Does equipment installed during a building expansion — like a hand-washing/sanitizing station, cabinetry and workstations, and internal wall systems — qualify for the Illinois Enterprise Zone building materials sales-tax exemption?

Subject

Enterprise Zones

Plain-English summary

A dental-materials manufacturing company was building an expansion at the same address as its existing plant and asked the Illinois Department of Revenue whether certain items being installed would qualify for the Illinois Enterprise Zone building materials sales-tax exemption (sometimes called the "BMEC" exemption). The items described were: (1) a "Hygiene Station" — a unit where workers and visitors entering the production floor wash, dry, and sanitize their hands and disinfect the bottoms of their shoes, which would be plumbed into the concrete and hard-wired, with two units to be installed; (2) cabinetry and workstations for a second-floor training center, to be hardwired with compressed air and data ports running to each station; and (3) internal wall systems to enclose offices and conference rooms in the new building extension. All of these items would be supplied by outside companies but installed by the taxpayer's building contractor.

The Department explained that the Enterprise Zone building materials exemption allows a deduction from Illinois Retailers' Occupation Tax liability for gross receipts from retail sales of building materials that will be incorporated into real estate located in an enterprise zone (established by a county or municipality under the Illinois Enterprise Zone Act) through remodeling, rehabilitation, or new construction (35 ILCS 120/5k). To be a "qualified sale," the building materials must be (a) for incorporation into real estate in an Illinois enterprise zone, (b) part of a building project, (c) covered by an issued Certificate of Eligibility for the sales-tax exemption, and (d) sold by the administrator of the enterprise zone where the project is located (86 Ill. Adm. Code 130.1951(d)(1)-(2)). The materials purchased must also qualify as "building materials" under 86 Ill. Adm. Code 130.1951(e), and the company must hold an Exemption Certificate at the time of purchase, with the property located within an enterprise zone.

To decide whether an item counts as a "building material" that has been incorporated into realty, the Department applies an "intention test" drawn from letter rulings involving construction contractors (citing ST 08-0003-PLR and quoting the three-factor test from ST 00-0156): whether the item is affixed to the realty, whether it is applied to the use or purpose of the realty, and the intent of the person affixing it — with an additional factor being whether the item is essential to the use of the real estate.

Applying that test, the Department stated: "Based on the limited information provided in your letter, it appears the items are permanently affixed to the realty and would qualify for the exemption." This is a qualified, fact-dependent conclusion rather than a definitive yes — the Department expressly limited it to the information provided and did not issue a binding determination, since this is a General Information Letter (GIL), not a Private Letter Ruling (PLR).

What this means for you

Businesses expanding facilities in an enterprise zone

If your business is installing equipment, fixtures, or interior systems as part of a remodeling, rehabilitation, or new-construction project inside an Illinois enterprise zone, this letter suggests that items which are hardwired or plumbed into the building — and installed by a contractor as part of the building project — have a reasonable chance of qualifying for the building materials exemption, provided you also hold a Certificate of Eligibility and Exemption Certificate for the project. But the outcome still turns on the specific facts of how each item is affixed and used.

Accountants and tax professionals advising on BMEC exemption claims

The Department's analysis here leans entirely on the "intention test" (affixation, use/purpose, and intent, plus essentiality to the real estate's use) rather than a bright-line list of qualifying products. When evaluating whether client equipment such as fixtures, built-in cabinetry, or wall/partition systems qualifies, look to how the item is installed (hardwired, plumbed, permanently mounted) and confirm the taxpayer has the required Certificate of Eligibility and Exemption Certificate under 86 Ill. Adm. Code 130.1951, since those are conditions of the exemption separate from the affixation analysis.

Anyone relying on this letter for their own project

Because this is a GIL, it is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120). The Department's own conclusion was expressly limited to "the limited information provided" in the taxpayer's letter. A business wanting a binding answer on its own specific equipment would need to request a Private Letter Ruling instead.

Common questions

Q: Did the Department definitively rule that the Hygiene Station, cabinetry/workstations, and wall systems qualify for the exemption?
A: Not definitively. The Department said that "based on the limited information provided in your letter, it appears the items are permanently affixed to the realty and would qualify for the exemption" — a conditional conclusion based on the facts as described, not an unqualified ruling.

Q: What test does the Department use to decide if equipment is "incorporated" into real estate for this exemption?
A: The "intention test" from ST 00-0156: whether the item is affixed to the realty, whether it is applied to the use or purpose of the realty, and the intent of the person affixing it, with an additional factor being whether the item is essential to the use of the real estate. The letter cites ST 08-0003-PLR (April 1, 2008) as identifying other letters that apply this same test.

Q: What has to be true for building materials to get the Enterprise Zone exemption at all?
A: Under 86 Ill. Adm. Code 130.1951(d)(1)-(2), the sale must be a "qualified sale": for incorporation into real estate in an Illinois enterprise zone, as part of a building project, covered by an issued Certificate of Eligibility for the sales-tax exemption, and sold by the administrator of the enterprise zone where the project is located. The property must be located within the enterprise zone, and the company must hold an Exemption Certificate at the time of purchase.

