How did Illinois treat software, static-control items, and climate equipment used by an electronics manufacturer?

Plain-English summary

An automotive electronics manufacturer asked whether engineering fees for changing code in mounting and assembly machines, and static-control boots, apparel, flooring, environmental equipment, and testing equipment, qualified for the manufacturing exemption or Manufacturer's Purchase Credit (MPC).

IDOR declined to issue a fact-specific Private Letter Ruling and provided the general framework:

• Machinery and equipment used primarily—more than 50%—in qualifying manufacturing or assembly were exempt.
• General ventilation, heating, cooling, and climate-control equipment did not qualify unless the manufacturing process required it. Foundations and special-purpose buildings were not exempt manufacturing equipment.
• Computers used primarily to operate exempt machinery in CAD/CAM systems could qualify. Software contained in qualifying machinery at purchase also followed the exemption.
• Software used to operate exempt manufacturing machinery was excluded from taxable computer software under 35 ILCS 120/2-25, but did not earn MPC.
• Personal apparel, supplies, coolants, lubricants, adhesives, solvents, fuel, electricity, gas, and water were not exempt machinery or equipment.
• MPC could be applied to the state tax on qualifying production-related property that was not itself exempt, including supplies, consumables, hand tools, protective apparel, and fire and safety equipment used in a manufacturing facility. It could not satisfy local tax.

The letter did not expressly decide which particular programming invoices or static-control purchases met those standards.

Common questions

Was software operating exempt manufacturing machinery taxable? No, under the exclusion described in the letter.

Did that exempt software earn MPC? No.

Did protective apparel qualify as exempt machinery? No, but qualifying production-related apparel could be an MPC use.

Did all climate equipment qualify? No. It had to be required by the manufacturing process.

Citations and references

• 86 Ill. Adm. Code 130.330 and 130.331
• 35 ILCS 120/2-25
• 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-12-0056.pdf

Original ruling text

ST 12-0056-GIL 10/24/2012 MANUFACTURING MACHINERY & EQUIPMENT
This letter describes the Manufacturing Machinery and Equipment Exemption and the
Manufacturer’s Purchase Credit. See 86 Ill. Adm. Code 130.330 and 130.331. (This is
a GIL.)
October 24, 2012
Dear:
This General Information Letter is in response to your letter dated April 10, 2012, in which you
request a Private Letter Ruling. 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.
This letter is in response to your letter dated April 10, 2012, in which you request information.
Whether to issue a Private Letter Ruling in response to a request for such a ruling is within the
discretion of the Department. See subpart (a)(2) of 2 Ill. Adm. Code 120.110. The Department has
decided that it will not issue a Private Letter Ruling in regards to your request and instead is providing
you with a General Information Letter.
In your letter you have stated and made inquiry as follows:
COMPANY1, acting on behalf of our client, COMPANY2, respectfully requests a private
letter ruling pursuant to Ill. Adm. Code 1200. A properly executed IL 2848 Power of
Attorney form is included in this package authorizing COMPANY1 to request this ruling.
General Statement
This private letter ruling is not requested for hypothetical or alternative proposed
transactions, but rather to determine the taxability for Retailer’s [sic] Occupation Tax or
Use Tax purposes of actual transactions engaged in by COMPANY2 as described
below. This ruling is sought for all tax periods during which the related purchases will
occur.
Facts
COMPANY2 is not currently under audit by the Illinois Department of Revenue and has
not received notice of an impending sales and use tax audit from the same. The
sales/use tax issues in this request are not a part of current or pending litigation
involving this taxpayer or a related taxpayer and the equipment underlying these issues
has been a part of COMPANY2’s production process since the inception of the
business. The requesting parties have been unable to locate any case law, regulations,
or prior rulings dispositive of the issues within this request and neither this taxpayer nor

