We're a steel-framing manufacturer: we use overhead cranes to take master coil out of storage and load it onto our slitter. Is that loading step part of the production cycle (exempt) or a pre-production activity (taxable) under the manufacturing machinery and equipment exemption?

Plain-English summary

A steel-framing manufacturer described its production process to the Department: it receives raw-material master coils from a steel vendor, slits the coils into appropriate widths using a slitter, uses roll-forming machines to continue processing the slit coil into finished product, and then packages the finished product for loading onto trucks for delivery to customers.

The taxpayer's specific question was about overhead cranes: the company uses overhead cranes to take the master coil out of storage and load it onto the slitter, and it asked whether that loading step is part of the "production cycle" (which would make the crane's use exempt) or a "pre-production activity" (which would make it taxable). The taxpayer itself quoted the two competing regulatory standards it was trying to apply:

• Machinery and equipment used primarily to store, convey, handle, or transport materials or sub-assemblies prior to their entrance into the production cycle does not qualify for the manufacturing exemption -- it is taxable.
• Machinery and equipment used to convey, handle, or transport property to be sold within production stations on the production line, or directly between production stations or buildings within the same plant, is exempt.

The Department did not specifically answer this question. Its response did not state whether using an overhead crane to move master coil from storage onto the slitter falls on the taxable "prior to entrance into the production cycle" side of the line, or the exempt "within/between production stations" side. Instead, the Department gave the same general explanation it gives for the July 1, 2019 expansion of the manufacturing and assembling machinery and equipment exemption to include "production related tangible personal property" (86 Ill. Adm. Code 130.330, 130.330(h)), and listed its four general example categories of production-related property:

1. Tangible personal property incorporated into real estate within a manufacturing facility for use in a production related process (whether purchased by the manufacturer or by a construction contractor).
2. Supplies and consumables used in a manufacturing process, including fuels, coolants, solvents, oils, lubricants, and adhesives.
3. Hand tools, protective apparel, and fire and safety equipment used or consumed within a manufacturing facility.
4. Tangible personal property used or consumed in a manufacturing facility for pre-production and post-production material handling, receiving, quality control, inventory control, storage, staging, and packing for shipping or transportation.

The Department did not connect any of these four categories back to the taxpayer's overhead-crane scenario, so the letter leaves the taxable-vs.-exempt determination for the master-coil-loading crane unresolved.

What this means for you

Steel framers and other manufacturers using overhead cranes or similar material-handling equipment

This GIL does not tell you whether moving raw material from storage onto a processing machine (like a slitter) is exempt "production" use or taxable "pre-production" use. The Department only restated the general legal framework -- it did not apply that framework to the crane/master-coil facts the taxpayer described. If you have a similar fact pattern, you cannot rely on this letter alone to conclude your overhead crane is exempt (or taxable); you would need a fact-specific determination, such as a Private Letter Ruling, to get a binding answer.

Businesses considering the July 1, 2019 "production related tangible personal property" expansion

Regardless of how the crane question comes out, note that the manufacturing and assembling machinery and equipment exemption was expanded, effective July 1, 2019, to reach "production related tangible personal property" -- not just machinery and equipment used directly in manufacturing. Review the four example categories above (real estate incorporation, supplies/consumables, hand tools/protective apparel/safety equipment, and pre-/post-production material handling and storage) against your own purchases to see whether any newly qualify.

Anyone weighing "pre-production" versus "in-cycle" material handling equipment

The taxpayer's own framing of the two competing regulatory standards remains a useful summary of the general test: equipment used primarily to store, convey, handle, or transport materials before they enter the production cycle is taxable, while equipment used to convey, handle, or transport product within or between production stations in the same plant is exempt. Where the line falls for any specific piece of equipment (including this taxpayer's overhead crane) is a fact-specific determination this letter does not make.

Common questions

Q: Did the Department decide whether the taxpayer's overhead crane is exempt or taxable?
A: No. The Department's response did not address the overhead-crane/master-coil-loading question at all. It only restated the general "production related tangible personal property" exemption expansion and its four example categories.

Q: What was the taxpayer's process, according to the letter?
A: The company receives master coils of raw material from a steel vendor, slits the coils into appropriate widths, uses roll-forming machines to process the slit coil into finished product, and packages the finished product for truck delivery to customers. Overhead cranes are used to take master coil out of storage and load it onto the slitter.

