Could an electroplater buy packaging materials for resale when the materials stayed with customer-owned metal returned after processing?

Plain-English summary

An electroplater processed customer-owned metal pieces, then wrapped them in kraft paper, inserts, and other protective packaging for return shipment. The packaging stayed with the product and was not returned.

IDOR treated electroplating as a sale of service. Packaging transferred with that service could create Service Occupation Tax or Use Tax liability under one of four serviceman methods. IDOR could not tell from the request which method the company had to use.

If the company used the separately stated price, 50%-of-bill, or registered de minimis method, it could give its supplier a resale certificate and pay Service Occupation Tax when the packaging was transferred, but only if ownership rights in the packaging passed unequivocally to the customer.

If it qualified as an unregistered de minimis serviceman using the Use Tax method, the company was treated as the packaging's end user. It owed Use Tax to the supplier or had to register and self-assess if the supplier did not collect. A resale exemption was not appropriate under that method. Any property consumed during electroplating and not transferred to the customer was also subject to Use Tax.

The GIL also noted that exemptions, including interstate-commerce treatment and customer exemption certificates, could be available under the applicable serviceman method.

Common questions

Did IDOR decide which method the electroplater used? No. The facts supplied were insufficient.

When could the company issue a resale certificate for packaging? Under one of the first three methods, if all ownership rights in the packaging were unequivocally transferred to the customer.

When was the company itself the packaging's user? Under the unregistered de minimis Use Tax method.

What about materials consumed in electroplating? If they were not transferred to the customer, the company owed Use Tax on them.

Citations and references

• 86 Ill. Adm. Code 140.101 through 140.109
• 86 Ill. Adm. Code 130.605

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0031.pdf

Original ruling text

ST 12-0031-GIL 06/29/2012 SERVICE OCCUPATION TAX
This letter concerns tax imposed on tangible personal property transferred incident to
sales of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)
June 29, 2012
Dear:
This letter is in response to your letter dated August 29, 2011, 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:
XXX Company, respectfully requests a General Information Letter regarding the
application of the Illinois Retailer’s [sic] Occupation Tax related to the purchase of its
packaging and shipping materials used in shipping of products to XXX Company’s
customers.
Statement of Facts:
XXX Company receives shipments of metal bars/pieces that have been purchased and
remain owned by the XXX Company customers. XXX Company customers are
manufactures [sic] that need their metal pieces electroplated before they sell it. The
electroplating process involves depositing a finish (layer of material to surface). This
layer adds a protective coating and beautifies the previously bare metal. A fee is paid
by the XXX Company customers for the additional processing completed by XXX
Company.
Upon completion of the electroplating process, XXX Company bundles the metal
bars/pieces to ship back to their customer by wrapping them in kraft paper, with paper
inserts between the layers of bars and other packaging materials. The packaging
materials protect the metal from damage that could take place during the shipping
process. The packaging materials remain with the product and are not returned to XXX
Company for further use.
Request:
We hereby request a General Information Letter regarding the taxability of the
packaging materials purchased by XXX Company used in the shipping process.

ST-12-0031-GIL
June 29, 2012
Page 2

DEPARTMENT’S RESPONSE:
The work performed for customers as described in this letter would be a sale of service. If tangible
personal property is transferred incident to sales of service, this will result in either Service
Occupation Tax liability or Use Tax liability for the servicemen depending upon his activities. For your
general information, see 86 Ill. Adm. Code 140.101 through 140.109 regarding sales of service and
Service Occupation Tax.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are taxed on
tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm. Code
140.101. The purchase of tangible personal property that is transferred to the service customer may
result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending upon
his activities. The serviceman’s liability may be calculated in one of four ways: (1) Service Occupation
Tax on the separately stated selling price of tangible personal property transferred incident to service;
(2) Service Occupation Tax on 50% of the serviceman's entire bill; (3) Service Occupation Tax on the
serviceman's cost price if the serviceman is a registered de minimis serviceman; or (4) Use Tax on
the serviceman's cost price if the serviceman is a de minimis serviceman and is not otherwise
required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item transferred as
a result of the sale of service. The tax is then calculated on the separately-stated selling price of the
tangible personal property transferred. If the servicemen do not separately state the selling price of
the tangible personal property transferred, they must use 50% of the entire bill to the service
customer as the tax base. Both of the above methods provide that in no event may the tax base be
less than the servicemen's cost price of the tangible personal property transferred. See 86 Ill. Adm.
Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis servicemen
who have either chosen to be registered or are required to be registered because they incur Retailers'
Occupation Tax liability with respect to a portion of their business. See 86 Ill. Adm. Code 140.109.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of the sale of service is less than 35% of the
total annual gross receipts from service transactions (75% in the case of pharmacists and persons
engaged in graphics arts production). Servicemen no longer have the option of determining whether
they are de minimis using a transaction by transaction basis. Registered de minimis servicemen are
authorized to pay Service Occupation Tax (which includes local taxes) based upon their cost price of
tangible personal property transferred incident to the sale of service. Such servicemen should give
suppliers resale certificates and remit Service Occupation Tax using the Service Occupation Tax
rates for their locations. Such servicemen also collect a corresponding amount of Service Use Tax
from their customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen that are not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and

ST-12-0031-GIL
June 29, 2012
Page 3

persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess and remit Use Tax to the Department. The servicemen are
considered to be the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a "tax" from the service customers. See 86 Ill. Adm.
Code 140.108.
We cannot tell from your letter how the company is required to satisfy its liability. If it would be under
one of the first three methods, the company could provide its supplier with a resale certificate and
remit Service Occupation Tax upon the transfer to its customer, assuming all ownership rights to the
packaging and shipping materials are unequivocally transferred to the customer. If the company is de
minimis and not otherwise required to be registered under Section 2a of the Retailers' Occupation
Tax Act, it would owe use Tax liability to its suppler. If the company’s suppliers are not registered to
collect and remit tax, the company must register, self-assess, and remit Use Tax to the Department.
A resale exemption would not be appropriate in this situation because the company would be the
“user” of the materials. In addition, please note that any tangible personal property that is used or
consumed in the process of electroplating, but that is not transferred to the customer, is subject to
Use Tax by the company.
Please note that a serviceman who incurs SOT on his or her selling price is authorized to claim any
exemption provided for in the Service Occupation Tax Act. For example, he or she may claim the
interstate commerce exemption or accept various exemption certificates from his or her customers
(e.g., Certificates of Resale, exemption identification numbers). 86 Ill. Adm. Code 140.106(d). A de
minimis serviceman incurring Service Occupation Tax liability on his or her cost price also is
authorized to claim any of the various exemptions provided for in the Service Occupation Tax Act. For
example, he may claim the interstate commerce exemption or accept various exemption certificates
from his customers (e.g., he can accept Certificates of Resale). 86 Ill. Adm. Code 140.109 (a)(3). The
Department has also determined that a de minimis serviceman incurring a Use Tax liability may claim
any of the exemptions, except as provided in 86 Ill. Adm. Code 140.108(a)(2)(C), authorized under
the Service Occupation Tax Act. De minimis servicemen incurring Use Tax liability may likewise claim
the interstate commerce exemption, which is more fully explained at 86 Ill. Adm. Code 130.605 and
86 Ill. Adm. Code 140.108(a)(2)(B).
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.
Sincerely,

Samuel J. Moore
Associate Counsel