Do solar panels and related wiring, incorporated into the ground with concrete at a solar farm inside an Illinois enterprise zone, qualify as exempt 'building materials' under the enterprise zone sales tax exemption?

Plain-English summary

An Enterprise Zone Advisor wrote to the Illinois Department of Revenue about a company that wanted to place a solar farm inside the advisor's Enterprise Zone. Because the Illinois enterprise zone building materials exemption regulation doesn't specifically mention solar panels, the advisor asked whether solar panels would count as a "covered material" for the sales tax exemption, and specifically whether panels incorporated into the ground using concrete -- along with their wiring -- would be considered "physically incorporated" into real estate and therefore sales tax exempt.

The Department explained the legal framework rather than answering for this specific project. The Retailers' Occupation Tax Act (35 ILCS 120/2; 86 Ill. Adm. Code 130.101) and the Use Tax Act (35 ILCS 105/3; 86 Ill. Adm. Code 150.101) together make up what's commonly called Illinois "sales tax." Under 35 ILCS 120/5k(a), a retailer who makes a "qualified sale" of building materials that will be incorporated into real estate in an enterprise zone (via remodeling, rehabilitation, or new construction) can deduct those receipts when calculating Retailers' Occupation Tax. A "qualified sale" requires that the purchaser hold an active Enterprise Zone Building Materials Exemption Certificate issued by the Department at the time of purchase (35 ILCS 120/5k(a); 86 Ill. Adm. Code 130.1951(c)(1)).

The Department's regulation at 86 Ill. Adm. Code 130.1951(e) gives examples of qualifying building materials, but those examples reflect more conventional buildings rather than something like a solar farm. The core concept, though, is that materials must be physically incorporated into real estate to qualify, and the Department applies a fact-specific "intention test" (originally set out in General Information Letter ST 00-0156) that looks at (1) whether the item is affixed to the realty, (2) whether it is applied to the use or purpose of the realty, (3) the intent of the person affixing it, and often also (4) whether the item is essential to the use to which the real estate is put.

While the Department had not issued a letter specifically about solar projects, it pointed to a line of private letter rulings addressing whether materials used to build electric generating facilities qualify for the same Section 5k exemption. In PLR ST 99-0009 (March 9, 1999), pipe racks, pipe, supports, and piping tie-ins at a natural gas fired power plant qualified because they were permanently affixed to real estate. In PLR ST 00-0013 (July 7, 2000), turbine generators, electrical transformers, electrical cabling, piping, and other materials permanently affixed to real estate at an electricity generating facility also qualified. The Department said it has "consistently ruled" that such materials qualify when permanently affixed, citing a long string of further PLRs (ST 00-0025, ST 00-0026, ST 00-0033, ST 00-0034, ST 01-0001, ST 01-0012, ST 01-0014, ST 01-0040, ST 01-0045, ST 02-0012, ST 05-0020, ST 08-0003, and ST-19-0002), and noted that fencing permanently affixed to real estate and gravel used on roads have also qualified (PLR ST 00-0034; PLR ST 94-0062).

The Department told the advisor that the qualification determination is made on an item-by-item basis (citing ST 08-0003-PLR) and that "it appears that the items at issue in your request may qualify if they are permanently affixed to the real estate." However, it stated the Department would need a more thorough explanation of each component before it could issue a binding Private Letter Ruling, and expressly said "the Department cannot make a binding ruling in a General Information Letter."

What this means for you

Solar developers and enterprise zone building projects

If you're installing solar panels, wiring, or similar equipment inside an Illinois enterprise zone and hoping for the Section 5k building materials exemption, this GIL is encouraging but not a guarantee. The Department signaled that panels set in concrete, with associated wiring, "may qualify" -- consistent with how it has treated other permanently affixed equipment at power-generation facilities (turbines, transformers, cabling, piping, even fencing and gravel). But solar panels are not among the examples listed in 86 Ill. Adm. Code 130.1951(e), and the Department did not commit to an outcome. You would need to seek your own Private Letter Ruling under 2 Ill. Adm. Code 1200.110, supplying a full description of how each component (panels, mounting/foundation, wiring, and any other equipment) is physically installed, to get a binding answer for your specific project.

