Did an Illinois Public Water Supply Construction Permit satisfy the permit requirement for the nonprofit community-water construction exemption?

Plain-English summary

A not-for-profit rural water cooperative was beginning construction of its first system for 203 rural customers. Because the system was not yet operational, the Illinois EPA had issued a Public Water Supply Construction Permit rather than a later operating permit. The cooperative asked whether that construction permit satisfied the permit requirement for Illinois's community-water sales and use tax exemption.

IDOR said yes. A Public Water Supply Construction Permit issued under Title IV of the Environmental Protection Act is a valid water-supply permit for this exemption.

The nonprofit must certify to suppliers that it is a not-for-profit corporation, operates a statutory community water supply, holds the valid Title IV permit, and will use the purchased property in construction or maintenance of that supply. A construction contractor buying on the nonprofit's behalf should give the supplier its own certification and a copy of the nonprofit's certificate. Suppliers should retain the documentation.

Common questions

Must a new system wait until it receives an operating permit? No. The GIL accepted the Title IV construction permit for exemption purposes.

Can the contractor make exempt purchases? Yes, with the contractor certification and a copy of the nonprofit's qualifying certificate.

Citations and references

• 35 ILCS 105/3-5(34), 110/3-5(26), 115/3-5(27), and 120/2-5(39)
• 415 ILCS 5/3.145 and Title IV
• 86 Ill. Adm. Code 130.1934

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0059.pdf

Original ruling text

ST-13-0059-GIL 10/18/13 COMMUNITY WATER SUPPLY
This letter concerns the community water supply exemption. See 35 ILCS 105/3-5(34) and 35
ILCS 120/2-5(39). (This is a GIL.)

October 18, 2013
Dear Xxxxx:
This letter is in response to your letter dated October 11, 2013, 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 represent a rural water cooperative formed as an Illinois Not for Profit
Corporation in 2007 for the purpose of designing and constructing a community
water supply, as defined in 86 Ill. Adm. Code Sec. 130.1934(b). The cooperative
has been recognized by the Internal Revenue Service as a tax exempt entity
pursuant to Internal Revenue Code Section 501(c)(12). The purpose of this letter
is to request a formal ruling concerning the definition of the phrase “hold a valid
water supply permit issued under Title IV of the Environmental Protection Act”
(See Section 130.1934(a)).

Statute/Regulation
35 ILCS 120/2-5(39) provides that the following is exempt from the Illinois sales
and use tax:
Beginning January 1, 2008, tangible personal property used in the construction
or maintenance of a community water supply, as defined under Section 3.145 of
the Environmental Protection Act, that is operated by a not-for-profit corporation
that holds a valid water supply permit issued under Title IV of the Environmental
Protection Act. This paragraph is exempt from the provisions of Section 2-70.
Background

After several years of planning, gathering easements to install water mains, and
signing customers, the cooperative was able to bid the project and closed on
construction grants and loans through the U.S. Department of Agriculture Rural
Development Office and the U.S. Environmental Protection Agency ($500,000
STAG Grant secured by Congressman John Shimkus). The project is budgeted at
$4.4 million. A notice to proceed was issued to the contactors on October 7, 2013
to install water mains and construct a water tower and booster pump station. The
water supply is being purchased from a village organized under the Illinois
Municipal code at a wholesale rate pursuant to a Water Purchase Agreement
entered into between cooperative and the Village.
This is the first construction project for this cooperative and is designed to supply
potable drinking water to 203 rural customers who currently do not have an
adequate supply of water for household purposes. The Illinois Environmental
Protection Agency has issued a construction permit, attached with redactions, but
has not issued a water supply permit as water, obviously, is not available to
customers when the system has yet to be built.
Based upon our work with several other similar rural water cooperatives since the
aforementioned regulation was issued preliminarily in IDOR information Bulletin
FY 2008-07 (December 2007), contactors have been able to utilize the IEPA
construction permit to obtain the sales and use tax exemption afforded under the
regulation and its enabling statute, 35 ILCS 120/2-5(39). This cooperative is the
first to be informed that the IEPA construction permit is not sufficient.
At this time, the contractors are ready to proceed with purchasing materials and
begin construction as the notice to proceed has been issued. Therefore, time is of
the essence in obtaining a ruling from the Department.

Issue
Whether a new community water supply system in its first phase of construction
qualifies for sales and use tax exemption pursuant to 35 ILCS 120/2-5(39) since a
not-yet constructed system has only a construction permit issued under the Illinois
Environmental Protection Act, and not a water supply permit issued under the
same statute.
Position of the Cooperative
As a new not-for-profit corporation that is constructing its first water system to
provided potable water to 203 households and farmsteads, the Cooperative would
not be in a position to obtain a water supply permit as such permits are not
available until the construction is complete, the necessary testing is complete, and
the system is operational. The taxing burden on a new organization trying to

service rural residents would be extraordinary when supplies for construction will
be well in excess of one million dollars. Such a burden would increase water
rates and require the organization to seek additional loans from the USDA Rural
Development program.
If the statutory exemption related to sales and use tax only exempts existing water
systems and not new systems, this would create a chilling effect on the ability of
new systems to become operational and provide water service to rural residents
who have no other options available to obtain potable water.
Therefore, we ask that the Department of Revenue issue a ruling clarifying that a
construction permit issued by the Illinois Environment Protection Agency
satisfies the statutory requirements for a permit when the community water supply
is constructing its first water distribution system.
If you need any additional information, please do not hesitate to contact me.
Thank you for your prompt attention to this request.

DEPARTMENT’S RESPONSE:
Beginning January 1, 2008, sales of tangible personal property used in the construction or
maintenance of a community water supply, as defined under 415 ILCS 5/3.145, that is operated
by a not-for-profit corporation that holds a valid water supply permit under Title IV of the
Environmental Protection Act are exempt from Use Tax Act, the Service Use Tax Act, the
Service Occupation Tax Act and Retailers’ Occupation Tax Act. 35 ICLS 105/3-5(34), 35 ILCS
110/3-5(26), 35 ILCS 115/3-5(27); 35 ILCS 120/2-5(39) and 86 Ill. Adm. Code 130.1934. To
document the exemption, qualifying not-for-profit corporations purchasing tangible personal
property to be used in the construction or maintenance of a community water supply should give
their suppliers a certificate that certifies that 1) it is a not-for-profit corporation; 2) it operates a
community water supply as defined under Section 3.145 of the Environmental Protection Act; 3)
it holds a valid water supply permit issued to it under Title IV of the Environmental Protection
Act; and 4) the tangible personal property being purchased will be used in the construction or
maintenance of the community water supply operated by the not-for-profit corporation.
In order for the construction contractor to obtain the benefit of the exemption on
purchases of tangible personal property purchased from suppliers on behalf of a not-for-profit
corporation that qualifies for the exemption, the construction contractor should certify to the
supplier that the tangible personal property being purchased will be used in the construction or
maintenance of the community water supply operated by the not-for-profit corporation and
provide the supplier with a copy of the certificate obtained from the not-for-profit corporation to
document the exemption. The supplier should maintain these certifications in its books and
records.
The copy of the Public Water Supply Construction Permit you provided was issued by
the Illinois Environmental Protection Agency “for the construction and/or installation of the

public water supply improvements . . . in accordance with the provisions of the ‘Environmental
Protection Act”, Title IV, Sections 14 through 17, and Title X, Sections 39 and 40 . . . “ A public
water supply that possesses a Public Water Supply Construction Permit issued pursuant to Title
IV holds a valid water supply permit under Title IV of the Environmental Protection Act for
purposes of the community water supply exemption.
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
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