Does butane-blending equipment that a pipeline/tank-storage company installs just before its truck loading rack qualify for Illinois's manufacturing machinery and equipment sales tax exemption?

Plain-English summary

A company that owns pipeline and storage-tank assets in Illinois -- and whose only revenue is tariffs paid by third parties to move and store refined petroleum products -- hired a contractor to design and build a butane blending system. The system would be installed just before the truck loading rack. Butane and gasoline, each owned by third parties (title never passes to the company), would be drawn from storage tanks and pumped into the blending system to raise the butane content of the gasoline so the final blended product meets state and federal volatility requirements for motor fuel. The blended product is not used by the company or the product owners -- it is resold to wholesalers and retailers. The company asked the Illinois Department of Revenue whether the blending system equipment qualifies for the manufacturing machinery and equipment exemption from sales tax, and whether it could give the contractor an exemption certificate so the contractor could buy the system components tax-free on the company's behalf.

The Department explained the general framework first: the Retailers' Occupation Tax applies to retail sales of tangible personal property, and Use Tax applies to using property purchased at retail, and together these make up what is commonly called Illinois "sales tax." Under 86 Ill. Adm. Code 130.330, machinery and equipment used primarily (over 50% of the time) in manufacturing or assembling tangible personal property for wholesale or retail sale or lease is exempt from Retailers' Occupation Tax. "Manufacturing" means producing or assembling articles of tangible personal property through procedures that substantially and significantly change existing material into a material with a different form, use, or name. The exemption does not cover foundations or special-purpose buildings that house or support the machinery, and it does not cover equipment used only for general ventilation, heating, cooling, or illumination that the manufacturing process doesn't specifically require.

Critically, the exemption also does not reach equipment that stores, conveys, handles, or transports materials before they enter the production cycle, or that stores, conveys, handles, or transports finished articles after the production cycle ends. Equipment squarely inside the production cycle -- effecting a direct physical change on the property, guiding or measuring that change, inspecting or testing the product as an integral part of the production flow, or moving the product between production stations -- generally does qualify.

Applying that framework, the Department went through the butane blending system piece by piece. It drew the line at the point where butane actually starts being measured, tested, and injected into the gasoline stream. Equipment upstream of that point -- used to receive and store butane before it enters the blending process -- was treated as pre-production handling and storage, and did not qualify. Equipment that samples, analyzes, and precisely injects the butane into the gasoline stream was treated as part of the actual production/blending process, and did qualify. Buildings, foundations, and grading supporting any of the equipment did not qualify, regardless of what equipment they supported.

What this means for you

If you're evaluating equipment for the manufacturing exemption

The Department's component-by-component approach shows how granular this analysis is -- the same overall system can have some parts that qualify and other parts that don't, based purely on whether each piece operates before, during, or after the actual production/transformation step:

• Did not qualify (pre-production storage/handling):

  • Butane offload station -- handles/conveys/transports butane before it enters the production cycle (86 Ill. Adm. Code 130.330(d)(4)(C))
  • Butane storage vessels (two 60,000-gallon bullet tanks and related accessories, connections, instruments, and valves) -- store butane before injection into the gasoline stream (Section 130.330(d)(4)(C))
  • Buildings to house equipment, foundation work, foundations, grading, and stone aprons -- never qualify regardless of what they support

• Qualified (integral to the actual blending/production process):

  • Gasoline sample point (sampling equipment, pumps, related tubing) -- Section 130.330(d)(3)
  • Inline analyzer and related enclosure, compressor, piping, separator, valves, tubing, and fittings used to test gasoline volatility -- Section 130.330(d)(3)(C)
  • Sample recovery tank used to handle tested gasoline before it's reinserted into the gasoline stream -- Section 130.330(d)(3)(D)
  • Programmable logic controller that calculates butane injection amounts based on volatility limits -- Section 130.330(c)(3)
  • Supply pump and related valves, piping, panel, detector, and strainer controlling butane injection rate -- Section 130.330(d)(3)(D)
  • Butane injection skid (auto-sampler, compressor, detector, meters, valves, strainers, transmitters) -- Section 130.330(d)(3)(D)

• Undetermined on the facts given: the office server, printer, modem, drivers, and software/programming associated with the programmable logic controller -- the Department said it lacked enough information to decide, and noted these items must themselves be used primarily (over 50% of the time) in manufacturing to qualify.

