Could a manufacturer exempt packaging, compressor parts, gloves, oils, and pollution-control equipment under Illinois's 2011 rules?

Plain-English summary

Illinois explained different rules for packaging, machinery parts, consumable production supplies, and pollution-control property.

Packaging transferred to customers

Pallets, boxes, shrink wrap, and other packaging could be purchased tax-free for resale when ownership transferred to the customer with the contained product. The manufacturer had to give its supplier a valid Certificate of Resale.

Containers did not qualify when the seller retained and reused them or discarded them after delivery.

Machinery and repair parts

Machinery and equipment used primarily—more than 50%—to manufacture or assemble property for sale or lease could qualify. Repair and replacement parts also qualified when incorporated into exempt machinery.

This framework could cover air-compressor units or parts only when their use and incorporation met those requirements; the GIL did not expressly classify each compressor item requested.

Gloves, oils, and consumables

The machinery exemption did not include hand tools, supplies, coolants, lubricants such as hydraulic and machine oils, adhesives, solvents, or personal apparel such as gloves. Necessary consumable supplies were still not machinery, equipment, or replacement parts.

Historical Manufacturer's Purchase Credit

Under the 2011 rules, Manufacturer's Purchase Credit earned from exempt machinery could offset state Use Tax or Service Use Tax on qualifying production-related property, including some supplies, lubricants, protective apparel, and safety equipment. It could not offset local tax.

Use required proper MPC certificates and timely annual earned and used reports; late filing could forfeit the credit absent reasonable cause.

Pollution-control property

Property used or consumed in operating pollution-control facilities within an enterprise zone had a separate exemption. The GIL stated that the exemption for the pollution-control facility itself had been available only until July 1, 2003.

What this means for you

Manufacturers

Classify each item by function and ownership transfer. An item can fail the machinery exemption yet have received different historical treatment under the MPC rules.

Packaging purchasers

Document customer ownership transfer and provide a valid resale certificate; separately itemizing packaging alone is not the stated test.

Common questions

Q: Were manufacturing gloves and machine oils machinery-exempt?
A: No.

Q: Could packaging qualify for resale?
A: Yes when transferred to the customer with the product.

Q: Is the 2011 Manufacturer's Purchase Credit discussion current?
A: Verify current law; this page reports the historical rules in the GIL.

Citations and references

• 86 Ill. Adm. Code 130.2070(b) and 130.1405(b) — transferred packaging and resale certificates.
• 86 Ill. Adm. Code 130.330 — manufacturing machinery, replacement parts, and excluded supplies.
• 35 ILCS 105/3-85; 35 ILCS 110/3-70; 86 Ill. Adm. Code 130.331 — historical Manufacturer's Purchase Credit.
• 35 ILCS 120/1e and 86 Ill. Adm. Code 130.1951(i) — enterprise-zone pollution-control property.

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-11-0056.pdf

Original ruling text

ST 11-0056-GIL 07/14/2011 MANUFACTURING MACHINERY & EQUIPMENT
Under the Retailers’ Occupation Tax Act, the manufacturing machinery and equipment
exemption is available for machinery and equipment 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.)

July 14, 2011

Dear Xxxxx:
This letter is in response to your letter dated May 12, 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:
I have read the Illinois sales tax laws. I still have some questions even though I have a
good general knowledge of what is a taxable and non taxable [sic] item for a firm
engaged in manufacturing activity.
Thank you for answering me [sic] questions below:
My employer is engaged in heavy manufacturing product for resale. They have their
exemption certificate.
Pallets, boxes, shrink wrap, packaging agents, identification tags used to ship product to
customers and outside processors. This material is used to protect product in route or
identify the product to them.
If the above is deemed taxable, if we were to itemize the shipment stating boxes and
packaging agents and pallets would that avoid sales tax on the purchase? In other
words, we are selling them these items.
Units and replacement parts for air compressors used to operate manufacturing
equipment to product.

Gloves used by production employees that protect product from becoming rusted.
Touching the product with a bare hand will leave moisture on the part that will create a
rust spot. The delivery of a rust free product is a requirement our customers demand.
Pollution control equipment attached to building that must be operating when the plant
is producing product.
Hydraulic and machine oils used in manufacturing equipment producing parts.
You may write or email me.

