SMART TAX USA - Illinois State Manufacturing Exemptions

You may be paying more than your fair share of sales and use tax. Experience shows that many Illinois manufacturers do not maximize the sales tax exemptions and credits available, and as a result, they end up overpaying sales and use taxes. This is due to the complex nature of Illinois exemptions as well as the processes that companies use in applying the law to the items purchased. In many cases, the people making the decision to tax or exempt particular transactions often do not have the specific tax knowledge. Illinois offers a variety of sales tax exemptions and credits to companies engaged in the manufacturing industry. These exemptions and credits can be categorized as follows:

Manufacturing Machinery and Equipment

In Illinois, sales tax 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. The exemption also extends to repair and replacement parts as long as the parts are incorporated into machinery and equipment that is exempt under the regulation.

The difficulty in applying the exemption includes determining where the manufacturing process begins and where it ends. The statute specifies that the “manufacturing process commences with the first operation or stage of production in the series and does not end until the completion of the final product in the last operation or stage of production in the series.” For example, forklifts that move raw materials from in-bound transportation trucks into raw material inventory and forklifts used in the finished goods warehouse generally would not qualify for the exemption. However, forklifts used to move partially finished goods from one manufacturing station to another would qualify for the exemption as long as they are primarily used in that capacity.

Manufacturer’s Purchase Credit (“MPC”)

The MPC is a significant sales tax credit available to Illinois manufacturing companies and printers that purchase qualifying exempt manufacturing and printing machinery and equipment, including qualifying repair and replacement parts. Purchasers of qualifying exempt machinery and equipment will receive a credit equal to 50 percent of what the state tax portion of the taxes (i.e., 6.25 percent) would have been if the qualifying machinery were taxable. The MPC can be applied against the state sales or use tax only on future purchases of “production related tangible personal property.”

The MPC must be used within two calendar years following the year in which the credit was earned. Specific MPC forms must be completed and filed by the manufacturer on an annual basis or the MPC is not valid. These forms are due by June 30th of each year. The Department of Revenue estimates that the MPC is one of the most underutilized credits administered by the Department.

Resale Exemption

The most obvious exemption for Illinois manufacturers is the resale exemption. Illinois provides that a purchase of tangible personal property is deemed to be purchased for resale, despite first being used, to the extent to which it is resold as an ingredient of an intentionally produced product or byproduct of manufacturing. This is fairly clear when, for example, a manufacturer of furniture purchases wood for an ingredient in the furniture tax-free under a resale exemption. But what about paint that is applied to the furniture, acids used to clean the wood or better yet, paint thinner that is used as an additive to the paint? Paint will generally be classified as an ingredient while acids and paint thinner may be classified as a consumable.

Packaging Exemption

The exemption for packaging materials and containers is similar to the resale exemption in that the manufacturer exempt from tax can purchase items purchased for sale to others. In Illinois, sellers of containers to manufacturers who sell tangible personal property contained in such containers to others are deemed to make sales of such containers to purchasers for purposes of resale if the purchasers of such containers transfer the ownership of the containers to their customers together with the ownership of the tangible personal property contained in such containers. The theory driving this exemption is that the packaging is an inseparable part of the product being purchased. Conversely, returnable containers, or containers where ownership does not transfer to the purchaser will generally be subject to the sales tax.

Enterprise Zone Credits

An enterprise zone is a specific area designated by Illinois in cooperation with a local government to receive tax incentives and other benefits to stimulate economic activity. For all manufacturers located within the boundaries of an Enterprise Zone, there is a state sales tax exemption for building materials permanently affixed to the property in a project that is certified by the particular zone administrator.

For manufacturers that apply and qualify, there is also a state sales tax exemption on purchases of tangible personal property to be used in the manufacturing or assembly process or in the operation of a pollution control facility within an Enterprise Zone. Eligibility is based on a business making an investment in an Enterprise Zone and creating or retaining a minimum number of full-time-equivalent jobs.

Also, for manufacturers that apply and qualify, there is a state utility tax exemption on gas, electricity and the Illinois Commerce Commission’s administrative charge and telecommunication excise tax. Eligibility is based on a business making an investment in an Enterprise Zone and creating or retaining minimum number of full-time-equivalent jobs.

Exemption Certificate Link

Copyright 2013 Smart Tax USA
All rights reserved.

SMART TAX USA, T 214-500-7056 , FAX 866-539-7906