Did alarm equipment left at customer sites qualify for Illinois's replacement-tax investment credit when the company kept ownership and charged for monitoring?

Plain-English summary

Leasing alarm equipment and selling monitoring services did not themselves make the company a retailer for the replacement-tax investment credit. The company retained ownership of equipment installed at customer sites, disabled it when a service contract ended, and described the arrangement as lease-like.

Illinois treated lessors as the end users of tangible personal property, not as retailers transferring ownership to customers. If all of the company's ordinary-course receipts came from security services and equipment leasing, none came from retail sales of tangible property and the identified equipment did not qualify.

The Department did not make a final eligibility finding because the request omitted the company's full gross-receipts mix. Regulation 100.2101(f) used ordinary-course gross receipts to decide whether more than 50% of the taxpayer's business was manufacturing, qualifying mining, retailing, or a combination of those activities.

What this means for you

For this credit, classify the transaction and the taxpayer's primary business separately. Equipment can be tangible and depreciable yet still fail because the taxpayer is not primarily engaged in a qualifying operation.

Prepare a companywide gross-receipts analysis; a description of the particular equipment is not enough.

Common questions

Q: Was the lease treated as a retail sale?
A: No. The lessor was treated as the equipment's end user.

Q: Did service and lease receipts count as retail receipts?
A: Not under the facts described.

Q: Did the GIL conclusively deny the company's credit?
A: No. It lacked enough information to decide whether other operations made the company primarily engaged in retailing.

Citations and references

• 35 ILCS 5/201(e) — replacement-tax investment credit and qualified property
• 35 ILCS 120/1 — sale-at-retail definition
• 86 Ill. Adm. Code 100.2101(f) — primary-business gross-receipts test
• 86 Ill. Adm. Code 130.101, 130.220, 130.2010 — lessor treatment

Subject

Credits – Replacement Tax Investment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2014/it-14-0009.pdf

Original ruling text

IT 14-0009 GIL 9/17/2014 Credits – Replacement Tax Investment
Taxpayer providing alarm monitoring services is not a retailer entitled to claim the replacement tax
investment credit.

September 17, 2014

Re:

Request for General Information Letter – IL Replacement Tax Credit

Dear Xxxx:
This is in response to your letter dated September 24, 2013 [the letter I received today is dated April
23, 2014] in which you request a ruling whether certain equipment placed into service by COMPANY
meets the criterion for being “qualified property” under 35 ILCS 5/201(e). Department of Revenue
(“Department”) regulations require that the Department issue only two types of letter rulings, Private
Letter Rulings (“PLRs”) and General Information Letters (“GILs”). 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 against the Department, but only as to the taxpayer issued
the ruling and only to the extent the facts recited in the PLR are correct and complete. GILs do not
constitute statements of Department policy that apply, interpret or prescribe the tax laws and are not
binding against the Department. See 2 Ill. Adm. Code 100.1200(b) and (c).
Your letter states as follows:
We are requesting guidance in the form of a General Information Letter regarding eligibility for
the Illinois Replacement Tax Credit for taxpayers in the business of providing alarm monitoring
services. At the time of sale, equipment is permanently placed in the purchaser’s place of
business or residence. While ownership of the equipment remains with the taxpayer, the
substance of the transaction is the transfer of tangible personal property under a lease-type
arrangement. Also at the time of sale, a service contract is entered into between the taxpayer
and the purchaser. The service contract provides for monthly payments for alarm monitoring
services for the duration of the agreement. Upon termination of the service contract, the
equipment remains at the location of the purchaser but is disabled until another contract is
commenced, either by the same purchaser or the next owner/lessee of the property location.
Under these circumstances, will the Illinois taxpayer be considered a retailer and therefore
qualify for the Illinois Replacement Tax Credit allowed under ILCS §5/201(e)?