ST 12-0056-GIL
October 24, 2012
Page 2
its representative has previously requested a ruling from the Department regarding the
issues contained within this request.
Business Description
COMPANY2 manufactures electronic control units (ECU’s) which are embedded
systems that control an electronic system or subsystem of an automobile such as
sunroofs, power sliding door systems, smart key systems, etc. (electronic parts) at its
location: ADDRESS, IL. These components are sold to customers in the automotive
industry to be further assembled into automobiles. The first shipment of parts to
customers occurred in September 20XX with the plant in uninterrupted operation since
that time.
Issue No. 1
The components produced by COMPANY2 contain embedded software,
microprocessors, as well as myriad other small and delicate electronic components that
are precisely affixed to a circuit board to operate load drivers and actuating relays. The
high-speed multi-purpose mounting machines that perform these operations require
considerable programming code to pickup [sic], place, and affix the components that
comprise COMPANY2’s products. This programming code is resident within this
manufacturing machinery when it is purchased and is an integral component of that
machinery.
In addition to the mounting machines, COMPANY2 uses assembly machines that
require significant programming code to pickup [sic], move, judge quality, heat, and coat
its products. As with the mounting machines, the code is an integral component of the
machinery.
Periodically, this code must be altered, added to, or reworked in order to adjust the
machinery to perform correctly or repurpose the equipment to produce a new and
distinct product. This software modification, code addition, or replacement must be
performed by highly skilled electrical engineers with the work frequently being
outsourced to a vendor that performs equipment repairs. These software changes and
code alterations are typically billed as “Service: Engineering Fee” on invoices (typical
invoice copy is included with this request) from the vendor even though the code
segments are prewritten or canned pieces of code which are merely inserted on the
appropriate line by the engineers.
Taxpayer’s Position-Issue No. 1
It is COMPANY2’s position that these programming “repairs” are analogous to retooling
presses or other types of manufacturing equipment that require replacement of parts or
tooling to better function or to perform a new function. The retooling of presses or
replacement of parts to improve functioning of manufacturing machinery employing
much lower technology in the performance of manufacturing processes are inarguably
considered to be repairs of manufacturing machinery and are exempt from the Retailers
[sic] Occupation Tax under Illinois law therefore making these types of purchases

ST 12-0056-GIL
October 24, 2012
Page 3
eligible to earn the Manufacturer’s Purchase Credit. It is also COMPANY2’s position
that the engineering fees for programming changes to its equipment (both mounting and
assembly machines) should earn the Manufacturer’s Purchase Credit. Alternatively,
since the invoices do not segregate the charges for the code and the engineer’s
placement of the code into the correct programming line, the engineering fees should
earn Manufacturer’s Purchase Credit at ½ the regular rate under 86ILAC140.106(a)(2).
Question No. 1
Do the engineering service fees for software changes to mounting and assembly
machines earn the Manufacturer’s Purchase Credit and if so, at what rate do they earn
the credit?
Issue No. 2
COMPANY2’s customers have very high quality standards and an extremely low
tolerance for imperfections in the components they purchase. COMPANY2’s products
are highly technical electrical components that absolutely cannot be exposed to static
electricity which would compromise the product integrity and render the product
unsalable.
These issues mandate that COMPANY2 have policies in place to require workers and
visitors in the production room to wear anti-static boots and anti-static clothing. These
apparel items serve no safety or comfort purposes for the wearer; they only prevent
static electricity buildup or discharge. COMPANY2 has equipment to test persons
entering the production area for a static charge. COMPANY2 has also put special
flooring in place to prevent static electricity buildup,
Additional measures employed by COMPANY2 to maintain the static-free environment
include humidity and temperature control which necessitates the purchase of equipment
to achieve the environmental control parameters required for static elimination. The
relative humidity must stay within a range of 30% to 60% and the temperature must stay
within a range of 22ºC to 28ºC.
Taxpayer’s Position-Issue No. 2
It is COMPANY2’s Position that the static control issues are analogous to the bacteria
control issues in meat processing and food manufacturing industries which are afforded
an exemption from tax on cooling equipment to maintain a precise temperature in
processing areas.
COMPANY2 is required to control static electricity in the
manufacturing room just as meat/food processors must control bacterial growth with
cooling equipment. The equipment and apparel at issue are used exclusively to control
static electricity buildup. It is COMPANY2’s position that the static electricity control
apparel and boots, flooring, humidity control equipment, heating/cooling control
equipment, and static electricity testing equipment are exempt manufacturing equipment
under Illinois law.
Question No. 2

