Could an equipment lessor claim Illinois's manufacturing exemption when its lessee subleased the equipment to the manufacturer using it?

Plain-English summary

A purchaser-lessor could claim the manufacturing machinery exemption even when its lessee subleased the equipment to the manufacturer that actually used it. The sublease step did not itself disqualify the purchase.

The exemption depended on the sublessee-manufacturer using the machinery or equipment in a manner that would qualify directly. If that qualifying use failed, the purchaser-lessor became liable for the previously exempt tax.

The supplier needed a properly completed exemption certificate from the purchaser-lessor. The certificate did not have to be the Department's ST-587 form if it contained all information required by Section 130.330(g).

If property did not qualify for the machinery and equipment exemption but did qualify as production-related tangible personal property, a purchaser with accumulated Manufacturer's Purchase Credit could use it against State Use Tax or Service Use Tax liability under the historical rule.

What this means for you

Trace actual equipment use through every lease tier and make the purchaser-lessor's exemption file complete. The exemption followed qualifying manufacturing use, but tax liability returned to the purchaser-lessor if that use failed.

Common questions

Q: Did the lessee-to-manufacturer sublease defeat the exemption?
A: No. The GIL said the rule did not preclude the exemption in that structure.

Q: Was the Department's ST-587 form mandatory?
A: No. Another certificate was sufficient if it contained all required information.

Citations and references

• 35 ILCS 120/2-10(14) and 105 ILCS 3-5(1), as printed in the GIL
• 86 Ill. Adm. Code 130.330(f) and (g)
• 86 Ill. Adm. Code 130.331
• 2 Ill. Adm. Code 1200.110(a)(3)(D) and (a)(4)

Subject

Machinery & Equipment Exemption

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0029.pdf

Original ruling text

ST 10-0029-GIL 03/31/2010 MACHINERY & EQUIPMENT EXEMPTION
This letter concerns applicability of the machinery and equipment exemption to a sublesseemanufacturer situation. See 86 Ill. Adm. Code 130.330. (This is a GIL.)

March 31, 2010

Dear Xxxxx:
This letter is in response to your letter dated July 21, 2009, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
Pursuant to regulation Title 2, Part 1200, Section 1200.100, we request a private letter
ruling on the below described issues. The parties involved are identified as follows –
COMPANY as Lessor; BUSINESS as Lessee and CORPORATION as Sub-Lessee.
Issues
Is the Lessor (COMPANY) of machinery/equipment (‘equipment’) in a multi-step
transaction (lease with known intent of Lessee (BUSINESS) to sublease the equipment)
required to pay IL use tax on equipment that is used by the Sub-Lessee
(CORPORATION) in an exempt manner under 35 ILCS 105/3-50?
If the Lessor (COMPANY) does not have to pay use tax because the equipment is used
in manufacturing, will the attached exemption certificate provided by the Sub-Lessee
(CORPORATION) be sufficient to document the exemption?
Alternatively, if the Lessor (COMPANY) is required to pay use tax on the equipment
may the Lessor reduce the tax by the Manufacturer’s Purchase Credit (MPC) since the
MPC had not yet expired when the lease/sublease commenced?
Statement of Facts

1.

COMPANY is an equipment financing and leasing company.

2.

COMPANY’s IL account number is #.

3.

COMPANY has a Master Lease Agreement in place with BUSINESS and certain
U.S. subsidiaries, including BUSINESS, dated April 23, 2008 (Exhibit A)

4.

COMPANY entered into a sixty month (60) operating lease of food processing
equipment with BUSINESS. The Order placed for equipment (Schedule) is dated
December 26, 2008. (Exhibit B)

5.

BUSINESS leased the equipment in contemplation of a sublease with
CORPORATION).
The equipment is used by CORPORATION at its
manufacturing plant in Illinois. (Exhibit C)

6.

The
lease
(COMPANY/BUSINESS)
and
(BUSINESS/CORPORATION) are true (operating) leases.

7.

CORPORATION’s IL account number is #.

8.

