Did self-service copiers leased to retail print shops qualify for Illinois manufacturing or resale exemptions?

Plain-English summary

A financing company leased self-service copiers and printers to retail copy shops under print-for-pay agreements. The shops claimed manufacturing and resale exemptions.

IDOR said photocopiers generally do not qualify for the manufacturing machinery exemption. Equipment must be used more than 50% in a process commonly regarded as manufacturing that substantially changes materials into property with a different form, use, or name.

The shops also could not claim a resale exemption for the copier itself because they did not transfer ownership of the machine to customers buying copies.

Lease form controlled the remaining tax:

• Under a true lease, the lessor was the end user and owed Use Tax on the copier's cost; rental receipts and the lessee were not taxed.
• Under a conditional sale, the lessor could buy the copier for resale, but all installment receipts were subject to Retailers' Occupation Tax and the lessee incurred Use Tax.

Paper sold to copy customers could be purchased for resale.

What this means for you

Do not equate producing copies with qualifying industrial manufacturing. Review whether the contract is a true lease or conditional sale and document paper resale separately from the copier's use.

Common questions

Did self-service copying qualify as manufacturing? Generally no under the GIL.

Could the lessee claim resale for the machine? No.

Could the shop buy copy paper for resale? Yes, when the paper was sold to customers as copies.

Citations and references

• 86 Ill. Adm. Code 130.330, 130.2010, 130.220, 130.1405, and 150.310(a)(3).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0067-gil.pdf

Original ruling text

ST 16-0067 GIL 12/27/2016 MANUFACTURING MACHINERY AND EQUIPMENT
Generally, photocopiers do not qualify for the manufacturing machinery and equipment
exemption. See 86 Ill. Adm. Code 130.330. (This is a GIL.)

December 27, 2016

Re:

COMPANY Technical Assistance Advisement Regarding sales tax on Print for Pay
leases.

Dear Xxxxx:
This letter is in response to your letter dated December 2, 2016, in which you requested
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:
We are writing to request a Technical Assistance Advisement from the Illinois
Department of Revenue regarding the State’s stance on the taxability of selfservice copiers and printers leased to retail copy shops.
ISSUES:

1. The COMPANY 1 and other retail printing customers such as COMPANY 2 and
   COMPANY 3 offer self-service copying and printing solutions to their customers,
   these stores are trying to claim a manufacturing exemption for the leased
   equipment on the grounds that they are a manufacturer of the copied materials
   and those materials are considered new tangible personal property created by
   the leased equipment for sale to their customers.
2. The COMPANY 1 other retail printing customers are trying to claim a resale
   exemption on the leased equipment based on the premise that they are using
   the equipment to resell the copies they are purchasing in the “Print for Pay”
   lease agreement.
   FACTS:

ST 16-0067-GIL
COMPANY provides leasing and equipment loan solutions to small businesses and
middle market companies in a wide range of industries. We provide financing solutions
to our borrowers and lessees and assist manufacturers and distributors in growing sales
by providing customized finance solutions to their commercial clients.
COMPANY 1 and other retail printing customers such as COMPANY 2 and COMPANY
3 will lease or rent a self-service copier or printer in a “Print for pay” lease agreement
from COMPANY. A “Print for pay” lease agreement is a modified cost per copy lease
agreement where the customer only pays & charges for the amount of copies that are
consumed. The equipment is located in retail store location and the equipment is made
available to the general public for self-service copy and printing needs.
REQUEST FOR RULING/ADVISEMENT:
We request a Technical Assistance Advisement to establish an opinion based on the
issues presented above and the application to the facts as described in this request.
We appreciate your assistance in this matter and are prepared to provide any additional
information you may require. If you wish to discuss the fact and questions of the
Technical Assistance Advisement please contact me at 904-380-5206 to discuss.

DEPARTMENT’S RESPONSE:
Manufacturing Machinery and Equipment Exemption
The Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property at retail to purchasers for use or
consumption. See 86 Ill. Adm. Code 130.101. 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.
Retailers' Occupation Tax, however, does not apply to 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 manufacturing process is the production of articles of tangible personal property
or assembling different articles of tangible personal property by procedures commonly
regarded as manufacturing, processing, fabricating, or refining which 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. See Section
130.330(b)(2). Machinery means major mechanical machines or major components of such
machines contributing to a manufacturing or assembling process, including machinery and
equipment used in the general maintenance or repair of such exempt machinery and
equipment or for in-house manufacture of exempt machinery and equipment. See Section
130.330(c)(2).

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ST 16-0067-GIL
Generally, photocopiers do not qualify for the manufacturing machinery and equipment
exemption. In order to qualify for the manufacturing machinery and equipment exemption, the
machinery or equipment must be used primarily in a manufacturing process that is commonly
regarded as manufacturing.
Leases
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types
of leasing situations: conditional sales and true leases. A conditional sale is usually
characterized by a nominal or one dollar purchase option at the close of the lease term.
Stated otherwise, if a lessor is guaranteed at the time of the lease that the leased property will
be sold, that transaction is considered to be a conditional sale at the outset of the transaction.
Persons who purchase items for resale under conditional sales contracts can avoid paying tax
to suppliers by providing certificates of resale that contain all the information set forth in 86 Ill.
Adm. Code 130.1405. All receipts received by a lessor/retailer under a conditional sales
contract are subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buy-out
provision does exist, it must be a fair market value buy-out option in order to maintain the
character of the true lease. Lessors of tangible personal property under true leases in Illinois
are deemed end users of the property to be leased. See 86 Ill. Adm. Code 130.220. As end
users of tangible personal property located in Illinois, lessors of a true lease owe Use Tax on
their cost price of such property. The State of Illinois imposes no tax on rental receipts.
Consequently, lessees incur no tax liability. In the case of a true lease, the lessors of the
property being used in Illinois would be the parties with Use Tax obligations. The lessors
would either pay their suppliers, if their suppliers were registered to collect Use Tax, or would
self-assess and remit the tax to the Department. If the lessors already paid taxes in another
state with respect to the acquisition of the tangible personal property, they would be allowed a
credit against Use Tax to the extent of the amount of the tax properly due and paid in the other
state. See 86 Ill. Adm. Code 150.310(a)(3).
Under either a true lease or a conditional sale, the lessee cannot claim a resale
exemption for the photocopier acquired from COMPANY. The lessee is not transferring any
ownership interest in the photocopier to a person that uses the photocopier to make copies.
We would note, however, that under a true lease, the lessor as the end user of the tangible
personal property, owes Use Tax on its cost price of such property. Under a true lease, the
lessee of the tangible personal property has no Use Tax obligation. Persons who purchase
items for resale under conditional sales contracts, the lessors/retailers, can avoid paying tax to
suppliers by providing certificates of resale. All receipts received by a lessor/retailer under a
conditional sales contract are subject to Retailers’ Occupation Tax. The lessee incurs Use Tax
on the payments made to the lessor under the conditional sales contract.
We would also note that the lessees may purchaser for resale the paper sold to persons
using the photocopier and paying for the copies.

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ST 16-0067-GIL
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:bkl

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