The "intention test" determines the outcome, item by item

Whether any given component qualifies turns on the fact-specific "intention test": is the item affixed to the realty, is it used for the realty's purpose, what did the installer intend, and is it essential to the real estate's use. The Department makes this determination on an item-by-item basis, not as a blanket rule for "solar equipment." Expect that some components (e.g., panels and mounting structures set permanently in concrete) may qualify while others might not, depending on how they're installed.

You still need a valid Enterprise Zone Building Materials Exemption Certificate

Regardless of whether solar equipment ultimately qualifies as exempt building material, the exemption under 35 ILCS 120/5k(a) only applies to a "qualified sale" -- one where the purchaser has an active Enterprise Zone Building Materials Exemption Certificate issued by the Department at the time of purchase. A construction contractor or other entity cannot make tax-free purchases without that certificate in hand at the time of the purchase.

Accountants and tax professionals

Note that this GIL leans heavily on prior PLRs concerning conventional power-generation equipment (natural gas plants, turbines, transformers) because the Department had not, as of this letter, issued a ruling specifically addressing solar projects. If you're advising a client on a solar installation in an enterprise zone, expect to build the same kind of item-by-item, permanently-affixed factual record that supported those earlier PLRs, and pursue a PLR rather than relying on this GIL for a binding answer.

Common questions

Q: Does this GIL say solar panels are sales-tax exempt in an Illinois enterprise zone?
A: No. The Department said the panels and wiring described "may qualify" if permanently affixed to the real estate, but it expressly declined to make a binding determination in a GIL, and asked for a more thorough explanation of each component before it could consider a Private Letter Ruling.

Q: What test does the Department use to decide if equipment is "physically incorporated" into real estate?
A: The "intention test" from General Information Letter ST 00-0156: whether the item is affixed to the realty, whether it's applied to the realty's use or purpose, the intent of the person affixing it, and (often) whether the item is essential to the realty's use.

Q: Has the Department ever ruled on similar power-generation equipment before?
A: Yes, though not specifically for solar. The Department cited a series of private letter rulings finding that pipe racks and piping (ST 99-0009), turbines, transformers, electrical cabling, and piping (ST 00-0013), and other permanently affixed materials at electricity generating facilities qualified for the Section 5k exemption, plus similar rulings on fencing and gravel (ST 00-0034; ST 94-0062).

Q: What do I need to actually claim the exemption on a qualifying enterprise zone building materials purchase?
A: The purchaser must hold an active Enterprise Zone Building Materials Exemption Certificate, issued by the Department, at the time of the purchase. Without it, a construction contractor or other entity cannot make the purchase tax-free under 35 ILCS 120/5k(a) and 86 Ill. Adm. Code 130.1951(c)(1).

Q: How can I get a binding answer for my specific solar project?
A: Request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, providing a thorough, item-by-item description of how the panels, wiring, and any related equipment are physically installed and affixed to the real estate. A GIL, like this one, cannot bind the Department.

Citations and references

Statutes:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition of tax)
• 35 ILCS 120/5k (enterprise zone building materials exemption)
• 35 ILCS 105/3 (Use Tax imposition)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulation)
• 86 Ill. Adm. Code 130.1951 (enterprise zone building materials exemption regulation, including the "qualified sale" and exempt-materials-examples provisions)
• 86 Ill. Adm. Code 150.101 (Use Tax regulation)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Prior rulings referenced in the Department's response:

• General Information Letter ST 00-0156 (sets forth the "intention test")
• ST 08-0003-PLR (April 1, 2008) (item-by-item determination; collects earlier letters invoking the intention test)
• PLR ST 99-0009 (March 9, 1999) (pipe racks, pipe, supports, piping tie-ins at a natural gas fired power plant)
• PLR ST 00-0013 (July 7, 2000) (turbine generators, electrical transformers, electrical cabling, piping at an electricity generating facility)
• PLR ST 00-0025 (October 19, 2000); ST 00-0026 (November 3, 2000); ST 00-0033 (December 11, 2000); ST 00-0034 (December 11, 2000); ST 01-0001 (January 9, 2001); ST 01-0012 (April 5, 2001); ST 01-0014 (April 9, 2001); ST 01-0040 (September 24, 2001); ST 01-0045 (October 26, 2001); ST 02-0012 (June 10, 2002); ST 05-0020 (November 18, 2005); ST-19-0002 (July 8, 2019)
• PLR ST 00-0034 (December 11, 2000); ST 94-0062 (March 17, 1994) (fencing and gravel permanently affixed/used on roads)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/st23-0025-gil.pdf

