How did Illinois treat repair parts for material-handling equipment, dyed diesel used off highway, and an excavator leased for manufacturing work?

Plain-English summary

Repair and replacement parts could share the manufacturing exemption when they were incorporated into machinery used primarily—more than 50% of the time—in qualifying manufacturing. The manufacturer used cranes, excavators, and loaders to move materials between production stations, with some use before the first station and after the last.

Machinery used primarily within the manufacturing process could qualify, along with incorporated repair and replacement parts. But equipment used primarily to store, convey, handle, or transport materials before production or finished goods after production did not. The GIL provided that line without conclusively measuring each machine's use.

For fuel, dyed diesel could be purchased free of Motor Fuel Tax for qualifying nonhighway use. That did not make it exempt from Retailers' Occupation and Use Tax. The letter noted separate sales-and-use-tax exemptions for 100% biodiesel and certain biodiesel blends.

For the excavator lease, a true-lease lessor generally was the end user and owed Use Tax on cost, while rental receipts were not taxed. But a lessor's purchase could qualify for the manufacturing exemption when the lessee used the equipment primarily in qualifying manufacturing or assembly.

The letter also discussed historical Manufacturer's Purchase Credit as a way to offset the State portion of tax on production-related supplies and consumables, not local tax. It says MPC was extended through August 30, 2014.

What this means for you

Track machine use by production stage and time. Repair parts do not qualify merely because the machine sometimes serves production; the machine must meet the primary-use test. Treat dyed-diesel Motor Fuel Tax treatment separately from sales and use tax. For leased equipment, document the lessee's qualifying manufacturing use and the lease structure.

Common questions

Q: Were repair parts for exempt manufacturing machinery exempt?
A: Yes when incorporated into qualifying exempt machinery and the regulatory conditions were met.

Q: Was dyed diesel automatically sales-tax exempt?
A: No. It could avoid Motor Fuel Tax for nonhighway use but remained subject to Retailers' Occupation and Use Tax absent another exemption.

Q: Could a lessor buy manufacturing equipment tax-free?
A: Potentially, if the lessee used the equipment primarily in qualifying manufacturing or assembly.

Subject

Manufacturing Machinery & Equipment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0021.pdf

Original ruling text

ST 11-0021-GIL MANUFACTURING MACHINERY & EQUIPMENT
Under the Retailers' Occupation Tax Act, the manufacturing machinery and equipment
exemption extends to machinery and equipment that is 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 GIL.)
NOTE: The provisions of this letter incorrectly made the following statement: “Please
note that the rules also specifically exempt gases that are consumed in a manufacturing
process. See Section 130.330(c)(3).” That statement has been clarified and corrected by
General Information Letter dated September 29, 2016, ST 16-0040, which specifically
provides that “gases are not generally exempt under Section 130.330(c)(3).”

April 1, 2011

Dear Xxxxx:
This letter is in response to your letter dated January 29, 2011, 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.
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 a letter ruling on the following issue.
COMPANY is a manufacturer and processor of steel. In addition, we are a
secondary provider of manufacturing services & equipment rental. We have
production facilities in Illinois in which our operations include the following.
•

Steel and Blast Furnace Slag Removal

•

Reclamation of Metallics

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April 1, 2011
•

Scrap Recycling

•

Revert Scrap Collection / Processing

•

Mill Scale Removal, Screening, and Recycling

•

Refractory Segregation and Recycling

•

Alloy Handling & Iron Breaking

•

Equipment Rental

We have three questions pertaining to the applicability of sales tax.

1. We are purchasing a number of repair parts for cranes, excavators, loaders.
   The equipment is used directly to move product and process scrap. (I’ve attached
   a more detailed description of production operations.) We had contacted your
   sales tax division to inquire as to whether the equipment repair parts i.e. motors,
   bearings, etc. purchased for the material handling equipment would be taxable or
   exempt. We were advised that based on the information, it would appear that the
   repair parts would qualify for exemption. The equipment is used primarily to take
   materials between production stations. (over 50%) The equipment is also used to
   a lesser degree to unload raw materials and take such materials to the first
   production stationand [sic] to take the finished product away from the last
   production station. It was suggested that we may want to contact Legal Services
   for a more definitive answer. Can you advise us on the above?
2. We are purchasing Dyed diesel fuel from ABC for the material handling
   equipment listed in question 1. The material handling equipment is entirely off
   highway and used in the matter described above. ABC has asked if we are
   exempt from sales tax. We are unsure and are asking for your opinion.
3. We have also purchased an excavator that is used as a rental at XYZ. The
   machine was purchased by us to use as a rental unit to XYZ. The machine sits on
   their property and is used only for them.
   We send an operator to their facility daily to dig out what they call a coke
   quenching pit. When they cool their coke products (burnt coal basically) some of
   the finer particulate materials wash into the quenching pit. All we do is dig that
   material out of their 3 stage cooling pit and place it on concrete pads to drain and
   solidify. This process takes between 4 and 8 hours per day and other than those
   hours the machine is just staged.
   The company we had purchased this excavator from has asked if we were taxable
   or exempt. We were hoping you could offer us some direction on this matter.