Q: What is the general rule the taxpayer cited for taxable versus exempt material-handling equipment?
A: Equipment used primarily to store, convey, handle, or transport materials or sub-assemblies prior to their entrance into the production cycle does not qualify for the exemption (taxable). Equipment used to convey, handle, or transport property to be sold within production stations on the production line, or directly between production stations or buildings in the same plant, is exempt.

Q: What did the Department's response actually cover?
A: It explained that, beginning July 1, 2019, the manufacturing and assembling machinery and equipment exemption includes "production related tangible personal property" as defined in 86 Ill. Adm. Code 130.330(h), and it listed four general categories of property the Department considers production related: real estate incorporation items, supplies/consumables, hand tools/protective apparel/safety equipment, and pre-/post-production material handling, receiving, quality control, inventory control, storage, staging, and packing for shipping.

Q: Can I rely on this GIL to classify my own overhead crane or similar equipment?
A: Only as general background. This GIL is not a statement of Department policy, is not binding on the Department, and here it does not even reach a conclusion on the specific crane question asked. A fact-specific ruling (such as a Private Letter Ruling) would be needed for a binding determination.

Citations and references

Statutes cited:

• 86 Ill. Adm. Code 130.330 (manufacturing and assembling machinery and equipment exemption, including the July 1, 2019 production related tangible personal property expansion)
• 86 Ill. Adm. Code 130.330(h) (defines production related tangible personal property used or consumed in a production related process by a manufacturer)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0023-gil.pdf

Original ruling text

ST 19-0023-GIL 12/04/2019 MANUFACTURING MACHINERY & EQUIPMENT
Beginning on July 1, 2019, the manufacturing and assembling machinery and
equipment exemption includes production related tangible personal property
purchased on or after July 1, 2019. See 86 Ill. Adm. Code 130.330. (This is a
GIL).
December 4, 2019
Dear XXX:
This letter is in response to your letter dated May 31, 2019, 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:
COMPANY is a manufacturer of steel framing. Our production process is
as follows. We receive our raw materials, master coils, from a steel vendor. We
slit master coils into appropriate widths for making various products, we use roll
forming machines to continue processing appropriate slit coil for finished product.
We package the finished product for loading on trucks and delivery to customer.
My question is on the taxability or exemption for overhead cranes. We use
overhead cranes to take the master coil out of storage and load it on to the slitter.
Is loading part of the production cycle or is it considered a pre-production
activity?
“The manufacturing machinery and equipment does not apply to
machinery or equipment used in primarily pre-production activities. Machinery
and Equipment used primarily to store, convey, handle or transport materials or
sub-assemblies prior to their entrance into the productions cycle do not qualify for
the equipment exemption. Taxable

ST 19-0023-GIL
December 4, 2019
Page 2
Or
“The use of machinery and equipment to convey, handle, or transport the
tangible personal property to be sold within production stations on the production
line or directly between the production stations or buildings within the same
plant”. Exempt
DEPARTMENT’S RESPONSE:
Beginning on July 1, 2019, the manufacturing and assembling machinery and
equipment exemption includes production related tangible personal property.
Production related tangible personal property means all tangible personal property used
or consumed in a production related process by a manufacturer in a manufacturing
facility in which a manufacturing process takes place or by a graphic arts producer in
graphic arts production. Production related tangible personal property also means all
tangible personal property that is used or consumed in research and development
regardless of use within or without a manufacturing or graphic arts production facility.
86 Ill. Adm. Code 130.330(h).
The Department recently filed emergency regulations that incorporate production
related tangible personal property into the manufacturing and assembling machinery
and equipment exemption which can be found on the Department’s website and
became effective upon filing. The Department included examples of items that the
Department considered to be production related. For example, the Department
provided that the following tangible personal property would be considered production
related: (1) tangible personal property purchased by a manufacturer for incorporation
into real estate within a manufacturing facility for use in a production related process; or
tangible personal property purchased by a construction contractor for incorporation into
real estate within a manufacturing facility for use in a production related process; (2)
supplies and consumables used in a manufacturing process in a manufacturing facility,
including fuels, coolants, solvents, oils, lubricants, and adhesives; (3) hand tools,
protective apparel, and fire and safety equipment used or consumed within a
manufacturing facility; and (4) tangible personal property used or consumed in a
manufacturing facility for purposes of pre-production and post-production material
handling, receiving, quality control, inventory control, storage, staging, and packing for
shipping or transportation.
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,

ST 19-0023-GIL
December 4, 2019
Page 3

DMB:rkn

Debra M. Boggess
Associate Counsel