Could a de minimis pan-refurbishing serviceman buy glaze tax-free when it became part of customers' exempt commercial baking equipment?

Plain-English summary

A company refurbished customer-owned commercial baking pans by stripping residue and old coating, straightening the pans, applying proprietary glaze, and curing it in an oven. The glaze became a component of the pan. The company never took title to the pans and operated as a de minimis serviceman paying Use Tax on transferred property.

IDOR ruled that the customer's manufacturing exemption could flow through to the serviceman. For industrial bakers, the pans were exempt manufacturing equipment and the impregnated glaze became part of that equipment. The company could buy glaze tax-free from Illinois suppliers and avoid self-assessing Use Tax on glaze bought from unregistered out-of-state suppliers.

The company had to document the customer's exemption with a completed Form ST-587 under the procedures described in the ruling. For unregistered out-of-state suppliers, it kept the ST-587 in its records.

The result did not cover pans used to prepare food in restaurants, food-service establishments, or other retail businesses, because that activity fell outside the manufacturing exemption.

What this means for you

A de minimis serviceman can use a customer's properly documented manufacturing exemption when transferred material becomes part of the customer's exempt equipment. Customer use and certificate records are essential.

Common questions

Why did the glaze qualify? It was cured into and became a component of exempt commercial baking pans used in manufacturing.

What documentation was required? A completed customer Form ST-587 handled as described in the ruling.

Did restaurant baking pans qualify? No. The ruling expressly excludes restaurants, food-service establishments, and other retailers.

Citations and references

• 86 Ill. Adm. Code 140.108(a)(2), 140.109, 140.106, and 130.330.
• Form ST-587.
• 2 Ill. Adm. Code 1200.110.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0002-plr.pdf

Original ruling text

ST 17-0002-PLR 02/09/2017 MANUFACTURING MACHINERY & EQUIPMENT
A de minimis serviceman incurring a Use Tax liability may claim exemptions predicated upon
either the exempt status of his customer or upon exemptions claimed by his customer based
on nontaxable uses of the tangible personal property transferred by the serviceman. These
exemptions include sales to customers who are able to properly document the manufacturing
machinery and equipment exemption. 86 Ill. Adm. Code 140.108(a)(2).

February 9, 2017

Re: Request for Private Letter Ruling-Application of Illinois Retailer Occupation Tax to
Purchases of Pan Glazing/Coating Materials.
Dear Xxxxx:
This letter is in response to your letter dated October 17, 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.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY for the issue or issues presented in this ruling and is
subject to the provisions of subsection (e) of Section 1200.110 governing expiration of Private Letter
Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY nor a
related taxpayer is currently under audit or involved in litigation concerning the issues that are the
subject of this ruling request. In your letter you have stated and made inquiry as follows:
COMPANY, a division of CORPORATION (“COMPANY”) writes to respectfully request
a private letter ruling from the Illinois Department of Revenue (“Department”) on
application of the Illinois Retailer Occupation Tax to purchases of pan glaze chemicals
(“Glaze”) used in its Illinois facility. COMPANY believes purchases of Glaze are exempt
and asks the Department to concur with its conclusion for the reasons stated herein.
I.)

Facts

ST 17-0002-PLR
PAGE 2

COMPANY is a division of CORPORATION, a S Corporation organized in STATE with
its headquarters in STATE. COMPANY operates various plants nationwide including its
COMPANY CITY facility located at ADDRESS. COMPANY is in the business of
refurbishing pans that are used in the commercial baking industry. Most pans and
bakeware used in the industry are designed to be used in automated conveyor ovens.
To operate properly, the pans must be straight to align with the conveyor mechanism.
The pans must also be coated with special chemicals that enable baked products to
release properly from the pan. Over time, the pans get disfigured from repeated use
and ovens heat; the chemical non-stick coating also wears away. At this point, the pans
no longer work properly. COMPANY refurbishes the pans by first cleaning the pan
using a proprietary process that completely strips the pan of all carbon, residue, and old
coating. The pans are next straightened to their original shape. Finally, the pans are
coated with Glaze which is cured in an oven and becomes a component part of the pan.
The pans are finally packaged and shipped to the customer. COMPANY does not take
title to the pans at any time; the pans remain property of the customer.
The Glaze COMPANY uses is a proprietary product; COMPANY purchases Glaze from
several vendors nationwide that produce the Glaze for COMPANY’s use. Vendors have
historically charged Illinois Retailer Occupation tax on purchases of Glaze used in its
CITY facility. COMPANY has historically accrued use tax in instances where ROT was
not charged.
II.)

Conclusion/Ruling Requested

COMPANY believes the application of Glaze is performed on items that qualify as
manufacturing machinery and equipment as its customers are industrial bakers that
manufacture baked goods. COMPANY understands such commercial/industrial bakers
are exempt from ROT on certain purchases of certain equipment including pans that are
refurbished by COMPANY. COMPANY believes the exemption afforded it’s industrial
baking customers “flows through” to COMPANY and allows COMPANY to purchase
Glaze exempt from Retailers Occupation Tax or Retailer’s Use Tax since COMPANY is
performing a service on exempt equipment.
COMPANY thus respectfully requests the Department to rule as follows:
i.)
ii.)
iii.)

III.)

COMPANY is properly considered to be a Deminimis Serviceman
COMPANY is entitled to exemptions available to its customers for exempt
use of Glaze transferred to its customers.
COMPANY can purchase Glaze exempt from Retailers Occupation Tax
and need not accrue use tax on purchases where ROT was not charged.

Analysis
A.) COMPANY is Properly Characterized as a Deminimis Service Provider

The pans that COMPANY refurbishes remain the property of its customers; COMPANY
does not take title to pans at any time. Thus, COMPANY is not a manufacturer of

ST 17-0002-PLR
PAGE 3
tangible personal property and is properly characterized as a service provider. The
Glaze that COMPANY purchases, however, is impregnated onto the pan and thus
becomes an item of tangible personal property that is sold and “transferred” to the
customer as part of the refurbishment process.
Section 140.108 (a) of the Illinois Service Occupation Tax provides that if the service
provider’s cost ratio of tangible personal property transferred to its customer is less than
35% of revenue received from the service, the service provider is considered a
“deminimis serviceman”.
The cost of the Glaze per pan transferred to the customer is less than 35% of the
revenue per pan received for the refurbishment service. Therefore, COMPANY is
properly characterized as a “Deminimis serviceman” as it provides a service and the
cost of Glaze transferred is less than 35% of per unit revenue.
B.) As a Deminimis Serviceman, COMPANY is entitled to its customers’
exemptions for nontaxable use of the Glaze transferred to its customers
Section 140.108 (a)(2) provides that the deminimis serviceman is the end user of
tangible personal property transferred to its service customers. However, this same
section provides:
“The Department has determined that a deminimis serviceman incurring a use tax
liability [on cost of tangible personal property transferred] may claim exemptions
predicated upon either the exempt status of the customer or upon exemptions claimed
by his customer based on nontaxable uses of the tangible personal property transferred
by the serviceman.”
As previously noted, the Glaze COMPANY purchases becomes a component part of the
customer’s pan and is transferred to the customer. COMPANY’s customers use the
pans in commercial baking operations which is an exempt use as described below
Section 130.330 of the Illinois Retailers Occupation Tax exempts sales at retail when
the goods sold are machinery and equipment primarily used in manufacturing of
tangible personal property for wholesale or retail sale. Equipment is further defined as
an independent device or tool that is separate from the machinery but is essential to an
integrated manufacturing process.
Section 130.330(d) of the Illinois Retailer’s Occupation Tax provides examples of when
machinery and equipment are primarily used in manufacturing such that the use is
exempt:
(F) “the production or processing of food, including the use of baking equipment such as
ovens to bake bread or other bakery items, whether that baking is performed by a
central bakery or a retail grocery store”
COMPANY’s customers use the pans in an exempt manner as equipment used in an
industrial bakery. Pans that COMPANY refurbishes are designed for repeated use in

ST 17-0002-PLR
PAGE 4
industrial and commercial ovens and are essential to the production of baked goods.
Hence, the pans meet the definition of equipment used in an integrated industrial
process. Furthermore, COMPANY’s customers are engaged in the “production and
processing of food” which is an example of an exempt primary use.
Since the Glaze is used in an exempt manner by its customers, COMPANY can
reasonably accept an exemption certificate from its customers. Using this exemption,
COMPANY can therefore purchase Glaze exempt from tax from its suppliers and does
not need to accrue use tax on Glaze purchased from suppliers where tax is not
charged.
Thank you in advance for consideration given to this ruling request. If you require any
additional information or have any questions, please contact the undersigned at ####.
DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. In Illinois, 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.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm.
Code 140.101. The purchase of tangible personal property that is transferred to the service customer
may result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending
upon his activities. The serviceman’s liability may be calculated in one of four ways: (1) Service
Occupation Tax on the separately stated selling price of tangible personal property transferred
incident to service; (2) Service Occupation Tax on 50% of the serviceman's entire bill; (3) Service
Occupation Tax on the serviceman's cost price if the serviceman is a registered de minimis
serviceman; or (4) Use Tax on the serviceman's cost price if the serviceman is a de minimis
serviceman and is not otherwise required to be registered under Section 2a of the Retailers'
Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of the sale of service. The tax is then calculated on the separately-stated
selling price of the tangible personal property transferred. If the servicemen do not separately state
the selling price of the tangible personal property transferred, they must use 50% of the entire bill to
the service customer as the tax base. Both of the above methods provide that in no event may the tax
base be less than the servicemen's cost price of the tangible personal property transferred. See 86 Ill.
Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers' Occupation Tax liability with respect to a portion of their business. See 86 Ill. Adm.
Code 140.109. Servicemen may qualify as de minimis if they determine that the annual aggregate
cost price of tangible personal property transferred incident to the sale of service is less than 35% of