ST 11-0021-GIL
April 1, 2011

If you need any clarification, I can be reached at #
Please issue any response to our tax office:

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property 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. If the purchases occur in Illinois, the purchasers
must pay the Use Tax to the retailer at the time of purchase. The retailers are then allowed to
retain the amount of Use Tax paid to reimburse themselves for their Retailers' Occupation Tax
liability incurred on those sales. If the purchases occur outside Illinois, purchasers must self
assess their Use Tax liability and remit it directly to the Department.
Manufacturing and Assembly Exemption
Under the Retailers’ Occupation Tax Act and Use Tax Act, machinery and equipment
that will be used by the purchaser primarily in the process of manufacturing or assembling
tangible personal property for wholesale or retail sale or lease, whether the sale or lease is made
directly by the manufacturer or by some other person, whether the materials used in the process
are owned by the manufacturer or some other person, is exempt from Retailers’ Occupation Tax
and Use Tax. 35 ILCS 120/2-10(14); 105 ILCS 3-5(1). The exemption is also available if the
machinery and equipment that will be used by the purchaser primarily in the process of
manufacturing or assembling tangible personal property for wholesale or retail sale or lease is
made apart from or as an incident to the seller engaging in a service occupation. See 86 Ill.
Adm. Code 140.125(o), which can be found on the Department’s website. When a person
manufacturing or assembling tangible personal property for wholesale or retail sale or lease is
manufacturing or assembling materials owned by some other person, the manufacturer or
assembler should obtain a certificate from the owner of the materials that certifies that the
manufactured or assembled tangible personal property will be sold or leased, and not used or
consumed, by the owner.
The manufacturing machinery and equipment exemption is extended to machinery and
equipment that is 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.
The manufacturing process is the production of any article of tangible personal property, whether
such article is a finished product or an article for use in the process of manufacturing or
assembling a different article of tangible personal property, by procedures commonly regarded as
manufacturing, processing, fabricating, or refining that changes some existing material or
materials into a material with a different form, use, or name. These changes must result from the

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process in question and be substantial and significant. See Section 130.330(b)(2). A certificate
of exemption must be presented to the seller for each transaction where exempt machinery or
equipment is purchased. See Section 130.330(g).
“Machinery” means major mechanical machines or major components of such machines
contributing to a manufacturing or assembling process. Machinery includes 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).
Further, repair and replacement parts for exempt machinery or equipment are exempt when
purchased by the owner of the exempt machinery and equipment, as long as the parts are
incorporated into the exempt machinery and equipment. See Section 130.330(c)(2). Servicemen
making repairs are governed by the Service Occupation Tax Act, which provides an exemption
for repair and replacement parts when such parts are incorporated into the exempt machinery and
equipment by the servicemen. See 35 ILCS 115/2 and P.A. 87-876 eff. January 1. 1993. The
exemption is also available where manufacturers build their own production machinery. Any
machine parts purchased to be incorporated into a machine which qualifies for the
Manufacturing Machinery and Equipment Exemption will also qualify for the exemption. See
Section 130.330(c)(2) and (c)(4).
The manufacturing machinery and equipment exemption does not apply to machinery or
equipment used primarily in pre-production activities. Machinery or equipment used primarily to
store, convey, handle, or transport materials or parts or sub-assemblies prior to their entrance into
the production cycle do not qualify for the manufacturing machinery and equipment exemption.
See part (4)(C) of subsection (d) of Section 130.330.
In addition, the manufacturing machinery and equipment exemption does not apply to
machinery or equipment used primarily in post-production activities. Machinery and equipment
used primarily to store, convey, handle, or transport finished articles of tangible personal
property to be sold or leased after the production cycle do not qualify for the manufacturing
machinery and equipment exemption. Machinery and equipment, such as loaders, conveyors,
and transport vehicles used primarily to move finished a product do not qualify for the
manufacturing machinery and equipment exemption.
Generally, hand tools do not qualify for the exemption afforded manufacturing machinery
and equipment. Hand tools include, but are not limited to, wrenches, pliers, hammers, chisels,
sanding blocks, and screwdrivers. See 86 Ill. Adm. Code 130.330(c)(3). However, pneumatic
hand tools or electric powered hand tools used primarily in manufacturing or assembling may
qualify for the exemption. Router bits, drill bits, sand paper, and screw tips can also qualify as
long as they are incorporated into manufacturing machinery and equipment that is exempt under
the regulation.
Consumable materials, in general, do not qualify for the manufacturing machinery and
equipment exemption. See Section 130.330(c)(3). These items, such as maintenance oils, grease,
adhesives, cleaning solutions or compounds, and antifreeze, are considered consumable items
and would be subject to Retailers' Occupation Tax and Use Tax. The rules specifically exclude

