What general Illinois exemptions and credits applied to manufacturers and exempt organizations in 2014?

Plain-English summary

IDOR declined to give specific answers to a set of broad questions and instead summarized several 2014 rules.

• Manufacturing exemption: machinery and equipment used primarily—more than 50% of the time—in qualifying manufacturing or assembly for sale or lease could be exempt under Rule 130.330.
• Manufacturer's Purchase Credit: an exempt machinery purchase earned a credit under Rule 130.331, usable against state Use Tax or Service Use Tax on qualifying production-related property that was not itself exempt. The credit could not cover local tax.
• Exempt organizations: an exclusively religious, educational, or charitable organization needed an Illinois exemption identification E number under Rule 130.2007. The number covered purchases by the organization for its purposes, not purchases by individual members.
• Tax paid in error: under Rule 130.1501, only the person who remitted the tax could claim the credit. A retailer that collected the tax had to establish unconditional repayment to the customer, such as through an irrevocable credit memorandum, to avoid unjust enrichment.

What this means for you

Manufacturers

Document how the equipment is used and whether the process substantially changes material into property with a different form, use, or name.

Exempt organizations and retailers

An E number is organization-specific. For refunds, coordinate through the retailer that remitted the tax and document repayment to the purchaser.

Common questions

Is every manufacturer automatically sales-tax exempt? No. The machinery and process must satisfy Rule 130.330.

Can Manufacturer's Purchase Credit pay local tax? No, according to the GIL.

Can the purchaser claim tax remitted by the retailer? The letter says only the remitter may claim the credit.

Citations and references

• 86 Ill. Adm. Code 130.330, 130.331, 130.1501, and 130.2007
• 35 ILCS 105/3-85; 35 ILCS 110/3-70

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0006.pdf

Original ruling text

ST-14-0006-GIL 03/07/2014 MACHINERY & EQUIPMENT
This letter discusses the manufacturing, machinery & equipment exemption, the manufacturer’s purchase credit,
claims for credit, and the rules for obtaining E numbers. See 86 Ill. Adm. Code 130.330 and 86 Ill. Adm. Code
130.331. See also 86 Ill. Adm. Code 130.1501 and 86 Ill. Adm. Code 130.2007
March 7, 2014
Dear Xxxxx:
This letter is in response to your letter dated January 2, 2014, 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 would like a letter ruling on some questions I have about something called sales tax
exempt. I could not find the answers to the questions online, so I am writing you for
clarification of the answers needed. This is for business purposes.
1.

Do manufactures in your state pay sales tax to the DOR?

2.
Is there any way I can find out what businesses in your state are sales tax
exempt? A list maybe?
3.
Is it possible for a business to get the amount of sales tax spent sent back to
them? If so how? How often can they do it? Is there a minimum or maximum involved
is it possible for a different company to get involved? How?
4.
Can a 2nd business help the 1st business become sales tax exempt? Is there any
special paperwork needed for this?
5.

Do distributors charge the end user (customer) sales tax? Houses for example?

6.
If a company only has distributors in that same state it is located in can it become
sales tax exempt in that state?
This is my first time with a letter ruling, if you have questions or need more info please
send a email to.
DEPARTMENT’S RESPONSE:

Due to the limited information included in your letter, we are unable to provide you a specific
answer to your questions. We hope you find this general information helpful.
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 35 ILCS
120/2; 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
35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These taxes comprise what is commonly known as "sales"
tax in Illinois. 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
purchases occur outside Illinois, purchasers must self assess their Use Tax liability and remit it
directly to the Department.
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 (over 50% of the time) 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. The manufacturing process is the production of any article of tangible personal property,
whether such article is a finished product or an article for use in the process of manufacturing or
assembling a different article of tangible personal property, by procedures commonly regarded as
manufacturing, processing, fabricating, or refining that changes some existing material or materials
into a material with a different form, use, or name. These changes must result from the process in
question and be substantial and significant.
When a manufacturer purchases manufacturing machinery and equipment, the State of Illinois
provides a Manufacturer's Purchase Credit (MPC) in addition to the exemption for manufacturing
machinery and equipment. See 86 Ill. Adm. Code 130.331. A purchaser of manufacturing machinery
and equipment that is exempt under the manufacturing machinery and equipment exemption also
earns MPC in an amount equal to a fixed percentage of the tax which would have been incurred
under the Use Tax or Service Use Tax. 35 ILCS 105/3-85; 35 ILCS 110/3-70.
MPC may be used to satisfy Use Tax or Service Use Tax liability that is incurred on the
purchase of production related tangible personal property that does not qualify for the manufacturing
machinery and equipment exemption. Please note that the amount of MPC that can be applied to a
purchase of production related tangible personal property is limited to the State rate of tax incurred on
that property (6.25%). MPC cannot be used to satisfy any local taxes incurred on the purchase of
production related tangible personal property.
In order for an entity to be exempt from sales and use tax in Illinois, it must obtain an
exemption identification number (an “E number”) to qualify. See 86 Ill. Adm. Code 130.2007.
Organizations that make application to the Department of Revenue and are determined to be
exclusively religious, educational, or charitable, receive an E number. The E number evidences that
the Department recognizes the organizations as exempt from incurring Use Tax when purchasing
tangible personal property in furtherance of their organizational purposes. If an organization does not
have an E number, then its purchases are subject to tax, unless another exemption applies. See 86
Ill. Adm. Code 130.120 for a list of nontaxable transactions. Please be aware that currently only sales
to organizations holding the E number are exempt, not sales to individual members of the
organization. For example, the purchase of meals by staff and members may not be made tax-free
on the basis of the E number issued to a church.

Regarding your question about whether businesses can get the amount of sales tax spent sent
back to them, claims for credit and refunds are available when a taxpayer shows that he or she paid
tax to the Department as a result of a mistake of fact or law. See 86 Ill. Adm. Code 130.1501. If a
retailer collects and remits to the Department tax on an item that should have been exempt as a sale
for resale or under some other exemption, the retailer may file a claim for credit. Only the remitter of
the tax erroneously paid to the Department is authorized to obtain a credit. In order to obtain a credit,
one must first demonstrate that he or she has borne the burden of the tax erroneously paid. The
Department cannot approve any claim for credit unless the claimant clearly establishes that he or she
has unconditionally repaid the amount of the tax to the person from whom he has collected the tax.
The retailer will be considered to have satisfied the unconditional repayment requirement
where it provides its purchaser with an instrument upon which the purchaser can make a demand
upon the retailer/claimant for payment of the tax recovered if the claim is allowed. The retailer's
provision of unconditional promissory notes or irrevocable credit memoranda to its purchasers who
paid tax in error would satisfy this requirement. The purpose of requiring the retailer to make an
unconditional repayment to its purchasers is to prevent unjust enrichment on the part of the retailer.
Therefore, in order to establish that it was not unjustly enriched, the retailer filing a claim for credit
must be able to demonstrate that it gave unconditional promissory notes or irrevocable credit
memoranda to its purchasers who paid tax in error to the retailer.
We are unsure what you mean by your question about a second business helping a first
business become tax exempt. Please see the guidelines above which the Department follows to
determine whether a business qualifies for an E number. We are also unsure what you mean by your
questions about distributors charging customers sales tax for houses and becoming tax exempt in the
state.
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,

Cara Bishop
Associate Counsel

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