On buying equipment exempt through a contractor

The ruling confirms the general exemption-certificate mechanics that follow from a favorable exemption determination: once specific equipment is determined to qualify, the owner can support its contractor's tax-exempt purchases of that qualifying equipment with the appropriate documentation, but only for the components the Department identified as qualifying -- not for the pre-production storage/handling equipment, buildings, or foundations, which remain taxable regardless of how the purchase is structured.

Common questions

Q: Does equipment used to store or move raw materials before manufacturing begins ever qualify for the exemption?
A: No. The ruling reiterates that the manufacturing machinery and equipment exemption does not apply to equipment that stores, conveys, handles, or transports materials prior to their entrance into the production cycle -- here, that meant the butane offload station and the butane storage vessels did not qualify, even though they are essential to the overall operation.

Q: What made the sample point, analyzer, and injection equipment different from the storage tanks?
A: Those components operate on the gasoline/butane stream itself as part of the actual blending process -- measuring, testing, and precisely injecting butane to create the final product -- which the ruling treats as integral to production rather than pre-production handling.

Q: Are buildings and foundations ever covered by this exemption?
A: No. The ruling states plainly that costs for buildings to house equipment, foundation work, foundations, grading, and stone aprons do not qualify for the manufacturing machinery and equipment exemption, regardless of what machinery they support.

Q: How long can a company rely on a Private Letter Ruling like this one?
A: Per 2 Ill. Adm. Code 1200.110(e), the ruling binds the Department for up to 10 years from the date of the letter (or less if there's a pertinent change in the statutory law, case law, rules, or the facts described in the ruling), and only as to the taxpayer who requested it.

Citations and references

• 86 Ill. Adm. Code 130.101 -- Retailers' Occupation Tax imposed on retail sales of tangible personal property
• 86 Ill. Adm. Code 150.101 -- Use Tax imposed on the privilege of using tangible personal property purchased at retail
• 86 Ill. Adm. Code 130.330 -- Manufacturing machinery and equipment exemption (including subsections (b)(2), (c)(2), (c)(3), (c)(5), (d)(2), (d)(3), (d)(3)(C), (d)(3)(D), and (d)(4)(C), (d)(4)(D), (d)(4)(H) as applied in this ruling)
• 2 Ill. Adm. Code 1200.110 -- Procedures for requesting and scope/expiration of Private Letter Rulings
• 2 Ill. Adm. Code 1200.120 -- General Information Letters (referenced to distinguish PLRs from GILs)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0007-plr.pdf

Original ruling text

ST 17-0007-PLR 08/16/2017 MANUFACTURING MACHINERY & EQUIPMENT
Under the Retailers’ Occupation Tax Act, the manufacturing machinery and equipment
exemption is available for 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. (This is a PLR.)

August 16, 2017

RE:

COMPANY requests a private letter ruling

Dear Xxxxx:
This letter is in response to your letter dated March 3, 2017 and email dated June 1, 2017 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.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY, for the issue or issues presented in this ruling, and is
subject to the provisions of subsection (e) of Section 1200.110 governing expiration of Private Letter
Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY, nor a
related taxpayer is currently under audit or involved in litigation concerning the issues that are the
subject of this ruling request. In your letter you have stated and made inquiry as follows:
FACTS
COMPANY (not to be published) owns pipeline and tank assets (LOCATION), with sole
revenue being tariffs from third parties for using COMPANY’s assets to move and store
refined petroleum products.
There are no current or pending sales tax audits or issues involving COMPANY.
The Department has not ruled on the same or similar issue for COMPANY, nor has
COMPANY previously submitted the same or similar request but withdrawn it before a
letter ruling was issued.
COMPANY has contracted with a COMPANY 1 (not to be published) (Contractor) to
design and construct a butane blending system for the purpose of blending butane and