ST 11-0021-GIL
April 1, 2011

items of personal apparel such as goggles, aprons, and masks from the exemption. Items used to
protect employees, such as protective face masks or helmets, gloves, coveralls, and protective
goggles are excluded from the exemption even if they are required by law. See Section
130.330(d)(4)(G). Please note that the rules also specifically exempt gases that are consumed in
a manufacturing process. See Section 130.330(c)(3). Consumable supplies used in a welding
process are subject to tax. For example, flux is generally considered to be a consumable
manufacturing supply and is fully taxable. However, to the extent that an item, such as solder or
welding wire, physically becomes a part of the product being manufactured for sale, it can be
purchased for resale.
Manufacturer’s Purchase Credit
The State of Illinois provides a manufacturer's purchase credit in addition to the
exemption for manufacturing machinery and equipment. See 86 Ill. Adm. Code 130.331.
Purchasers of manufacturing machinery and equipment that qualifies for the manufacturing
machinery and equipment exemption earn a credit in an amount equal to a fixed percentage of
the tax which would have been incurred under the Use Tax or Service Use Tax. 35 ILCS 105/385; 35 ILCS 110/3-70.
The credit may be used to satisfy Use Tax or Service Use Tax liability that is incurred on
the purchase of production related tangible personal property that does not qualify for the
manufacturing machinery and equipment exemption. Please note that the amount of
manufacturer's purchase credit that can be applied to a purchase of production related tangible
personal property is limited to the State rate of tax incurred on that property (6.25%). Any local
taxes incurred on the purchase of production related tangible personal property remain the
responsibility of the purchaser.
"Production related tangible personal property" includes all tangible personal property
used or consumed in a production related process by a manufacturer in a manufacturing facility
in which a manufacturing process described in Section 2-45 of the Retailers' Occupation Tax Act
takes place, and all tangible personal property used or consumed by a manufacturer or graphic
arts producer in research and development regardless of use within or without a manufacturing or
graphic arts production facility. See 35 ILCS 105/3-85. The Department’s regulation for the
credit provides examples of tangible personal property that will be considered production related:
supplies and consumables used in a manufacturing facility, including fuels, coolants, solvents,
oils, lubricants, cleaners, adhesives, and hand tools, protective apparel, and fire and safety
equipment used or consumed in a manufacturing facility. See 86 Ill. Adm. Code 130.331(b)(4).
This means that the credit may be applied to the State tax due for purchases of these items. See
86 Ill. Adm. Code 130.331(b)(1).
It is the responsibility of the retailer or serviceman making the sale of production related
tangible personal property to properly document the receipt of MPC on that sale through the use
of MPC certificates. Retailers and servicemen are required to keep those certificates in their
books and records. See subsection (f)(1) of Section 130.331. Retailers and serviceman may