Original ruling text

ST-23-0025-GIL 08/01/2023 ENTERPRISE ZONES
This letter discusses the enterprise zone building materials exemption. 35 ILCS
120/5k; 86 Ill. Adm. Code 130.1951. (This is a GIL.)
August 1, 2023

NAME
CITY
Enterprise Zone Advisor
ADDRESS
Dear NAME:
This letter is in response to your letter dated May 4, 2023, 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:
RE: Solar Panels
We have been approached by a company to place a solar farm within our
Enterprise Zone (COUNTY ####). The code does not specifically mention
solar panels so I am inquiring if they are a covered material for the Sales
Tax Exemption.
If they incorporate the solar panels in the ground using concrete, would
the panels themselves and the wiring be sales tax exempt? Would the
panels and wiring be considered physically incorporated?
If you could please review and give me a ruling, I would appreciate it.
DEPARTMENT’S RESPONSE:

CITY
Page 2
August 1, 2023
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. 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. 35 ILCS 105/3; 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales tax” in Illinois.
Each retailer who makes a qualified sale of building materials to be incorporated
into real estate in an enterprise zone established by a county or municipality under the
Illinois Enterprise Zone Act by remodeling, rehabilitation or new construction, may
deduct receipts from such sales when calculating the tax imposed by Retailers’
Occupation Tax Act. 35 ILCS 120/5k(a).
A "qualified sale" means a sale of building materials that will be incorporated into
real estate as part of a building project for which an Enterprise Zone Building Materials
Exemption Certificate has been issued to the purchaser by the Department. A
construction contractor or other entity shall not make tax-free purchases unless it has
an active Enterprise Zone Building Materials Exemption Certificate issued by the
Department at the time of the purchase. 35 ILCS 120/5k(a); 86 Ill. Adm. Code
130.1951(c)(1).
The Department’s regulation at 86 Ill. Adm. Code 130.1951(e) provides examples
of qualifying building materials. The enterprise zone exemption includes component
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. General Information Letter 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.

CITY
Page 3
August 1, 2023
Although the Department has not issued a letter regarding solar projects, the
specific question of whether the materials used in constructing an electric generating
facility qualify for the building materials exemption under Section 5k of the Retailers’
Occupation Tax Act has been addressed in numerous private letter rulings issued by
the Department in recent years. These letters may prove helpful. In Private Letter
Ruling ST 99-0009 (March 9, 1999) the Department ruled that pipe racks, pipe,
supports, and piping tie-ins installed at a natural gas fired power plant qualified for the
exemption because they were permanently affixed to real estate. In Private Letter
Ruling ST 00-0013 (July 7, 2000) the Department found that certain materials
incorporated into realty within an electricity generating facility qualified for the
exemption. The Department found that turbine generators, electrical transformers,
electrical cabling, piping and other materials that are permanently affixed to real estate
qualified for the exemption in 35 ILCS 120/5k. Thereafter, the Department has
consistently ruled that these materials qualified for the exemption if it was demonstrated
that they were permanently affixed to the real estate. See e.g., Private Letter Rulings
ST 00-0025 (October 19, 2000); ST 00-0026 (November 3, 2000); ST 00-0033
(December 11, 2000); ST 00-0034 (December 11, 2000); ST 01-0001 (January 9,
2001); ST 01-0012 (April 5, 2001); ST 01-0014 (April 9, 2001); ST 01-0040 (September
24, 2001), ST 01-0045 (October 26, 2001), ST 02-0012 (June 10, 2002), ST 05-0020
(November 18, 2005); ST 08-0003 (April 1, 2008); and ST-19-0002 (July 8, 2019). The
Department has also held in the past that fencing permanently affixed to the real estate
and gravel used on roads qualify for the enterprise zone building materials exemption.
Private Letter Ruling ST 00-0034 (December 11, 2000); ST 94-0062 (March 17, 1994).
Generally, the determination of whether an item qualifies for the exemption must
be made on an item-by-item basis. ST 08-0003-PLR (April 1, 2008). It appears that the
items at issue in your request may qualify if they are permanently affixed to the real
estate. However, the Department would require a more thorough explanation of each of
the components before a Private Letter Ruling may be issued. The Department cannot
make a binding ruling in a General Information Letter.
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,

Katarzyna Kowalska
Associate Counsel
KK:dlb