Q: Does it matter who installs the equipment?
A: The letter notes that all the items in question (the Hygiene Station, cabinetry/workstations, and wall systems) were to be installed by the taxpayer's building contractor, which supports treating them as part of the building project and physically incorporated into the real estate — one of the factors bearing on the intention test.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 2 Ill. Adm. Code 1200.120, which by its own terms is not a statement of Department policy and is not binding on the Department. A taxpayer wanting a binding determination on its specific facts would need a Private Letter Ruling.

Q: What underlying tax does the Enterprise Zone building materials exemption reduce?
A: The Illinois Retailers' Occupation Tax (commonly called "sales tax"), which is imposed on persons selling tangible personal property at retail (86 Ill. Adm. Code 130.101), and which works alongside the Use Tax imposed on the privilege of using tangible personal property purchased at retail (86 Ill. Adm. Code 150.101).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0032-gil.pdf

Original ruling text

ST 18-0032-GIL 11/29/2018 ENTERPRISE ZONES
Under the Enterprise Zone building materials exemption, a deduction from Illinois
Retailers’ Occupation Tax liability exists for gross receipts from retail sales of
materials that will be incorporated, by remodeling, rehabilitation, or new
construction, into real estate located in an enterprise zone established by a
county or municipality under the Illinois Enterprise Zone Act. (See 35 ILCS
120/5k and 86 Ill. Adm. Code 130.1951(e).) (This is a GIL.)

November 29, 2018

Dear Xxxxx:
This letter is in response to your letter, 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 requesting the legal department to make a determination as to a
specific piece of equipment we will be installing into our new building
expansion qualifies for the Illinois Enterprise Zone Sales Tax (BMEC)
exemption. The expansion will have the same address as our current
building..
We are a manufacturing company of dental materials. We require a
“clean” environment in the production facilities. The piece of equipment
we are inquiring about is a Hygiene Station for all associates and guests
entering the production floor. It is a station where you wash, dry and
sanitize your hands and it will disinfect the bottom of your shoes. It is
purchased from COMPANY and will be installed by our building

ST 18-0032-GIL
Page 2

CONTRACTOR. The unit will be plumbed into the concrete and hard
wired. We will be installing 2 of these.
I have also enclosed Central Registration’s “opinion” on this matter.
We would also like your determination on the cabinetry and workstations
that will be installed in the 2nd floor training center. They will be supplied
by COMPANY 1 and installed by our building CONTRACTOR. The
workstations will be hardwired with compressed air running to each station
as well as data ports.
And one more item in question – the internal wall systems that will be
used to enclose all the offices and conference rooms in the new building
extension. The wall systems will be furnished by COMPANY 2. They will
be installed by the building CONTRACTOR.
Please contact me if you need any further information. I appreciate your
consideration of these matters.
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.
Under the Enterprise Zone building materials exemption, a deduction from Illinois
Retailers’ Occupation Tax liability exists for gross receipts from retail sales of building
materials that will be incorporated into real estate located in an enterprise zone
established by a county or municipality under the Illinois Enterprise Zone Act by
remodeling, rehabilitation or new construction. 35 ILCS 120/5k. All “qualified sales” of
building materials sold for incorporation into any Illinois enterprise zone are eligible for
the deduction. 86 Ill. Adm. Code 130.1951(d)(1). A “qualified sale” means a sale of
building materials: a) for incorporation into real estate in an Illinois enterprise zone, b)
as part of a building project, c) for which a Certificate of Eligibility for sales tax
exemption has been issued, d) by the administrator of the enterprise zone in which the
project is located. 86 Ill. Adm. Code 130.1951(d)(2). In order to qualify for the
deduction, the materials being purchased must be building materials. 86 Ill. Adm. Code
130.1951(e).
The Department’s regulation at 86 Ill. Adm. Code 130.1951(e) provides examples
of qualifying building materials. The enterprise zone exemption includes component

ST 18-0032-GIL
Page 3

parts of building materials that are permanently affixed to realty. While the examples in
the Department’s regulation reflect more conventional buildings, the fundamental
concept of the building materials exemption is that to qualify, provided that the other
requirements of the regulation are met, the materials at issue must also be physically
incorporated into real estate.
The Department has invoked the intention test in the context of letter rulings
concerning construction contractors. ST 08-0003-PLR (April 1, 2008) identifies a
number of letters invoking the test. ST 00-0156 sets forth the intention test as follows:
“In determining whether an item is permanently affixed to real estate, a
very fact-specific inquiry must be made regarding whether the item is
intended to remain with the realty. In order to make a finding that the item
is permanently affixed, at least three factors must generally be examined.
First, the item must be affixed to the realty. The item must also be applied
to the use or purpose to which the realty is put. Finally, the intent of the
person affixing the item must be examined. Another factor often examined
is whether the item is essential to the use to which the real estate has
been put.”
To qualify for the exemption the property must be located within an enterprise
zone and the Company must possess an Exemption Certificate at the time the building
materials are purchased.
Based on the limited information provided in your letter, it appears the items are
permanently affixed to the realty and would qualify for the exemption.
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

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