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. See 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. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
Note, purchases of packaging materials may be purchased tax free for resale as long as they
are transferred along with the products contained in them to customers. See 86 Ill. Adm. Code
130.2070(b). Such purchasers must provide their suppliers with Certificates of Resale to document
the exemption. The requirements for a valid Certificate of Resale are set forth at 86 Ill. Adm. Code
130.1405(b). Please note further, however, that containers will not qualify for the exemption if, after
delivery, the seller of the tangible personal property contained in them retained and reused them or
discarded them.
Persons who sell tangible personal property must either pay tax or document an exemption.
The Manufacturing Machinery and Equipment Exemption from sales tax is available for sales of
machinery and equipment 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
process must meet the requirements of manufacturing or assembling set forth in the Department's
rules.
The exemption also applies to repair and replacement parts as long as the parts are
incorporated into machinery and equipment that is exempt under the regulation. It is important to note
that the product being produced must be for sale or lease for the manufacturing machinery and
equipment exemption to apply.
The law exempts only the purchase and use of “machinery” and “equipment” used in
manufacturing or assembling. Machinery means major mechanical machines or major components of
such machines contributing to a manufacturing or assembling process; including, machinery and
equipment used in the general maintenance or repair of such exempt machinery and equipment. See
86 Ill. Adm. Code 130.330(c)(1) and 130.330(c)(2).
Note, the exemption does not include hand tools, supplies (such as rags, sweeping or cleaning
compounds), coolants, lubricants (e.g., hydraulic and machine oils), adhesives, or solvents, items of
personal apparel (such as gloves, shoes, glasses, goggles, coveralls, aprons, masks), coal, fuel oil,
electricity, gas, or water. See 86 Ill. Adm. Code 130.330(c)(3). Usually, oils and lubricants are
considered consumable supplies.
Consumable supplies, which although necessary in the

manufacturing process, do not qualify for the exemption because they are not machinery, equipment,
or replacement parts for such machinery or equipment. Please refer to 86 Ill. Adm. Code 130.330.
When a manufacturer purchases manufacturing machinery and equipment, the State of Illinois
provides a Manufacturer's Purchase Credit (MPC) in addition to the exemption for manufacturing
machinery and equipment. See 86 Ill. Adm. Code 130.331. A purchaser of manufacturing machinery
and equipment that is exempt under the manufacturing machinery and equipment exemption also
earns MPC 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 105/3-85; 35 ILCS 110/3-70.
MPC 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 MPC 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%). MPC cannot be used to satisfy any local taxes incurred on the purchase of
production related tangible personal property.
"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 MPC provides examples of tangible personal property that will
be considered production related (e.g., supplies and consumables used in a manufacturing facility,
including fuels, coolants, solvents, oils, lubricants, cleaners, adhesives, as well as 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 MPC may be applied to the State 6.25% tax due for
purchases of these items. See 86 Ill. Adm. Code 130.331(b)(1).
A manufacturer or graphic arts producer must provide a Manufacturer's Purchase Credit
Certificate (ST-16-C or purchaser’s own form) when using 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. 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 servicemen may require that separate MPC
certificates be provided for each invoice or purchase in order to properly document those sales.
In order to validate credit earned as the result of a qualifying purchase of exempt
manufacturing machinery and equipment or exempt graphic arts machinery and equipment, however,
the manufacturer or graphic arts producer must report credit earned to the Department by signing and
filing an Annual Report of Manufacturer's Purchase Credit Earned (ST-16) for each calendar year no
later than the last day of the sixth month following the calendar year in which the Manufacturer's
Purchase Credit is earned. See Section 130.331(e)(1). A purchaser that fails to properly file an
Annual Report of Manufacturer's Purchase Credit Earned (ST-16) or an Annual Report of
Manufacturer's Purchase Credit Used (ST-17) with the Department by the last day of the sixth month
following the end of the calendar year forfeits all Manufacturer's Purchase Credit earned or used for
that calendar year, unless the purchaser establishes that the purchaser's failure to file was due to
reasonable cause. See Section 130.331(e)(6).

The Retailers’ Occupation Tax Act provides that “all tangible personal property to be used or
consumed in the operation of pollution control facilities, as defined in Section 1a of this Act, within an
enterprise zone established pursuant to the “Illinois Enterprise Zone Act”, as amended, shall be
exempt from the tax … .” See 35 ILCS 120/1e and 86 Ill. Adm. Code 130.1951(i). The exemption for
the pollution control facility itself was available until July 1, 2003.
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,

Debra M. Boggess
Associate Counsel
DMB:msk