' occupation and use taxes, "but not State or local Service Occupation Tax."

In practice: you pay tax when you buy materials, or self-assess use tax if the seller didn't charge it, and the customer's construction invoice has no sales tax line. That's like [Wisconsin](https://www.brix.so/taxes/wisconsin) and [Missouri](https://www.brix.so/taxes/missouri). What makes Illinois distinctive is what happens on repair and service calls.

## Repair and service work: Illinois service occupation tax

Illinois taxes service work through its service occupation tax (SOT), and only the parts are taxed. IDOR Publication 113-SOT says "the service component of a sale of service remains nontaxable. The only part of a sale of service that is taxable is the" transfer of tangible personal property. A serviceman can pay tax in one of these ways:

- SOT on the selling price of the parts transferred to the customer;
- "SOT on 50%, but not less than the cost price, of the Serviceperson's entire bill"; or
- if they qualify as a de minimis serviceperson, SOT or use tax on the cost price of the parts.

Which method applies depends on how you bill and how much of your revenue comes from parts. Publication 113-SOT walks through each, and the governing rule is 86 Ill. Adm. Code 130.2075. Get your CPA's help choosing; picking the wrong one is an easy way to over- or under-collect. The [sales tax on labor vs. materials](https://www.brix.so/learn/sales-tax-on-labor-vs-materials) guide shows how unusual this approach is.

> **Example: a $600 water heater repair (illustrative)**
>
> Parts are $200 at selling price and labor is $400, stated separately.
>
> **Selling-price method:** SOT applies to the $200 of parts; the $400 of labor isn't taxed.
>
> **50%-of-bill method:** SOT applies to 50% of the $600 bill, or $300, as long as that's not less than the parts' cost price.
>
> A full water heater replacement in a new addition would instead be a construction job: the contractor owes use tax on the heater's cost and charges no tax.

## Illinois sales tax rates and use tax on materials

Publication 113-SOT cites "the statewide general merchandise tax rate of 6.25 percent," with local taxes on top: home-rule and non-home-rule municipal taxes, county taxes, and Regional Transportation Authority and Metro-East transit taxes. Local rates change on January 1 and July 1. The July 1, 2026 bulletin shows combined general merchandise rates such as 10.00% in Glencoe and Winnetka and 10.50% in Schiller Park. Use the MyTax Illinois tax rate finder for an address.

Because construction contractors owe use tax on materials they incorporate, an out-of-state purchase that wasn't taxed means you owe Illinois use tax yourself. More on how that works: [use tax for contractors](https://www.brix.so/learn/use-tax-for-contractors).

## Illinois contractor licensing

Illinois licenses two building trades at the state level. The Illinois Department of Public Health (IDPH) says people who plan, install, alter or repair plumbing "must be licensed," and "all plumbing contractors must register with the state and pay an annual fee," with general liability, bodily injury, property damage and workers' comp insurance. The Department of Financial and Professional Regulation (IDFPR) licenses roofers under the Roofing Industry Licensing Act.

**Illinois contractor licensing by trade**

| Trade | Agency | License | Official page |
| --- | --- | --- | --- |
| Plumbing | Illinois Department of Public Health | Individual plumber license; plumbing contractor registration with annual fee | [IDPH plumbing program](https://dph.illinois.gov/topics-services/environmental-health-protection/plumbing.html) |
| Roofing | IDFPR | Limited (residential, 8 units or less) or unlimited (residential, commercial and industrial) roofing contractor license | [IDFPR roofing](https://idfpr.illinois.gov/profs/roof.html) |
| Electrical | City or county | Local license where required (not on IDFPR's list) | Your local building department |
| HVAC | City or county | Local license where required (not on IDFPR's list) | Your local building department |
| General contractor | City or county | Local license or registration where required | Your local building department |

_Checked 2026-10-19 against IDPH and IDFPR, including IDFPR's list of regulated professions. Cities can run their own licensing programs._

IDFPR's limited roofing license covers "residential roofing, including residential properties consisting of 8 units or less," and the unlimited license covers "residential, commercial and industrial." The application needs a bond, an insurance form, proof of workers' comp and a $125 fee. For an overview of state vs. local licensing, read [contractor license](https://www.brix.so/learn/contractor-license).

## Illinois income and replacement taxes

Illinois has a flat individual income tax: "4.95 percent of net income," effective July 1, 2017. Corporations pay "7 percent of net income." On top of that, Illinois charges a personal property replacement tax on business income: "2.5 percent" for corporations other than S corporations, and "1.5 percent" for partnerships, trusts and S corporations. That replacement tax surprises many owners who form an S corp or multi-member LLC; build it into your entity decision with your CPA.

Owners without withholding generally make quarterly estimated payments to the IRS and Illinois. See [quarterly estimated taxes for contractors](https://www.brix.so/learn/quarterly-estimated-taxes-for-contractors) and the [quarterly estimated tax calculator](https://www.brix.so/tools/quarterly-estimated-tax-calculator).

## Workers' comp in Illinois

The Illinois Workers' Compensation Commission says "if you have one employee, even a part-time employee, you must obtain workers' compensation insurance," with rare exceptions under Section 3 of the Act. For construction businesses, the commission points to the Employee Classification Act and says coverage is required "in almost all instances." Sole proprietors "may elect to come under the Act or they may choose not to." Both the IDPH plumbing registration and the IDFPR roofing license also ask for proof of coverage. Background: [workers' compensation](https://www.brix.so/learn/workers-compensation).

## Local taxes in Illinois

Local sales taxes push combined rates above 10% in some Chicago-area towns, and they change twice a year. Construction contractors feel this through the use tax on materials; servicemen feel it on the SOT they charge. Home-rule cities can also levy their own taxes and license fees, so check with each city you work in.

