What Illinois exemptions applied to manufacturing utilities, packaging, research, local taxes, and residential utility accounts?

Plain-English summary

An engineering company asked a broad set of questions about utility costs in manufacturing, research and development, packaging, tax rates and limitations, local taxes, residential utilities, and refund procedures.

IDOR's main answers were:

• Manufacturing exemption: The machinery-and-equipment exemption covered qualifying machinery used primarily—more than 50%—in manufacturing. It did not cover hand tools, supplies, lubricants, apparel, coal, fuel oil, electricity, gas, or water.
• Packaging: Machinery that placed products into the container, package, or wrapping in which they were normally sold could qualify when part of an integrated manufacturing process.
• Research and development: R&D was not itself part of the manufacturing process. But qualifying R&D property could fall within “production related tangible personal property” for the historical Manufacturer's Purchase Credit.
• Gas and electricity: Separate Gas Revenue Tax, Gas Use Tax, and Electricity Excise Tax laws applied. The letter listed limited exceptions for specified certified businesses, interstate commerce, the federal government, enterprise-zone gas use, qualifying exempt organizations, electric-energy production, refinery operations, natural-gas processing, and fertilizer production.
• Local taxes: Local retailers' occupation taxes administered by IDOR followed the same exemption and credit rules as the state Retailers' Occupation Tax.
• Residential utilities: Illinois did not impose sales tax on water sold by public utilities, cooperatives, or local governments. The letter said there generally were no residential-consumer exemptions under the electricity and gas excise/use tax laws it discussed.

The response also gave historical rates and limitations references. Those figures should not be used without checking current law.

Common questions

Were electricity, gas, and water exempt manufacturing machinery? No.

Could packaging equipment qualify? Yes, when it was part of an integrated manufacturing process and packaged the product for normal sale.

Was R&D itself manufacturing? No, though qualifying R&D property could receive historical MPC treatment.

Did state-administered local occupation taxes follow state exemptions? Yes.

Citations and references

• 86 Ill. Adm. Code 130.330 and 130.331
• 35 ILCS 615/1 and 615/2
• 35 ILCS 173/5-10 and 5-50
• 35 ILCS 640/2-4(c)
• 35 ILCS 105/3-85 and 35 ILCS 110/3-70

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0052.pdf

Original ruling text

ST 12-0052-GIL 09/20/2012 MISCELLANEOUS
This letter responds to a general information request regarding sales and excise taxes.
See 86 Ill. Adm. Code 130.101. (This is a GIL.)
September 20, 2012
Dear:
This letter is in response to your letter dated August 6, 2012, 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 professional engineering company that provides utility studies for our clients.
We would like clarification on the following issues:

1. Is there any exemption to State Sales Tax or City fees available to
   manufacturers for the use of gas, electricity and water in the manufacturing
   process?
2. If yes, are research and development activities and packing operations
   considered manufacturing?
3. What is your sales tax rate and the statute of limitations?
4. Can local cities impose their own tax and are they subject to any
   exemptions?
5. Are there any exemptions available to residential accounts for the use of
   water, gas and electricity?
6. If yes, are nursing homes and apartment buildings considered residential?
7. Are there any other circumstances where utilities could be considered
   exempt from tax?
8. Who can we talk to or write to if we have additional questions concerning
   sales and use tax?
   Please send us the forms necessary to file a claim for refund and exemption. Also,
   could you explain the proper procedure for filing a claim, including whether we file it with
   the state or the utility company. Are there any fact sheets or regulations we can refer
   to.
   Thank you in advance for your timely response. If you have any questions, my direct
   number is X.

ST 12-0052-GIL
September 20, 2012
Page 2

DEPARTMENT’S RESPONSE:
1.

Is there any exemption to State Sales Tax or City fees available to manufacturers for
the use of gas, electricity and water in the manufacturing process?

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.
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 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).
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.
The Gas Revenue Tax Act imposes a tax upon persons engaged in the business of distributing,
supplying, furnishing, or selling gas to persons for use or consumption and not for resale. 35 ILCS
615/2. Except for transactions in interstate commerce, no specific exemptions are provided under the
Gas Revenue Tax Act. However, the definition of gross receipts contained in the Act excludes
consideration received from certain businesses that are certified by the Department of Commerce
and Community Affairs under Section 9-222.1 of the Public Utilities Act (220 ILCS 5/9-222.1). 35
ILCS 615/1. See 86 Ill. Adm. Code 470.131. The tax also does not apply to gross receipts received
from the federal government. See 86 Ill. Adm. Code 470.160.
The Gas Use Tax Law imposes a tax on the privilege of using in this State gas obtained in a
purchase of out-of-state gas at the rate of 2.4 cents per therm or 5% of the purchase price for the
billing period, whichever is the lower rate. See 35 ILCS 173/5-10 and 86 Ill. Adm. Code 471.105.
Section 5-10 of the Gas Use Tax Law provides that the tax does not apply to gas used by business
enterprises certified under Section 9-222.1 of the Public Utilities Act to the extent of such exemption
and during the period of time specified by the Department of Commerce and Economic Opportunity.
Section 5-50 contains the following exemptions from the Gas Use Tax:

ST 12-0052-GIL
September 20, 2012
Page 3

1.
2.

