How did Illinois tax steel cable reels and customer reel deposits when the manufacturer retained or transferred ownership?

Plain-English summary

A cable manufacturer shipped cable on steel reels, charged separately stated reel deposits, and pursued customers for return of the reels. It asked how to tax the reel purchase and deposits when cable customers supplied resale or direct-pay certificates or failed to return a reel within one year.

IDOR said the answer depended mainly on ownership. If the manufacturer transferred reel title to the customer together with the cable, it could buy the reels tax-free for resale using a valid Certificate of Resale. The reel deposit then became part of the cable sale, so a resale certificate covering the cable also covered the deposit.

If the manufacturer retained ownership and reused or discarded the reels, it was the user and owed Use Tax when purchasing them. In that situation, the customer did not incur tax on the reel deposit, and the deposit generally was not included in the manufacturer's gross receipts.

What this means for you

Calling an amount a refundable deposit does not decide its tax treatment. Document whether title passes, whether return is contractually required, and who ultimately uses or disposes of the container.

Common questions

Could the manufacturer buy the reel for resale? Yes, when it transferred reel ownership with the cable.

What if it kept title? The manufacturer owed Use Tax on the reel.

Was the deposit taxable when title was retained? Generally no, according to this GIL.

Citations and references

• 86 Ill. Adm. Code 130.2070(a), (b), and (c)(1).
• 86 Ill. Adm. Code 130.1405.

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-15-0057-gil.pdf

Original ruling text

ST-15-0057-GIL – August 31, 2015 - GROSS RECEIPTS
This letter discusses the taxability of containers, wrapping, and packing materials and
related products. See 86 Ill. Adm. Code 130.2070. (This is a GIL.)

August 31, 2015

Dear Mr. XXXX:
This letter is in response to your letter dated May 8, 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:
I am writing to request a private letter ruling. COMPANY is a
manufacturer of cable products and purchases steel reels to place the
manufactured cable on for shipping to our customers. These reels are capitalized
when we purchase them and we maintain ownership to the reel even after
shipping the reel to and invoicing our customer for the deposit. When a customer
purchases the cable we charge a separately stated amount for the reel deposit on
our invoice. Based upon the above, please answer 1 and 2 below:

1. Should we charge sales tax or use tax on the separately stated steel reel
   deposit if the customer provided either a resale or direct pay certificate for the
   purchase of the cable?
2. Should we charge sales or use tax on the separately stated steel reel
   deposit if the customer is taxable on the cable portion of the invoice?

3. If we don’t charge the reel deposit on the initial cable invoice (the cable
is on the reel) but provide the customer a 1 year window to return the reel and
only after that 1 year period if they fail to return the reel, only then do we invoice
for the reel deposit. Based upon 3, please answer the following questions:
a. If the customer initially provided a resale or direct pay certificate when
they purchased the cable 1 year prior, should we now (1 year later) charge
sales/use tax on the reel deposit invoice?
b. If the customer did not provide a resale or direct pay certificate when
they purchased the cable 1 year prior, should we now (1 year later) charge
sales/use tax on the reel deposit invoice?
COMPANY considers the steel reels to be returnable and thus we pursue
the customer until they return them to us. Should we pay or self-assess sales/use
tax when we purchase of the reels?
Please respond as soon as possible. Please contact me with any questions
at (XXX) XXX-XXXX.

DEPARTMENT’S RESPONSE:
Based on the limited information in your letter, we cannot determine the exact nature of
the transactions involved. Your company’s tax liability for the reels and your customer’s tax
liability for the reel deposit are largely intertwined and dependent on a few factors. The sale of
containers, as defined in 86 Ill. Adm. Code 130.2070(a), is not subject to Retailers' Occupation
Tax liability or Use Tax when the purchasers of those containers transfer to customers the
ownership of the containers together with what is contained in them. If your company transfers
ownership of the cable reels to its customers together with the cable, the cable reels may be
purchased without incurring tax as purchases for resale. See subsection (b) of Section 130.2070.
You must provide your suppliers with Certificates of Resale that contain the information set out
in 86 Ill. Adm. Code 130.1405.
In the instances when your company transfers ownership of the cable reels to your
customers together with the cable, the deposit for the cable reel is considered to be a component
part of the gross charges for the sale of the cable it is attached to. Thus, if your customer
provides a resale certificate for the cable, the deposit is included in the charge for the cable, and
the entire sale is considered to be a sale for resale.
Your letter mentions that your company retains ownership of the reels subsequent to their
shipment to your customer. Please note that your company’s purchase of the cable reels would
not qualify for the resale exemption if your company does not transfer the ownership or title of
the cable reels to your customers and instead retains and reuses the cable reels or discards them.
See subsection (c)(1) of Section 130.2070. In such instances, your company would incur Use
Tax when it purchases the cable reels because your company would be considered the user of the

reels. In this instance, the customer who purchases cables from your company would not incur
tax on the reel deposit.
If the reels your company purchases are used to transfer your product to retail customers
with no binding agreement that those reels (or a like number of similar reels) be returned to you,
your company’s original purchase of the reels would be a tax-exempt purchase for resale. See
Sec. 130.2070(b)(1). We cannot determine the exact nature of these transactions based on the
limited information in your letter. However, if you do not transfer title to the reels, the deposit
for the reels will generally not be included in gross receipts when you make a sale to a customer.
Instead, in that case, your company should self assess Use Tax on the reels.
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,

Cara Bishop
Associate Counsel
CJB:mdb