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require that separate MPC certificates be provided for each invoice or purchase in order to
properly document those sales.
A manufacturer or graphic arts producer must provide a Manufacturer's Purchase Credit
Certificate (ST-16-C or purchaser’s own form) when using Manufacturer's Purchase Credit
(MPC) on a purchase of production related tangible personal property, unless the same
information is included in the manufacturer’s or graphic arts producer’s purchase order. See
subsection (f) of 86 Ill. Adm. Code 130.331.
The MPC was recently extended by P.A. 96-0116, through August 30, 2014.
Dyed Diesel Fuel
Section 2 of the Motor Fuel Tax Law, 35 ILCS 505/2, imposes a tax on “the privilege of
operating motor vehicles upon the public highways and recreational-type watercraft upon the
waters of this State.” Beginning January 1, 1990, the rate of tax imposed on all motor fuel used
in motor vehicles operating on the public highways and recreational type watercraft is 19 cents
per gallon. The tax on the privilege of operating motor vehicles which use diesel fuel is at the
rate of 19 cents per gallon plus an additional 2 ½ cents per gallon.
“Motor fuel” is defined as “all volatile and inflammable liquids produced, blended or
compounded for the purpose of, or which are suitable or practicable for, operating motor
vehicles. Among other things, ‘Motor Fuel’ includes ‘Special Fuel.’” “Special fuel” is defined
as “all volatile and inflammable liquids capable of being used for the generation of power in an
internal combustion engine except that it does not include gasoline as defined in Section 5,
example (A), of this Act, or combustible gases as defined in Section 5, example (B), of this Act.
‘Special Fuel’ includes diesel fuel as defined in paragraph (b) of Section 2 of this Act.” “Diesel
fuel” is defined as “any petroleum product intended for use or offered for sale as a fuel for
engines in which the fuel is injected into the combustion chamber and ignited by pressure
without electric spark.”
Generally, Motor Fuel Tax is due when motor fuel is purchased. Persons other than
distributors or suppliers who lose motor fuel through any cause or use motor fuel upon which the
Motor Fuel Tax has been paid for any purpose other than operating a motor vehicle upon the
public highways or waters, shall be reimbursed and repaid the amount so paid. See 86 Ill. Adm.
Code 500.235. Distributors and suppliers may file claims for credit. See 86 Ill. Adm. Code
500.265. Section 13 of the Motor Fuel Tax Law sets forth the provisions for such
reimbursement. No claims based upon idle time are allowed.
Beginning January 1, 2000, the State of Illinois implemented a dyed diesel fuel program.
This program provides for tax-free purchases of dyed diesel fuel. Any special fuel sold or used
for non-highway purposes must be dyed. Since the dyed diesel fuel is purchased tax-free, there
is no need to apply for reimbursement of the tax. In some situations, it is not practicable for
dyed diesel fuel to be used for off-road purposes. In that case, clear (undyed) diesel fuel may be
purchased tax-paid for off-road use, but the purchaser must apply to the Department for a refund

ST 11-0021-GIL
April 1, 2011

of the tax. Section 13 of the Motor Fuel Tax Law sets forth the situations in which the tax paid
for clear diesel fuel may be reimbursed. The Department’s regulations at 86 Ill. Adm. Code
500.235 and 500.265 explain how claims for credit or refund may be made.
Although dyed diesel fuel may be purchased free of Motor Fuel Tax, it remains subject to
Retailers’ Occupation Tax and Use Tax. However, 100% biodiesel and certain biodiesel blends
are exempt from Retailers’ Occupation Tax and Use Tax. 35 ILCS 120/2-10; 35 ILCS 105/3-10.
Leases
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases.
A conditional sale is usually characterized by a nominal or one dollar purchase option at
the close of the lease term. Stated otherwise, if lessors are guaranteed at the time of the lease
that the leased property will be sold, this transaction is considered to be a conditional sale at the
outset of the transaction, thus making all receipts subject to Retailers’ Occupation Tax. See 86
Ill. Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buyout
provision does exist, it must be a fair market value buy out option in order to maintain the
character of the true lease. Lessors of tangible personal property under true leases in Illinois are
deemed end users of the property to be leased. See 86 Ill. Adm. Code 130.220. As end users of
tangible personal property personal property located in Illinois, lessors owe Use Tax on their cost
price of such property. The State of Illinois imposes no tax on rental receipts. Consequently,
lessees incur no tax liability.
As stated above, in the case of a true lease, the lessors of the property being used in
Illinois would be the parties with Use Tax obligations. The lessors would either pay their
suppliers, if their suppliers were registered to collect Use Tax, or would self-assess and remit the
tax to the Department. If the lessors already paid taxes in another state with respect to the
acquisition of the tangible personal property, they would be exempt from Use Tax to the extent
of the amount of such tax properly due and paid in such other state. See subsection (a)(3) of 86
Ill. Adm. Code 150.310.
Under Illinois law, lessors may not “pass through” their tax obligation to the lessees as
taxes. However, lessors and lessees may make private contractual arrangements for a
reimbursement of the tax to be paid by the lessees. If lessors and lessees have made private
agreements where the lessees agree to reimburse the lessors for the amount of the tax paid, then
the lessees are obligated to fulfill the terms of the private contractual agreements.
As noted above, under the Retailers’ Occupation Tax Act and Use Tax Act, machinery
and equipment that will be used by the purchaser primarily in the process of manufacturing or
assembling tangible personal property for wholesale or retail sale or lease, whether the sale or

ST 11-0021-GIL
April 1, 2011

lease is made directly by the manufacturer or by some other person, whether the materials used
in the process are owned by the manufacturer or some other person, is exempt from Retailers’
Occupation Tax and Use Tax. Therefore, if the lessee is using the equipment primarily in the
process of manufacturing or assembling tangible personal property for wholesale or retail sale or
lease, the purchase by the lessor would be exempt from Use Tax.
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
RSW:msk