When was a custom bridge-control system treated as special-order property subject to Service Occupation Tax rather than a taxable retail sale?

Plain-English summary

Illinois declined a binding ruling but explained when custom machinery was primarily a service rather than a retail sale. If an item was substantially similar to a stock or standard product, its sale produced Retailers' Occupation Tax even if custom-made. Special-order treatment required all three elements in 86 Ill. Adm. Code 130.2115(b): the purchaser primarily employed the seller's engineering or scientific skill; the property had use or value only for the specific purpose; and it had use or value only to that purchaser.

A customized movable-bridge control system generally met the service test when the manufacturer was hired to engineer and produce it for the buyer's particular needs and it had no value to others. Preparing manufacturing drawings from the customer's plans could be a substantial design contribution when the manufacturer was contractually responsible for the engineering. Subcontracting engineering did not change that result if the manufacturer retained contractual responsibility.

For a qualifying service transaction, the serviceman could calculate tax using the separately stated selling price of transferred property, 50% of the bill, Service Occupation Tax on cost for a registered de minimis serviceman, or Use Tax on cost for a qualifying unregistered de minimis serviceman. The first two bases could not be below the transferred property's cost.

What this means for you

Evaluate each order separately. Keep the contract, engineering responsibility, design work, and evidence that the finished system has purpose- and purchaser-specific value.

Common questions

Q: Is every custom-built machine a service transaction?
A: No. A product substantially similar to stock or standard items remained a retail sale.

Q: Must the manufacturer perform all engineering in-house?
A: No. Subcontracted engineering could qualify if the manufacturer was contractually responsible for it.

Q: Did the Department conclusively classify the submitted sale?
A: No. It declined the PLR and gave general, fact-specific rules.

Citations and references

• 86 Ill. Adm. Code 130.2115(b) and (b)(2)
• 86 Ill. Adm. Code 140.101(f), 140.106, 140.108, and 140.109
• 2 Ill. Adm. Code 1200.110(a)(4) and 1200.120

Subject

Service Occupation Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0056.pdf

Original ruling text

ST 10-0056-GIL 07/29/2010 SERVICE OCCUPATION TAX
Sellers of special order machines are considered to be engaged primarily in a service
occupation, rather than being engaged in the business of selling tangible personal property, if
the test set out in 86 Ill. Adm. Code 130.2115(b) is met. See 86 Ill. Adm. Code 130.2115. (This
is a GIL.)

July 29, 2010

Dear Xxxxx:
This letter is in response to your letter dated October 19, 2009, in which you request
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.
In your letter you have stated and made inquiry as follows:
I am the president of COMPANY located in CITY IL. My company designs and
manufacturers [sic] control panels used in every type of industrial application
imaginable. Additionally, we produce automatic movable bridge control systems for
bascule, vertical lift and swing bridges. The type of work that COMPANY does is
unique and there are only a few companies in the United States that I feel could be
considered as competitors. The design work and fabrication involved with products
manufactured is complex and never initiated until the customer is satisfied with all
drawings for the project.
COMPANY does not maintain any inventory of completed or partially completed
products. Everything manufactured by us is not initiated until our bid has been
accepted by the future purchaser. Since we are a unique company with a very special
type of product, our customer base is not limited to IL customers.
On taxable job orders shipped into Illinois we are charging sales tax i.e. Retailers [sic]
Occupation Tax at the CITY rate of 9.75%. Many of these sales would be considered
repeat or second orders or they might be similar to products designed, manufactured
and sold in the past. Engineering skills required would not be considered design
engineering but rather production engineering.