ST 12-0056-GIL
October 24, 2012
Page 4

Are the static control boots, apparel, flooring, temperature control equipment, humidity
control equipment, and testing equipment exempt from Illinois ROT/UT? If so, do they
therefore earn the Manufacturer’s Purchase Credit?
Requested Ruling Issue No. 1
COMPANY2 respectfully requests that the Department issue a Private Letter Ruling that
specifies the engineering fees listed in Issue No. 1 are considered to be equipment such
as parts that require replacement in the normal course of operation and would therefore
earn the Manufacturer’s Purchase Credit.
Requested Ruling Issue No. 2
COMPANY2 also respectfully requests that the Department issue a Private Letter
Ruling that specifies the components listed in Issue No. 2 are integral parts of the
manufacturing process and are exempt from Illinois Retail [sic] Occupation tax and
Illinois Use tax and, as a corollary, earn Manufacturer’s Purchase Credit.
Request for a Conference
We respectfully request a personal conference to discuss these matters orally, if the
Department believes that such a discussion may be helpful or if the Department may
otherwise intend to render a ruling contrary to the taxpayer’s position on the issues.
Thank you in advance for your consideration of this request.
DEPARTMENT’S RESPONSE:
Manufacturing Machinery and Equipment exemption & computer software
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 are exempt from Retailers'
Occupation Tax. 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 process in question and be substantial and significant.
Machinery or equipment used for general ventilation, heating, cooling, climate control or general
illumination, not required by the manufacturing process would not qualify for the manufacturing
machinery and equipment exemption, and the purchaser would not earn MPC. See Section
130.330(d)(4)(H).
Machinery and equipment of this type only qualifies if required by the
manufacturing process.
Manufacturing equipment does not include foundations for, or special purpose buildings to house or
support, machinery and equipment. See Section 130.330(b)(5).

ST 12-0056-GIL
October 24, 2012
Page 5

Section 130.330(c)(3) describes the application of the manufacturing machinery and equipment
exemption to computer-assisted manufacturing systems. The exemption applies to equipment,
"including computers used primarily in operating exempt machinery and equipment in a computerassisted design, computer-assisted manufacturing (CAD/CAM) system." See 86 Ill. Adm. Code
130.330(c)(3). If manufacturing machinery and equipment qualifies for the exemption, any computer
software contained in the machinery or equipment at the time of purchase will also qualify for the
exemption.
The Retailers’ Occupation Tax Act is imposed upon persons engaged in the business of selling at
retail tangible personal property, including computer software. 35 ILCS 120/2. Computer software is
defined in Section 2-25 of the Retailers’ Occupation Tax Act and is considered tangible personal
property for purposes of the Act. The definition specifically excludes software used to operate
exempt machinery and equipment used in the process of manufacturing or assembling tangible
personal property for wholesale or retail sale or lease. Although computer software generally is not
exempt under the manufacturing machinery and equipment exemption since computer software is
neither machinery nor equipment, computer software used to operate exempt machinery and
equipment that used in the process of manufacturing or assembling tangible personal property is not
subject to Retailers’ Occupation Tax. See 35 ILCS 120/2-25; 86 Ill. Adm. Code 1935(d). Computer
software exempt under Section 2-25 does not earn MPC.
Manufacturer’s Purchase Credit
As noted above, the Retailers' Occupation Tax does not apply to 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 manufacturing
process is the production of articles of tangible personal property 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 Section 130.330(b)(2). The exemption does not apply to “hand tools,
supplies (such as rags, sweeping or cleaning compounds), coolants, lubricants, adhesives, or
solvents, items of personal apparel (such as gloves, shoes, glasses, goggles, coveralls, aprons,
masks, mask air filters, belts, harnesses, or holsters), coal, fuel oil, electricity, natural gas, artificial
gas, steam, refrigerants or water.” See Section 130.330(c)(3).
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.
In addition, MPC may also 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. 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

ST 12-0056-GIL
October 24, 2012
Page 6
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 (similar to the tangible personal property about which you inquire in your
letter) 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).
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