ST 17-0007-PLR
Page 2
gasoline to increase the butane content of the gasoline in order to create a final product
meeting state and federal volatility requirements for motor fuel.
Once complete, the blending system will be owned by COMPANY. The system will be
located adjacent to and just prior to the truck loading rack. Butane and gasoline (each
owned by third parties) will be drawn from storage tanks and pumped to the blending
system to create the final product just prior to going through the truck rack and being
loaded in tanker trucks. Title to the gasoline and butane never passes to COMPANY.
The resulting blended product is not for use by the owners, but rather resold to
wholesalers and retailers.
Please find attached presentation describing the process and the location, pictures and
function of the equipment. (Confidential and not to be published)
RULING REQUESTED
Does the blending system equipment qualify for the manufacturing machinery and
equipment exemption for sales tax?
Can COMPANY submit a machinery and equipment exemption to Contractor in order
for Contractor to provide their vendors and purchase the system equipment sales tax
exempt?
In your email you stated:
Butane Blending Process Narrative
Gasoline is typically delivered from refineries to tank farms via distribution systems
consisting primarily of pipelines. Gasoline is stored at these tank farms in large
atmospheric storage tanks capable of holding tens of thousands of barrels of product.
Gasoline is then dispensed from the storage tank to tanker trucks, which then deliver
the gasoline to local retail gasoline stations to be sold to the consumer.
An important physical property of gasoline is its volatility, or its ability to combust. There
are three methods for assessing the volatility of gasoline 1) measuring vapor pressure,
2) measuring vapor liquid ratio, and 3) measuring the distillation profile. Volatility
indicates the combustibility of gasoline, and its impact on the ease with which an
automobile engine is started, especially during the colder seasons when the cooler
ambient temperature can depress volatility. Butane is commonly added as a volatility
modifying agent during the colder months because of its high volatility and because it is
less expensive than gasoline.
Butane is first introduced at the refinery during the gasoline blending process.
Refineries add butane in response to seasonal volatility demands and costs. This
method is imprecise, however, because the gasoline produced serves multiple regions
and cannot exceed the volatility limits of any one region or pipeline system. Thus the
gasoline received at the tank farm does not typically meet the volatility limit of the region

ST 17-0007-PLR
Page 3
it will be distributed. This creates an opportunity to add butane to gasoline at the tank
farm to create a final product that meets regional volatility requirements. By using the
butane blending equipment, volatility can be precisely measured and butane can be
automatically added to the gasoline stream as it is loading into tanker trucks to create a
final blended product that meets regional moto [sic] fuel requirements.
DEPARTMENT’S RESPONSE:
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 does not apply to 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 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). However, machinery
and equipment does not include foundations for, or special purpose buildings to house or support,
machinery and equipment. See Section 130.330(c)(5). Generally, items such as the framing for a
building and its walls, ceilings, floors, and doors would not qualify for the exemption.
The fact that particular machinery or equipment may be considered essential to the conduct of
the business of manufacturing or assembling because its use is required by law or practical necessity
does not, of itself, mean that machinery or equipment is used primarily in manufacturing or
assembling. See Section 130.330(d)(2). In addition, machinery or equipment that is used for general
ventilation, heating, cooling, climate control or general illumination, not required by the manufacturing
process would not qualify for the manufacturing machinery and equipment exemption. See Section
130.330(d)(4)(H). Generally, items such as sprinkler systems and employee facilities such as
lunchrooms, restrooms, and locker rooms would not qualify for the exemption. Machinery and
equipment does not include foundations for, or special purpose buildings to house or support,
machinery and equipment. See Section 130.330(c)(5).
The following activities will generally be considered to constitute an exempt use:
A)

The use of machinery or equipment to effect a direct and immediate physical
change upon the tangible personal property to be sold;

ST 17-0007-PLR
Page 4
B)