I am currently being questioned by a few customers who have retained COMPANY to
design and manufacture unique control panels or specific bridge control systems about
the tax rate being charged. This therefore is the purpose of my letter to you.
I have been told that tax should only be charged on material cost because COMPANY
is producing a special order item on which Retailers [sic] Occupation Tax would not
apply. These types of questions/concerns never surfaced before but due to the current
economic conditions all companies are reviewing all cash outlays. I am therefore
writing to you for a Private Letter Ruling and guidance as to the correct taxability on
certain transactions.
I have read Section 1200.110 on Private Letter Rulings and will comply with those
instructions. I am currently not under audit or any type of investigation nor have I been
contacted by anyone from the IL Dept. of Revenue. I have spent considerable time
reviewing your web page and have reviewed numerous letter rulings but I cannot find a
letter detailing a circumstance/situation similar to mine. I have reviewed Section
130.2115 Sellers of Machinery, Tools and Special Order items and conclude that this
section does apply to various sales of custom order panels and control systems
designed and manufactured by COMPANY.
Situation: COMPANY receives a job order from a contractor to design and manufacture
a control panel for a lift bridge which is owned and operated by a railroad. Also
received are drawings of the building that is to house the Lift Bridge Control System and
requirements as to specifications that must be met in order to operate the lift bridge. It
now becomes COMPANY’s responsibility to design, build and program the Control
System so that it not only works satisfactorily and opens and closes the bridge but also
is able to be installed in the building that contains everything for the operation of the
bridge.
Bridge buildings are designed and built for specific locations to operate the opening and
closing of the bridge safely and efficiently. Such buildings are unique to the type of
bridge (vertical lift, bascule or swing) and their location on or near the bridge. Bridge
buildings are not similar to houses where a customer can purchase a blueprint and then
build the house at any given location. Each bridge building is different so that the
control panel designed and manufactured by COMPANY for the bridge building at a
specific location cannot be placed in another bridge building somewhere else. The
control panel’s use or value is only for the specific bridge building that it was designed
and manufactured for. Equally important is that all components of the control panel
must be able to be placed into the bridge building to insure proper operation.
The type of bridge (vertical lift, bascule or swing) also presents numerous engineering
problems because each type of bridge is so different and the type and design of the
control panel that works with the vertical lift will not work with the swing and vice versa.
The factors that must be considered by the engineer for the designing of the control
system are monumental.
Many of the components of COMPANY’s control panel manufactured would be
considered standard ie. messenger cabinets, motors, motor control centers, speed
switches, encoders, control consoles, PLC enclosures, data logging hardware &
software, rack angles, vent-filter kits, grid straps, wire, screws etc but without the design
and engineering that is necessary to complete the finished panel it would not be
functional to the customer at their given location.

COMPANY maintains a staff of electrical, chemical, mechanical and computer
engineers who evaluate the requirements of the control panel being purchased and
design a panel which will not only conform to the requirements but can also be installed
in the bridge building. In this particular situation it took ## labor hours to manufacture
the Lift Bridge Control System. However, it took ## hours for engineering to design and
produce drawings for the system plus an additional ## for CAD hours. Prior to finalizing
the drawings the control tower where the system will be installed is visited to insure the
cabinets and motor control center will fit securely in this location. In this situation the
material cost was $$ and the labor cost was $$ for a total of $$.
Section 103.2115 describes in great detail when a transaction would not be subject to
Retailers [sic] Occupation Tax. In this situation COMPANY was hired for our
engineering skill to produce the Lift Bridge Control System. Total hours charged to
engineering and CAD are a clear indicator of this. Secondly, the Lift Bridge Control
System has use or value only to the railroad and can only be used in this location
because it was specifically manufactured to be installed in the control tower at this
location. Control towers for various types of bridge systems are never identical.
Since control towers and bridge systems are unique the same type of system is never
produced more than once so multiple orders would not occur.
I would therefore greatly appreciate a response to my request so that I am confident I
am in compliance with any and all IL Laws. If you need any additional information
please contact me and I will gladly respond. Thank you for your consideration in this
matter.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). The Department recently met and determined that it would decline to issue a
Private Letter Ruling in response to your request. The fact situation presented in this letter does not
apply to the request being made, since the project discussed in the fact situation presented consists
of sales of items shipped out of Illinois, and, apparently, to a sales tax exempt customer. We hope,
however, the following will be helpful in addressing your questions.
The issue of whether a person incurs a Retailers' Occupation Tax or Service Occupation Tax
liability depends upon the nature of the items being produced and the nature of the design work
involved. If the item being produced is substantially similar to stock or standard items, even though
custom-made, the sale of that item would result in Retailers' Occupation Tax liability. The test for
special order items that result in Service Occupation Tax liability is set forth in subsection (b) of the
Department’s rule “Sellers of Machinery, Tools and Special Order Items” at 86 Ill. Adm. Code
130.2115. The seller of a special machine, tool, die, jig, pattern, gauge or other similar item is
engaged primarily in a service occupation, rather than in the business of selling tangible personal
property, and so does not incur Retailers' Occupation Tax liability with respect to the sale, if the
following tests for exemption are all met in the transaction:

A)

The purchaser employs the seller primarily for his engineering or other scientific
skill to design and produce the property on special order for the purchaser and to
meet the particular needs of the purchaser;

B)

the property has use or value only for the specific purpose for which it is
produced; and

C)

the property has use or value only to the purchaser. 86 Ill. Adm. Code
130.2115(b).

For example, if a manufacturer of customized movable bridge control systems is employed to
provide engineering or other scientific skill to design and produce a customized movable bridge
control systems on special order for the purchaser in order to meet the particular needs of the
purchaser, and the movable bridge control system has no value to others than the purchaser for the
purpose for which it is produced, then the manufacturer will generally incur Service Occupation Tax
liability on the sale of the movable bridge control system, rather than Retailers' Occupation Tax
liability.
These inquiries are very fact-specific. The seller must determine in each situation whether the
sale qualifies for exempt under the provisions of 130.2115(b).
As to the requirement that the seller be employed primarily for his engineering or other
scientific skill to design and produce the property, it is sufficient if the seller is responsible for making
a substantial contribution to the designing of the property that is to be produced on special order. See
subsection (b)(2) of Section 130.2115. A manufacturer who takes a customer’s blueprints and
prepares its own drawings that set out the materials, dimensions, and the method of manufacture
necessary to create a customized movable bridge control system and then uses those drawings to
manufacture the bridge control system is generally responsible for making a substantial contribution
to the designing of the property that is to be produced on special order as long as the manufacturer is
contractually responsible for the engineering of the bridge control system. This is not affected by the
fact that the manufacturer may subcontract out the engineering work to another as long as the
manufacturer is contractually responsible for the engineering work.
In the case where sellers of special order property are not subject to Retailers’ Occupation Tax
in accordance with Section 130.2115, the purchase of tangible personal property that is transferred to
service customers may result in either Service Occupation Tax liability or Use Tax liability for the
servicemen, depending upon which tax base the servicemen use to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) separately stated selling price; (2)
50% of the entire bill; (3) Service Occupation Tax on cost price if they are registered de minimis
servicemen; or, (4) Use Tax on cost price if the servicemen are de minimis and are not otherwise
required to be registered under Section 2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred.
If servicemen do not wish to separately state the selling price of the tangible personal property
transferred, those servicemen must use the second method where they will use 50% of the entire bill
to their service customers as the tax base.
Both of the above methods provide that in no event may the tax base be less than the cost
price of the tangible personal property transferred. Under these methods, servicemen may provide

their suppliers with Certificates of Resale when purchasing the tangible personal property to be
transferred as a part of the sales of service. Upon selling their product, they are required to collect the
corresponding Service Use Tax from their customers. See 86 Ill. Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen are
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit the tax to the
Department by filing returns and do not pay tax to suppliers. They provide suppliers with Certificates
of Resale for the property transferred to service customers. See 86 Ill. Adm. Code 140.108.
The final method of determining tax liability may be used by de minimis servicemen not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that their annual aggregate cost price of
tangible personal property transferred incident to sales of service is less than 35% of their annual
gross receipts from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). Such de minimis servicemen may pay Use Tax to their suppliers or may self
assess and remit Use Tax to the Department when making purchases from unregistered out-of-State
suppliers. Those servicemen are not authorized to collect “tax” from their service customers because
they, not their customers, incur the tax liability. Those servicemen are also not liable for Service
Occupation Tax. It should be noted that servicemen no longer have the option of determining whether
they are de minimis using a transaction-by-transaction basis. See 86 Ill. Adm. Code 140.109.
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.
Sincerely,

Samuel J. Moore
Associate Counsel
SJM:msk