Can an electrical contractor buy small hand tools tax-free because it is working on a project covered by the manufacturing machinery and equipment exemption?

Subject

Manufacturing Machinery And Equipment

Plain-English summary

An electrical contractor's representative asked the Illinois Department of Revenue whether small tools purchased for a project could be bought tax-free, based on a vendor's claim that a June 2019 Department bulletin (2019-28) let the contractor skip sales tax on tools used for a project covered by the manufacturing machinery and equipment exemption. Critically, these tools were not being installed into the manufacturing facility — the contractor was just using them to do the installation work.

The Department said no. Illinois exempts machinery and equipment used primarily in manufacturing or assembling tangible personal property for wholesale or retail sale or lease (see 86 Ill. Adm. Code 130.330). Since July 1, 2019, that exemption has also covered "production related tangible personal property" — things like supplies, consumables, hand tools, protective apparel, and safety equipment — but only when a manufacturer uses or consumes them inside its own manufacturing facility as part of a manufacturing or production-related process, or when a construction contractor purchases property that is incorporated into real estate at the facility for a production related process.

The Department drew a clear line: hand tools qualify as exempt production related property only if a manufacturer itself uses or consumes them within the manufacturing facility. A contractor's own tools — the ones it keeps and uses to perform its installation services — do not qualify, even though the contractor is working on a manufacturing-exempt project. The rule does not let a contractor buy its own tools tax-free just because it is providing services to a manufacturer at a manufacturing facility.

The letter also touches on a related, narrower scenario: when a vendor sells qualifying machinery and equipment to a contractor who will incorporate it into real estate for a manufacturer, the contractor (who is the taxable user in that case) can claim the exemption only by giving the vendor a certification that the property will become manufacturing machinery and equipment for that manufacturer, including the manufacturer's name and registration number.

What this means for you

Contractors working at manufacturing facilities

If you are a contractor providing installation, construction, or other services at a manufacturing facility, you cannot buy your own hand tools, equipment, or supplies tax-free just because the project involves manufacturing machinery and equipment exempt from sales tax. The exemption for production related tangible personal property (including hand tools) applies to what the manufacturer uses or consumes in its own facility — not to tools a contractor buys and keeps for its own use. If you are instead purchasing machinery or equipment that you will incorporate into the manufacturer's real estate, a different certification procedure (naming the manufacturer and its registration number) may let the exemption pass through, per 86 Ill. Adm. Code 130.330(j)(4).

Vendors selling to contractors

Don't assume a customer's manufacturing-related project automatically makes everything you sell them exempt. Vendors should confirm whether the specific items being purchased are (1) machinery/equipment being incorporated into a manufacturing facility for a manufacturer, with proper certification, or (2) supplies/tools/equipment a contractor is simply using to perform its own work — only the former can qualify for exemption.

Accountants and tax professionals

This GIL is a useful reminder that the July 1, 2019 expansion of the manufacturing exemption to "production related tangible personal property" (86 Ill. Adm. Code 130.330(h)) is tied to use or consumption by a manufacturer within its manufacturing facility, not to any purchase connected to a manufacturing project generally. When advising contractor clients, check whether the client is the end user of the tools/supplies (taxable) versus incorporating exempt machinery/equipment into real estate for a certified manufacturer (potentially exempt with proper certification under 130.330(j)(4)).

Common questions

Q: Can a contractor buy tools tax-free if it is working on a manufacturing machinery and equipment exempt project?
A: No. The manufacturing exemption for production related tangible personal property, including hand tools, applies only when a manufacturer uses or consumes the property within its own manufacturing facility. A contractor cannot buy its own tools tax-free simply because it provides services to a manufacturer at a manufacturing facility.

Q: What is "production related tangible personal property"?
A: Under 86 Ill. Adm. Code 130.330(h), effective July 1, 2019, it is all tangible personal property used or consumed in a production related process by a manufacturer in a manufacturing facility (or by a graphic arts producer in graphic arts production), plus property used or consumed in research and development regardless of location. The Department's examples include supplies and consumables (fuels, coolants, solvents, oils, lubricants, adhesives), hand tools, protective apparel, fire and safety equipment used within the facility, and property used for pre- and post-production material handling, receiving, quality control, inventory control, storage, staging, and packing for shipping.