The use of machinery or equipment to guide or measure a direct and immediate
physical change upon the tangible personal property to be sold, provided this
function is an integral and essential part of tuning, verifying, or aligning the
component parts of such property;

C)

The use of machinery or equipment to inspect, test or measure the tangible
personal property to be sold where the function is an integral part of the
production flow;

D)

The use of machinery and equipment to convey, handle, or transport the
tangible personal property to be sold within production stations on the production
line or directly between the production stations or buildings within the same plant;

E)

The use of machinery or equipment to place the tangible personal property to be
sold into the container, package, or wrapping in which this property is normally
sold when the machinery or equipment is used as a part of an integrated
manufacturing process. See Section 130/330(d)(3).

The manufacturing machinery and equipment exemption does not apply to the use of
machinery or equipment to store, convey, handle or transport finished articles at the end of the
production cycle. This would also apply to equipment which stores, handles, conveys or transports
materials prior to their entrance into the production cycle. See Section 130.330(d)(4)(C) and (D).
Butane Offload Station
It is the Department’s understanding that the butane offload station handles, conveys or
transports materials prior to their entrance into the production cycle. It is the Department’s decision
based on Section 130.330(d)(4)(C) that the equipment located at the butane offload station does not
qualify for the manufacturing machinery and equipment exemption.
Butane Storage Vessels
It is the Department understanding that the butane storage vessels are used to handle or store
butane prior to their entrance into the production cycle. It is the Department’s decision based on
Section 130.330(d)(4)(C) that the two 60,000 gallon bullet tanks and related accessories,
connections, instruments and valves used to store butane prior to injection into the gasoline stream
do not qualify for the manufacturing machinery and equipment exemption.
Gasoline Sample Point
It is the Department’s decision based on Section 130.330(d)(3) that the sampling equipment,
pumps and related tubing used to take samples of gasoline in the gasoline stream qualify for the
manufacturing machinery and equipment exemption.
Analyzer

ST 17-0007-PLR
Page 5
It is the Department’s decision based on Section 130.330(d)(3)(C) that the inline analyzer and
related enclosure, compressor, piping, separator, valves, tubing and fittings used to test gasoline in
the gasoline stream for volatility qualify for the manufacturing machinery and equipment exemption.
Sample Recovery Tank
It is the Department’s decision based on Section 130.330(d)(3)(D) that the sample recovery
tank used to handle the tested gasoline prior to reinserting the tested gasoline back into the gasoline
stream qualifies for the manufacturing machinery and equipment exemption.
Programmable Logic Controller
It is the Department’s decision based on Section 130.330(c)(3) that the programmable logic
controller that automatically calculates the amount of butane that can be added to the gasoline
stream based on the selected volatility limits qualifies for the manufacturing machinery and equipment
exemption. The Department does not have sufficient information to determine if the office server,
printer, modem, drivers and software and programming qualify for the manufacturing machinery and
equipment exemption. The office server, printer, modem, drivers and software and programming
must be used primarily, over 50% of the time, in the process of manufacturing to qualify for the
exemption.
Supply Pump
It is the Department’s decision based on Section 130.330(d)(3)(D) that the supply pump and
related valves, piping, panel, detector and strainer used to control the injection rate of butane into the
gasoline stream qualify for the manufacturing machinery and equipment exemption.
Butane Injection Skid
It is the Department’s decision based on Section 130.330(d)(3)(D) that the butane autosampler, compressor, detector, meters, valves strainers and transmitters used to enable the injection
of butane into the gasoline stream qualify for the manufacturing machinery and equipment exemption.
Buildings, Foundations and Grading
The costs for buildings to house any of the equipment, for foundation work, foundations,
grading and stone aprons do not qualify for the manufacturing machinery and equipment exemption.
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or hearing and this ruling shall bind the
Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this Private Letter
Ruling, you may contact me at (217) 782-2844. If you have further questions related to the Illinois

ST 17-0007-PLR
Page 6
sales tax laws, 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
Chairman, Private Letter Ruling Committee
RSW:bkl