> **Not tax or legal advice**
>
> Illinois' split between construction contracts and service occupation tax trips up even experienced contractors. Have a CPA who knows Illinois sales tax review your billing, and contact the Illinois Department of Revenue with questions about your specific jobs.

BRIX keeps parts and labor on separate lines on every quote and invoice and syncs them with QuickBooks, which makes it easier to apply whichever SOT method your CPA picks. BRIX doesn't determine your tax method or file returns.

- [Quotes and estimates](https://www.brix.so/features/quotes-estimates): Builds accurate quotes on site and follows up on every open estimate.
- [Invoicing and payments](https://www.brix.so/features/invoicing-payments): Turns finished jobs into invoices and politely chases unpaid ones until the money is in your account.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

### Neighboring state guides

- [Indiana](https://www.brix.so/taxes/indiana): Lump-sum vs. time-and-material contracts
- [Wisconsin](https://www.brix.so/taxes/wisconsin): Dwelling contractor credential
- [Missouri](https://www.brix.so/taxes/missouri): Labor untaxed, local licensing
- [Iowa](https://www.brix.so/taxes/iowa): Repair labor taxable

## Frequently asked questions

### Do contractors charge sales tax in Illinois?

Not on construction contracts. Illinois deems construction contractors end users of the materials they incorporate into real property. They owe use tax on the cost of those materials and don't charge customers sales tax on the contract.

### Is labor taxable in Illinois?

No. On construction jobs, labor isn't taxed. On repair and service jobs, IDOR says the service component remains nontaxable and only the transfer of parts is taxed under the service occupation tax.

### What is the Illinois service occupation tax?

It's the tax on parts transferred as part of a service, such as a repair. A serviceman can pay it on the parts' selling price, on 50% of the entire bill (but not less than cost), or, if de minimis, on the parts' cost price.

### Does Illinois require a contractor license?

The state licenses plumbers through IDPH and roofers through IDFPR, and plumbing contractors register with IDPH. Electrical, HVAC and general contractors aren't on IDFPR's list, so check with your city or county.

### What is the Illinois sales tax rate?

The statewide general merchandise rate is 6.25%. Local taxes are added, and some Chicago-area towns have combined rates of 10% or more. Local rates change on January 1 and July 1.

### What is the Illinois replacement tax?

The personal property replacement tax is charged on business income on top of income tax: 2.5% for corporations other than S corporations and 1.5% for partnerships, trusts and S corporations, per the Illinois Department of Revenue.

### Do I need workers' comp in Illinois with one employee?

Yes. The Illinois Workers' Compensation Commission says one employee, even part-time, means you must obtain workers' compensation insurance. Construction businesses must carry it in almost all instances.

## Related

- [Do Contractors Charge Sales Tax on Labor or Materials?](https://www.brix.so/learn/sales-tax-on-labor-vs-materials)
- [What Is Use Tax for Contractors?](https://www.brix.so/learn/use-tax-for-contractors)
- [What Is a Contractor License?](https://www.brix.so/learn/contractor-license)
- [What Is Workers' Compensation Insurance?](https://www.brix.so/learn/workers-compensation)
- [Quarterly Estimated Taxes for Contractors: How They Work in 2026](https://www.brix.so/learn/quarterly-estimated-taxes-for-contractors)
- [Quarterly Estimated Tax Calculator for Self-Employed Contractors (2026)](https://www.brix.so/tools/quarterly-estimated-tax-calculator)
- [Indiana Contractor Taxes and Licensing: Lump-Sum vs. Time-and-Material Contracts](https://www.brix.so/taxes/indiana)
- [Wisconsin Contractor Taxes and Licensing: Real Property Work, Lawn Care and DSPS Credentials](https://www.brix.so/taxes/wisconsin)
- [Missouri Contractor Taxes and Licensing: Untaxed Labor, Local Licenses](https://www.brix.so/taxes/missouri)
- [Self-Employment Tax Calculator (2026)](https://www.brix.so/tools/self-employment-tax-calculator)

## Sources

- [Illinois Department of Revenue — Sales Tax Audit Manual, Chapter 13 (construction contractors)](https://tax.illinois.gov/content/dam/soi/en/web/tax/research/publications/auditmanual/documents/sales-tax/idor-st-am-ch13.pdf) (checked 2026-10-19)
- [Illinois Department of Revenue — Publication 113-SOT, Service Occupation Tax (N-03/26)](https://tax.illinois.gov/content/dam/soi/en/web/tax/research/publications/pubs/documents/pub-113-sot.pdf) (checked 2026-10-19)
- [Illinois Department of Revenue — Bulletin FY 2026-26, local rate changes effective July 1, 2026](https://tax.illinois.gov/research/publications/bulletins/fy-2026-26.html) (checked 2026-10-19)
- [Illinois Department of Revenue — Income tax rates](https://tax.illinois.gov/research/taxrates/income.html) (checked 2026-10-19)
- [Illinois Department of Public Health — Plumbing program](https://dph.illinois.gov/topics-services/environmental-health-protection/plumbing.html) (checked 2026-10-19)
- [IDFPR — Roofing contractor licensing](https://idfpr.illinois.gov/profs/roof.html) (checked 2026-10-19)
- [IDFPR — List of regulated professions](https://idfpr.illinois.gov/profs/proflist.html) (checked 2026-10-19)
- [Illinois Workers' Compensation Commission — Insurance](https://iwcc.illinois.gov/about/insurance.html) (checked 2026-10-20)

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Written by BRIX Editorial Team. Last updated 2026-10-19. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/taxes/illinois