CORPORATION uses the equipment primarily in the process of manufacturing
tangible personal property for sale. CORPORATION is engaged in the business
of producing, packaging and selling beverages and foods for human
consumption.

9.

CORPORATION executed its own sales/use tax exemption certificate in lieu of
the department’s form ST-587. (Exhibit D).

10.

A wholly-owned subsidiary of BUSINESS supplies CORPORATION with
aluminum beverage containers (cans). This supply arrangement was the key
factor in BUSINESS’s participation in the lease/sublease situation.
The
arrangement enabled the subsidiary’s customer (CORPORATION) to obtain the
needed aluminum can retort equipment. The cans become a component part of
the final product CORPORATION sells.

Applicable Illinois Statutes and Regulations
•

35 ILCS 105/3-5(18)

•

35 ILCS 105/3-50

•

35 ILCS 120/2-5(14)

•

35 ILCS 120/2-45

•

86 Ill. Adm. Code 130.120(q)

•

86 Ill. Adm. Code 130.330

Conclusion

the

sublease

Based on the above statutes and regulations, the use of the equipment in Illinois
determines the taxability for use tax purposes. This equipment is used to manufacture
tangible personal property for sale and thus no use tax is due. The exemption
certificate prepared by CORPORATION is acceptable and required to substantiate the
exempt use of the equipment in the state. MPC has been generated on this qualifying
equipment and the credit may be utilized by COMPANY.
The above issues are not the subject of an audit or being litigated by COMPANY with
the Department. To the best of our knowledge, the Department has not previously ruled
on the same or similar issues for COMPANY or a predecessor nor has COMPANY
previously submitted the same or similar issues to the Department but withdrew it
before a letter ruling was issued.
Please consider all exhibits as trade secret information and/or confidential material.
We respectfully request a private letter ruling on our issues. Should you have questions
or require additional information, please contact me as shown below. Thank you for
your time.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject to the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
The Department declines to issue a Private Letter Ruling since its regulations are dispositive of the
subject of your request. Although we are not providing you with a Private Letter Ruling, we hope the
following general information will be of assistance.
Under the Retailers’ Occupation Tax Act and Use Tax Act, machinery and equipment that will
be used primarily in the process of manufacturing or assembling tangible personal property for
wholesale or retail sale or lease is exempt from Retailers’ Occupation Tax and Use Tax. 35 ILCS
120/2-10(14); 105 ILCS 3-5(1). For this exemption to apply, the purchaser need not itself employ the
exempt machinery or equipment in manufacturing. If the purchaser leases that machinery or
equipment to a lessee-manufacturer who uses it in an exempt manner, the sale to the purchaserlessor will be exempt from tax. A supplier may exclude these sales from its taxable gross receipts
provided the purchaser-lessor provides to the supplier a properly completed exemption certificate.
For the requirements of an exemption certificate, see 86 Ill. Adm. Code 130.330(g) and Department
Form ST-587. An exemption certificate is sufficient as long as it contains all the information required
by the rule. Should the purchaser-lessor lease the machinery or equipment to a lessee who does not
use it in a manner that would qualify directly for the exemption, the purchaser-lessor will become
liable for the tax from which he was previously exempted. 86 Ill. Adm. Code 130.330(f).
The rule does not preclude a lessor from claiming the exemption where the lessee subleases
the machinery and equipment. If a lessee subleases machinery and equipment to a sublesseemanufacturer that uses the equipment in an exempt manner, the sale to the purchaser-lessor will be
exempt from tax. However, should the sublessee-manufacturer fail to use the machinery and

equipment it in a manner that would qualify directly for the exemption, the purchaser-lessor will
become liable for the tax on the machinery and equipment.
If tangible personal property does not qualify for the Machinery and Equipment Exemption, it
may still qualify as production-related tangible personal property; and, if the purchaser has any
accumulated MPC, he or she can use it to satisfy his or her State Use Tax or Service Use Tax liability
on the purchase of the production-related tangible personal property. See 86 Ill. Adm. Code 130.331.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk