Could a leased soybean seed-treatment system qualify for Illinois's farm machinery exemption?

Plain-English summary

A business leased a soybean seed treater, holding tanks, conveyor belts, scales, and automation controls used seasonally to hold, move, and treat other people's seed. After conflicting audit treatment, it asked whether the leased system was taxable.

IDOR did not decide the specific equipment because the request lacked enough information. It explained that new or used machinery and equipment used or leased primarily in production agriculture could be exempt from Retailers' Occupation and Use Tax, along with individual replacement parts.

Production agriculture included the statutory crop, livestock, seed-stock, animal-husbandry, floriculture, aquaculture, horticulture, and viticulture activities quoted in the letter. Qualifying machinery had to contribute to that process, and the purchaser had to certify its primary agricultural use. Real-estate improvements such as fences, barns, roads, grain bins, silos, and confinement buildings were not exempt farm machinery.

Equipment purchased for lease could qualify when the lessee used it primarily in production agriculture and the purchaser-lessor certified that expected use at the time of purchase. If the lessor later leased it primarily to users whose activities did not qualify, the lessor became liable for the previously exempted tax.

What this means for you

The exemption turned on primary use and timely certification, not merely on the equipment being located at an agricultural business or used during planting season. The GIL left the soybean system's actual qualification unresolved.

Common questions

Did IDOR exempt the specific seed-treatment system? No.

Could leased equipment qualify? Yes, under the primary-use and certification rules described.

What if later leases were mainly nonagricultural? The purchaser-lessor became liable for the tax previously avoided.

Citations and references

• 35 ILCS 120/2-5(2) and 120/2-35.
• 86 Ill. Adm. Code 130.305(a) and (n).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0031-gil.pdf

Original ruling text

ST-15-0031 GIL 06/18/2015 FARM MACHINERY & EQUIPMENT

The sale of certain types of tangible personal property used in production agriculture is not
subject to Illinois Retailers’ Occupation Tax and Use Tax. See 35 ILCS 120/2-5(2) and 86 Ill.
Adm. Code 130.305.

June 18, 2015

Dear Mr. XXXX:

This letter is in response to your letter March 10, 2015, 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:

Our business recently (DATE) leased a soybean seed treater, holding tanks,
conveyor belts to move soybean seed to the scales and treater, and automation
controls to allow for proper application of the treatment for the seed. This system is
used for a short period of time during pre-plant and planting time only as it has no other
purpose.

As was discussed by us and the lessor, we assumed the system to hold, move
and treat the seed of others was production agriculture.

This was confirmed by an audit of our sales tax procedures which closed DATE.
Taxpayer ID: XX-XXXXXXX

Account ID: XXX-XXXX

Audit ID: XXXXXXXXXX

Return Type: XX-X

Audit periods: DATE - DATE

During the audit, the lease documentation was presented and was not included
in our tax liability which | concluded did reinforce our belief that it was indeed classed as
either production agriculture or possibly manufacturing.

A recent audit of the lease company’s parent bank deemed that our treater
system was in fact taxable contrary to the audit mentioned above. That bank has paid
the tax along with penalty and interest, is seeking payment from their lease company,
which in turn is wanting us to reimburse them...... which leads to the following question:

Is the treater system we are leasing subject to sales tax?

| was advised by an auditor in your department to send this question to your legal
department for consideration as the answer is undoubtedly unclear.

Further information, details, or explanations of the situation will be provided upon
request from: COMPANY, ADDRESS.

DEPARTMENT’S RESPONSE:

Without more information, the Department cannot provide you with a specific ruling on the
transaction described in your letter. However, we hope the following information is helpful.

In general, the Illinois Retailers’ Occupation Tax is imposed upon the total gross receipts
received by retailers who make sales of tangible personal property to Illinois end users. Unless the
sales are specifically exempted, such retailers must collect and remit the sales tax. See 86 Ill. Adm.
Code 130.101.

In certain cases, the sale of tangible personal property used in production agriculture is not
subject to Illinois Retailers’ Occupation Tax and Use Tax. Production agriculture is defined under the
Retailers’ Occupation Tax Act as “the raising of or propagation of livestock; crops for sale for human
consumption; crops for livestock consumption; and production seed stock grown for the propagation
of feed grains and the husbandry of animals or for the purpose of providing a food product, including
the husbandry of blood stock as a main source of providing a food product. Production Agriculture
also means animal husbandry, floriculture, aquaculture, horticulture, and viticulture.” See 35 ILCS
120/2-35.

Under 86 Ill. Adm. Code 130.305 “Farm Machinery and Equipment”, Illinois sales tax does not
apply to the sale of machinery and equipment, both new and used and including that manufactured
on special order, used or leased for use primarily in production agriculture or for use in State or
Federal agricultural programs. The sale of individual replacement parts for such machinery and
equipment is also exempt. In order to obtain the exemption, the purchaser must certify to the use
primarily in production agriculture of the equipment or machinery. See Section 130.305(a).

Machinery means major mechanical machines or machine components thereof contributing to
the production agriculture process or used primarily in State or Federal agricultural programs.
Machinery would include such things as tractors, combines, balers, irrigation equipment and cattle
and poultry feeders. Improvements to real estate such as fences, barns, roads, grain bins, silos and
confinement buildings are not considered exempt farm machinery.

Under 86 Ill. Adm. Code Section 130.305(n), farm machinery and equipment purchased for
lease to be used by the lessee primarily in production agriculture or in a State or Federal agricultural
program qualify for the exemption. Therefore, the lessor will not incur Use Tax on the purchase of the
machinery or equipment if at the time of the sale, the purchaser-lessor certifies that the equipment or
machinery will be used primarily in production agriculture. Should the purchaser-lessor subsequently
lease the machinery or equipment primarily to lessees who do not use it in a manner that would
qualify for the exemption, the purchaser-lessor will become liable for the tax from which he was
previously exempted. See Section 130.305(n).

| 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 Boggess
Associate Counsel

DMB:mdb