RULING
Section 201(e) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/201(e)) defines the qualified property
eligible for a credit against the Personal Property Tax Replacement Income Tax as follows:
(1) A taxpayer shall be allowed a credit equal to .5% of the basis of qualified property placed in
service during the taxable year …
(2) The term "qualified property" means property which:

(A) is tangible, whether new or used, including buildings and structural components of
buildings and signs that are real property…
(B) is depreciable pursuant to Section 167 of the Internal Revenue Code,
(C) is acquired by purchase
(D) is used in Illinois by a taxpayer who is primarily engaged in manufacturing, or in
mining coal or fluorite, or in retailing, or was placed in service on or after July 1, 2006 in
a River Edge Redevelopment Zone established pursuant to the River Edge
Redevelopment Zone Act; and
(E) has not previously been used in Illinois in such a manner and by such a person as
would qualify for the credit provided by this subsection (e) or subsection (f).
(3) ….For purposes of this subsection (e), the term "retailing" means the sale of tangible
personal property for use or consumption and not for resale, or services rendered in
conjunction with the sale of tangible personal property for use or consumption and not for
resale. For purposes of this subsection (e), "tangible personal property" has the same meaning
as when that term is used in the Retailers' Occupation Tax Act, and, for taxable years ending
after December 31, 2008, does not include the generation, transmission, or distribution of
electricity.
Your letter does not provide enough information for a determination as to whether COMPANY would
qualify for the Illinois replacement tax investment credit.
As pointed out in Section 201(e)(3) above, a determination is needed as to whether COMPANY is
primarily engaged in the business of selling tangible personal property or primarily engaged in the
sale of services.
In order to determine whether a taxpayer is primarily engaged in an activity, the department must take
into account all of the business operations in which the taxpayer engages. This is further described in
86 Il.Admin.Code Section 100.2101(f) which states:
f) To qualify for the credit, property must be used in Illinois by a taxpayer who is primarily
engaged in manufacturing, or in mining coal or fluorite, or in retailing. It is not required that the
property be used exclusively in manufacturing, mining of coal or fluorite or in retailing. So long
as the taxpayer is primarily, more than 50%, engaged in one of these operations, all qualified
property is eligible for the credit, even if the property is not actually used in an exempt
manufacturing, coal or fluorite mining or retailing process. The taxpayer must engage primarily
in one or more of the operations. In other words, a taxpayer that is engaged 30% of the time in
retailing and 40% of the time in manufacturing will qualify for the credit, because the taxpayer
is engaged primarily in one or more of the operations. In determining whether a taxpayer is
primarily engaged in an activity the Department will look to the gross receipts of the taxpayer
received in the ordinary course of business by that taxpayer. For example, if more than 50% of
the taxpayer's gross receipts are from manufacturing, the taxpayer is primarily engaged in
manufacturing, or if more than 50% of the gross receipts are from retailing, the taxpayer is
primarily engaged in retailing. The taxpayer (and the Department) will look to the gross
receipts received by the taxpayer in the ordinary course of business. Therefore, if, for example,
the taxpayer suffers a casualty loss and that is compensated for by an insurance payment, the
amount of money so received will not be deemed gross receipts received in the ordinary
course of business, and disqualify the taxpayer from eligibility and perhaps result in the
recapture of credits granted in prior years.

In order to qualify for the credit, COMPANY must primarily be involved in retailing of alarm equipment,
defined by 35 ILCS 5/20(e)(3) as follows:
(T)he term "retailing" means the sale of tangible personal property for use or consumption and
not for resale, or services rendered in conjunction with the sale of tangible personal property
for use or consumption and not for resale.
The Illinois Retailers’ Occupation Tax Act (35 ILCS 120/1) defines Sale at retail as follows:
Sec. 1. Definitions. "Sale at retail" means any transfer of the ownership of or title to tangible
personal property to a purchaser, for the purpose of use or consumption, and not for the
purpose of resale in any form as tangible personal property to the extent not first subjected to a
use for which it was purchased, for a valuable consideration: Provided that the property
purchased is deemed to be purchased for the purpose of resale, despite first being used, to
the extent to which it is resold as an ingredient of an intentionally produced product or
byproduct of manufacturing.
In Illinois, lessors of tangible personal property are deemed to be the end-users of such property.
Please refer to 86 Ill. Adm. Code 130.101, 130.220 and 130.2010. If COMPANY leases the
equipment to its customers, it is the end-user of the equipment and is not selling the equipment at
retail.
Accordingly, if the only gross receipts of the taxpayer are from providing security services and leasing
equipment, the equipment identified in your request does not qualify for the credits defined by 35
ILCS 5/201(e) because none of its gross receipts would be from sales of tangible personal property.
However, your request does not include enough information to make the determination of whether or
not than 50% of the taxpayer’s gross receipts are from sales of tangible personal property.
Sincerely,

Matthew Crain
Associate Counsel (Income Tax)