Did an automated pharmacy machine that counted pills and filled, labeled, and capped bottles qualify for Illinois's manufacturing machinery exemption?

Plain-English summary

A pharmacy planned to buy a machine that automatically counted medication, filled bottles, applied labels, and capped the final prescription for pharmacist review. It argued that replacing manual work with mechanical assembly should qualify for the manufacturing machinery and equipment exemption.

IDOR said the exemption required machinery used primarily in manufacturing or assembling tangible personal property for sale or lease. The process had to substantially and significantly change existing material into property with a different form, use, or name.

The described pharmacy machine generally did not qualify because its counting, filling, labeling, and capping functions did not make that required change in the material.

What this means for you

Automation, accuracy, labor savings, and mechanical operation do not by themselves establish manufacturing. The equipment must perform a qualifying transformation or assembly under Section 130.330.

Common questions

Did replacing manual prescription filling make the machine exempt? No.

What requirement was missing? A substantial and significant change to material's form, use, or name.

Citations and references

• 86 Ill. Adm. Code 130.101, 130.330, and 150.101.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0028-gil.pdf

Original ruling text

ST 16-0028 GIL 07/08/2016

MANUFACTURING MACHINERY & EQUIPMENT

Under the Retailers’ Occupation Tax Act, the manufacturing machinery and equipment
exemption is available for 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. 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 86 Ill. Adm. Code 130.330.
(This is a GIL.)
July 8, 2016
RE: Sales tax ST-587 Equipment Exemption Certificate
Dear Xxxxx:
This letter is in response to your letter dated April 25, 2016, in which you requested
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 at COMPANY are looking to go the route of automation in assembling our final
product to the patients. We are purchasing a machine in which we will able to Count,
Fill the bottle, Label the Bottle, and Cap so the final product is ready to be checked by
the pharmacist and dispensed to the patient. We are trying to understand if this
purchase is eligible for the Sales tax exemption as per your documentation in Section
130.330 it seems like if we use the product for assembly for retail sale then the eligibility
would be sustained. The machine to do this process is available in the market only by 3
manufacturers and I am sending you a copy of one machine to review. This piece of
machinery is 99.99% accurate helping us automate the process which is done by my
Technicians today to give them more time to be with patients and do what we are here
to do is communicate with the patients as well as other providers. This automation is
replacing the valuable time in which it take about 2 minutes in average to fill a
prescription and the machine will do the same process with higher accuracy in less than
30 seconds without and attendant. It will also eliminate the possibility of cross infection
between drugs since they will be contained in a small cell and not touch anything else. I

also think it is a requirement to have mechanical mechanism which is how this machine
works by mechanically doing every task by taking the input from the computer as the
pharmacist types it in and authorizes it. The reason we believe this exemption should
be allowed is that we the process that is replaced is complete manual labor and nothing
else has been taken away from neither our technicians nor the Pharmacist. I know you
may of not considered this mechanism for automation before for Sales Tax Exemption
but I urge you please look into it closely and grant us this permission. Please let us
know if you need any other information and please feel free to call me at (XXX) XXXXXXX or email me at EMAIL. Our Mailing address is as follows:
NAME
ADDRESS
CITY, IL XXXXX
DEPARTMENT’S RESPONSE:
The Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property at retail to purchasers for use or consumption. See 86
Ill. Adm. Code 130.101. 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.
Retailers' Occupation Tax, however, does not apply to sales of machinery and equipment used
primarily 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).
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 or for in-house
manufacture of exempt machinery and equipment. See Section 130.330(c)(2).
Generally, equipment used in the manner described in your letter would not qualify for the
manufacturing machinery & equipment exemption because the equipment is not changing the
existing material into a material with a different form, use or name.
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,

Debra M. Boggess
Associate Counsel
DMB:bkl