3.

4.
5.
6.

gas used by a business located in an enterprise zone;
gas used by governmental bodies or entities operated and organized exclusively
for charitable, religious, or educational purposes who have been issued a tax
exemption identification number by the Department of Revenue:
gas used in the production of electric energy, but not including gas used in the
general maintenance or heating of an electric energy production facility or other
structures;
gas used in petroleum refinery operations;
gas used in liquefaction and fractionation processes that produce value-added
natural gas by-products for resale; and
gas used in the production of anhydrous ammonia and downstream nitrogen
fertilizer products for resale.

A business enterprise need only be located in an enterprise zone certified by the Department of
Commerce and Economic Opportunity to claim the exemption provided in Section 5-50. The
business itself does not need to be certified by the Department of Commerce and Economic
Opportunity. Gas used by business enterprises under that exemption does not include gas that is
used for any residential purpose. See 86 Ill. Adm. Code 1471.125(a)(1).
The Electricity Excise Tax Law (35 ILCS 640/1 et seq.) imposes a tax upon the privilege of using in
this State electricity purchased for use or consumption and not for resale, other than by municipal
corporations owning and operating a local transportation system for public service. Section 2-4(c) of
this Law states in part: “[t]he tax imposed by this Section 2-4 is not imposed with respect to any use
of electricity by business enterprises certified under Section 9-222.1 or 9-222.1A of the Public Utilities
Act, as amended, to the extent of such exemption and during the time specified by the Department of
Commerce and Economic Opportunity; or with respect to any transaction in interstate commerce, or
to the extent to which such transaction may not, under the Constitution and statutes of the United
States, be made the subject of taxation by this State.”
2.

If yes, are research and development activities and packing operations considered
manufacturing?

A “manufacturing process” is the production of articles of tangible personal property, whether such
articles are finished products or articles for use in the process of manufacturing or assembling
different articles of tangible personal property by procedures commonly regarded as manufacturing,
processing, fabricating, or refining which changes some existing material or materials into a material
with a different form, use or name. These changes must result from the process in question and be
substantial and significant. See 86 Ill. Adm. Code 130.330(b)(2).
As noted above, Retailers' Occupation Tax does not apply to sales of machinery and equipment used
primarily (over 50%) in the manufacturing or assembling of tangible personal property for wholesale
or retail sale or lease. See 86 Ill. Adm. Code 130.330. The requirements of 86 Ill. Adm. Code
130.330 must be met when determining whether a piece of equipment qualifies for the manufacturing
machinery and equipment exemption.
In general, the use of machinery or equipment to place the tangible personal property to be sold into
the container, package, or wrapping in which such property is normally sold where such machinery or

ST 12-0052-GIL
September 20, 2012
Page 4
equipment is used as a part of an integrated manufacturing process would qualify. See 86 Ill. Adm.
Code 130.330(d)(3)(E).
Research and development are not part of the manufacturing process. However, 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 105/3-85; 35 ILCS 110/3-70.
The credit may be used to satisfy 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. 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%). 86 Ill. Adm. Code 130.331(b)(2).
‘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.
3.

What is your sales tax rate and the statute of limitations?

The Retailers’ Occupation Tax rate and Use Tax rate imposed by the State of Illinois are 6.25% and
1%, depending on the type of item being sold. See Sections 130.310 and 130.311. For local tax
rates, see the Department’s Tax Rate Database and the Tax Rate Finder on the Department’s
website.
Sections 4 and 5 of the Retailers' Occupation Tax Act set out the limitations periods for issuance of
Notices of Tax Liability to retailers. See 35 ILCS 120/4 & 5. Section 12 of the Use Tax Act
incorporates certain sections of the Retailers' Occupation Tax Act, including the limitations provisions
provided in that Act. See 35 ILCS 105/12. These limitation provisions run from the date the tax is
due rather than from the date the gross receipts are received.
4.

Can local cities impose their own tax and are they subject to any exemptions?

See the information provided in response to question 3.
Local retailers’ occupation taxes imposed by local governments and that are administered by the
Department must follow the same rules for exemptions, credits, and other administrative procedures
as the State Retailers' Occupation Tax. Consequently, if an item is exempt under the Retailers'
Occupation Tax, it is also exempt from a local retailers’ occupation tax.
5.

Are there any exemptions available to residential accounts for the use of water, gas and
electricity?

The State of Illinois does not impose a sales tax on the sale of water by public utilities, cooperatives
or units of local government.

ST 12-0052-GIL
September 20, 2012
Page 5

Generally, there are no exemptions under the Electricity Excise Tax Law, The Gas Revenue Tax Act
and the Gas Use Tax Law for residential consumers.
7.

Are there any other circumstances where utilities could be considered exempt from tax?

The exemptions from Electricity Excise Tax, Gas Revenue Tax and the Gas Use Tax are generally
described in paragraph 1 above.
8.

Who can we talk to or write to if we have additional questions concerning sales and use tax?

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