Q: Do contractors ever get an exemption on a manufacturing project?
A: Yes, but only in a specific circumstance: contractors receive an exemption for production related tangible personal property they purchase for incorporation into real estate within a manufacturing facility for use in a production related process. When a vendor sells qualifying machinery and equipment to a contractor who will incorporate it into the manufacturer's real estate, the contractor should give the vendor a certification (including the manufacturer's name and registration number) stating the property will be transferred to the manufacturer as manufacturing machinery and equipment.

Q: Does this letter carry the same legal weight as a Private Letter Ruling?
A: No. This is a General Information Letter (GIL), which merely directs taxpayers to relevant regulations and other sources of information. It is not a statement of Department policy and is not binding on the Department. A Private Letter Ruling (PLR), by contrast, is binding on the Department as to the specific taxpayer and facts presented, and must follow the procedures in 2 Ill. Adm. Code 1200.110.

Q: Where can I read the underlying regulation?
A: See 86 Ill. Adm. Code 130.330, including subsection (h) (production related tangible personal property) and subsection (j)(4) (contractor certification), as well as related provisions on construction contractors at 86 Ill. Adm. Code 130.1940 and 130.2075.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.330 (manufacturing machinery and equipment exemption)
• 86 Ill. Adm. Code 130.330(h) (definition of production related tangible personal property)
• 86 Ill. Adm. Code 130.330(j)(4) (contractor certification for machinery and equipment incorporated into real estate)
• 86 Ill. Adm. Code 130.1940 (construction contractors as taxable users)
• 86 Ill. Adm. Code 130.2075 (construction contractors)
• 2 Ill. Adm. Code 1200.110 (procedures for Private Letter Rulings)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• 44 Ill. Reg. 5392 (regulatory update reflecting changes to the manufacturing exemption)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0027-gil.pdf

Original ruling text

ST 20-0027-GIL 10/14/2020

MANUFACTURING MACHINERY AND EQUIPMENT

This letter discusses the manufacturing machinery and equipment exemption and production
related tangible personal property. See 86 Ill. Adm. Code 130.330. (This is a GIL.)

October 14, 2020

Dear Xxxx:
This letter is in response to your letter received February 6, 2020, 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:
NAME with the Illinois Department of Revenue directed me to contact the legal division
regarding a question related to sales tax.
I have a client that is an electrical contractor in the state of Illinois. A vendor that they
purchase supplies from has told them that, according to the June 2019 IDOR Bulletin
(2019-28), they do not have to pay sales tax on small tools that are being purchased for
a project that has the Machinery & Equipment Exemption for a manufacturing facility.
To be clear, the small tools that are being purchased are not being installed in the
facility, but are instead being used by the contractor for installation on the project.
Please provide clarification as to whether or not this is the correct interpretation of the
June 2019 bulletin.
If you should need to reach out to me, please contact me at NUMBER or EMAIL. If you
would prefer to respond in a letter format, please address the letter to my attention and
send to COMPANY, ADDRESS.
DEPARTMENT’S RESPONSE:
Machinery and equipment that is used primarily in the manufacturing or assembling of tangible
personal property for wholesale or retail sale or lease is exempt from Retailers’ Occupation Tax. See
86 Ill. Adm. Code 130.330. The manufacturing process is the production of any article of tangible

ST 20-0027-GIL
Page 2

personal property, whether such article is a finished product or an article for use in the process of
manufacturing or assembling a different article 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. The Department recently
updated its regulations to reflect recent changes to the exemption. 44 Ill. Reg. 5392.
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 included examples of items that are 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.
In the case of a vendor who makes sales of qualifying machinery and equipment to a
contractor who will incorporate it into real estate so that the contractor, itself, would be the taxable
user (see Sections 130.1940 and 130.2075), the purchasing contractor should provide the vendor
with a certification that the machinery and equipment will be transferred to a manufacturer as
manufacturing machinery and equipment in the performance of a construction contract for the
manufacturer. The purchasing contractor should include the manufacturer's name and registration
number on the certification when claiming the exemption. 86 Ill. Adm. Code 330(j)(4).
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. Contractors only receive an exemption for production related
tangible personal property purchased for incorporation into real estate within a manufacturing facility
for use in a production related process. Hand tools qualify as production related tangible personal
property only if they are used or consumed by a manufacturer within a manufacturing facility. The
rule does not allow contractors to buy tools tax free simply because the contractor provides services
to a manufacturer at a manufacturing facility.
We urge you to review this regulation to determine its applicability to the items you sell or
install for your customers.

ST 20-0027-GIL
Page 3

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

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