Could a telecommunications provider use Illinois's manufacturing machinery exemption for equipment used to build its network?

Plain-English summary

Illinois did not extend its manufacturing machinery and equipment exemption to telecommunications equipment. The startup provider bought equipment to build its Illinois network and believed the purchases might qualify because another state treated them as manufacturing assets.

The GIL says a purchaser of tangible property had to pay tax or document another exemption. The manufacturing exemption required machinery used primarily—more than 50%—in qualifying manufacturing or assembly, but Illinois did not treat telecom equipment as eligible under that exemption.

The letter separately described Telecommunications Excise Tax, municipal telecommunications tax, and an infrastructure maintenance fee. Value-added processing charges had to be disaggregated and separately stated from transmission charges or the full bundled charge could be taxable.

What this means for you

Do not import another state's manufacturing treatment into Illinois. Document equipment purchases and any other-state tax separately from telecom-service charges and current fee obligations.

Common questions

Q: Did building a telecom network count as qualifying manufacturing for this exemption?
A: No according to this GIL.

Q: Could prior tax paid to another state matter?
A: Potentially under separate Use Tax credit rules, but the GIL did not decide the refund facts.

Q: Were value-added processing charges automatically taxable telecom?
A: Not necessarily, but they required proper disaggregation from transmission charges.

Subject

Telecommunications Excise Tax

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-10-0105.pdf

Original ruling text

ST 10-0105-GIL 10/29/2010 TELECOMMUNICATIONS EXCISE TAX
The Telecommunications Excise Tax is imposed upon the act or privilege of originating or
receiving intrastate or interstate telecommunications in Illinois at the rate of 7% of the gross
charges for such telecommunications purchased at retail from retailers. See 35 ILCS 630/1 et
seq. (This is a GIL.)

October 29, 2010

Dear Xxxxx:
This letter is in response to your letter dated September 7, 2010, 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:
I am filing the attached Use tax report of the second quarter 2010. We have had a
problem with our vendor(s) collecting and remitting taxes to the wrong states, so we are
filing use tax for these purchases. We have requested a refund from Indiana, but have
not yet received it. In the mean time, [sic] we are filing a use tax return with Illinois (the
location where the equipment was installed).
In addition, I believe that the majority of these purchases will qualify under the IL state
manufacturing sales tax exemption, as they do in Missouri. However, prior to using this
exemption, I am requesting a letter ruling from your state’s sales tax division to insure
that it will be approved by Illinois. Therefore, we are filing this return and paying the
taxes with the understanding that we will probably be requesting a refund as soon as we
receive the letter ruling.
We provide telecommunications services, so we are also filing RT-2. All sales taxes are
paid on the RT-2. In the future, we may file a sales tax return for small incidental retail
sales as necessary. At the moment, we are still in the startup stage and have three
locations is [sic] Illinois, two of which may have retail sales at some time in the future.

After the third quarter we will probably not have any more use tax to file. This tax was
on the purchases used to build our network used to manufacture telecommunication
products. Most supplies and other costs will be purchased in the state of Illinois and will
be taxed when purchased.

DEPARTMENT’S RESPONSE:
Although we cannot give you a specific answer in the form of a General Information Letter, we
hope you find the following helpful.
Telecommunications
The Illinois Telecommunications Excise Tax Act imposes a tax on the act or privilege of
originating or receiving intrastate or interstate telecommunications by persons in Illinois at the rate of
7% of the gross charges for such telecommunications purchased at retail from retailers by such
persons. 35 ILCS 630/3 and 4. The Simplified Municipal Telecommunications Tax Act allows
municipalities to impose a tax on the act or privilege of originating in such municipality or receiving in
such municipality intrastate or interstate telecommunications by persons in Illinois at a rate not to
exceed 6% for municipalities with a population of less than 500,000, and at a rate not to exceed 7%
for municipalities with a population of 500,000 or more, of the gross charges for such
telecommunications purchased at retail from retailers by such persons. 35 ILCS 636/5-10 and 5-15.
“Telecommunications,” in addition to the meaning ordinarily and popularly ascribed to it,
includes, without limitation, messages or information transmitted through use of local, toll and wide
area telephone service; private line services; channel services; telegraph services; teletypewriter;
computer exchange services; cellular mobile telecommunications service; specialized mobile radio;
stationary two way radio; paging service; or any other form of mobile and portable one-way or twoway communications; or any other transmission of messages or information by electronic or similar
means, between or among points by wire, cable, fiber-optics, laser, microwave, radio, satellite or
similar facilities. “Telecommunications” do not include “value added services in which computer
processing applications are used to act on the form, content, code and protocol of the information for
purposes other than transmission.” See 35 ILCS 630/2(a) and 2(c). If telecommunications retailers
provide these services, the charges for each service must be disaggregated and separately stated
from telecommunications charges in the books and records of the retailers. If these charges are not
thus disaggregated, the entire charge is taxable as a sale of telecommunications.
The Telecommunications Infrastructure Maintenance Fee Act imposes a State infrastructure
maintenance fee upon telecommunications retailers equal to 0.5% of all gross charges charged by
the telecommunications retailer to service addresses in this State for telecommunications, other than
wireless telecommunications, originating or received in this State. 35 ILCS 635/15(b). A
telecommunications retailer shall charge each customer an additional charge equal to the State
infrastructure maintenance fee attributable to that customer's service address. Such additional charge
shall be shown separately on the bill to each customer. 35 ILCS 635/25(a).
Use Tax
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.

Unless there is an exemption, if the purchases occur in Illinois, the purchasers must pay the
Use Tax to the retailer at the time of purchase. The retailers are then allowed to retain the amount of
Use Tax paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on those
sales. If the retailer does not collect the Use Tax from the purchaser for remittance to the Department,
the purchaser is responsible for remitting the Use Tax directly to the Department. See 86 Ill. Adm.
Code 150.130.
Manufacturing Machinery & Equipment
Persons who sell tangible personal property must either pay tax or document an exemption.
The Manufacturing Machinery and Equipment Exemption from sales tax is available for sales of
machinery and equipment used primarily in the manufacturing or assembling of tangible personal
property for wholesale or retail sale or lease. See 86 Ill. Adm. Code 130.330. The process must meet
the requirements of manufacturing or assembling set forth in the Department's rules. In addition, the
machinery or equipment must be used primarily (over 50% of the time) in a qualifying manufacturing
or assembling process. Exemption certificates must be executed by the purchaser and submitted to
the retailer. See 86 Ill. Adm. Code 130.330(g). Form ST-587, Machinery and Equipment Exemption
Certificate, may be used to document the Manufacturing Machinery and Equipment exemption.
Please note, however, that while some states may allow a manufacturing machinery &
equipment exemption for telecommunication equipment, Illinois does not.
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,

Debra M. Boggess
Associate Counsel
DMB:msk