ST 17-0002-PLR
PAGE 5
the total annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphics arts production). Servicemen no longer have the option of determining
whether they are de minimis using a transaction by transaction basis. Registered de minimis
servicemen are authorized to pay Service Occupation Tax (which includes local taxes) based upon
their cost price of tangible personal property transferred incident to the sale of service. Such
servicemen should give suppliers resale certificates and remit Service Occupation Tax using the
Service Occupation Tax rates for their locations. Such servicemen also collect a corresponding
amount of Service Use Tax from their customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act. This
method applies to COMPANY if it makes no retail sales and is therefore not required to be registered
as a retailer under Section 2a of the Retailers’ Occupation Tax Act and its aggregate annual cost
price of all tangible personal property transferred incident to sales of service is less than 35% of its
annual gross receipts from all sales of service. Such de minimis servicemen handle their tax liability
by paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess and remit Use Tax to the Department. The servicemen are
considered to be the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a "tax" from the service customers. See 86 Ill. Adm.
Code 140.108.
The rules governing de minimis servicemen provide that: “[t]he de minimis serviceman
incurring Use Tax liability is considered to be the end user of the tangible personal property
transferred to service customers. In this situation, the de minimis serviceman's customer incurs no
tax liability, since the customer is not the "user" of the tangible personal property transferred to him by
the serviceman. Although liability rests with a serviceman, the Department has determined that a de
minimis serviceman incurring a Use Tax liability may claim exemptions predicated upon either the
exempt status of his customer or upon exemptions claimed by his customer based on nontaxable
uses of the tangible personal property transferred by the serviceman.” 86 Ill. Adm. Code
140.108(a)(2). The rule goes on to state: “[f]or instance, these exemptions would include, but not be
limited to, sales to customers who are able to properly document the . . . manufacturing machinery
and equipment . . . exemption[].” 86 Ill. Adm. Code 140.108(a)(2)(B).
As described in this letter, the baking pans glazed by COMPANY are exempt equipment used
in a manufacturing process by COMPANY’s customers. The glaze that is impregnated onto the
baking pans by COMPANY becomes a part of that exempt equipment. Therefore, when COMPANY
purchases the glaze from its Illinois suppliers it may do so tax-exempt based on the nontaxable use of
the glaze by its service customers. Further, when COMPANY purchases glaze from its out-of-state
suppliers who are not registered to collect Illinois Use Tax, COMPANY does not incur and is not
required to self-assess Use Tax on these purchases. To document the exemption, COMPANY
should follow the procedures set out in 86 Ill. Adm. Code 140.108(a)(2)(A) regarding customers who
are “E” number holders. In place of providing suppliers your customer’s “E” number, you should
provide a copy of your customer’s completed ST-587 as described in 86 Ill. Adm. Code 130.330(g),
or, in cases where you purchase glaze from out-of-state suppliers who are not registered to collect
Illinois Use Tax, in which case you would be required to self-assess Use Tax, you should keep your
customer’s completed ST-587 in your records.

ST 17-0002-PLR
PAGE 6
It is important to note that the manufacturing machinery and equipment exemption extends to
baking equipment used in the production or processing of food. 86 Ill. Adm. Code 130.330(c)(3)(F).
The exemption does not extend to the preparation of food and beverages by restaurants, food service
establishments, and other retailers. 86 Ill. Adm. Code 130.330(b)(7). For any of COMPANY’s
customers that are restaurants, food service establishments, or other retailers, the exemption does
not apply.
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or hearing and this ruling shall bind the
Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this Private Letter
Ruling, you may contact me at (217) 782-2844. If you have further questions related to the Illinois
sales tax laws, 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
Chairman, Private Letter Ruling Committee
RSW:SJM:bkl