Illinois Department of Revenue Issues Draft Regulations

The Illinois Department of Revenue recently issued draft regulations on a variety of sales and use tax issues including the manufacturing and graphics arts equipment exemptions, vending machine sales, Manufacturers' Purchase Credit requirements, telecommunications definitions, and administrative procedures. These regulations are subject to informal comment.

Sales Tax Exemptions Expanded to Threshold of $0.50 for Vending Machines

Regulation 130.2135 - Effective January 1, 2002, the sale of merchandise from a bulk vending machine for 50 cents or less is exempt from Retailers' Occupation Tax. The definition of a "bulk vending machine" now includes a vending machine containing unsorted confections, nuts, toys, or other items designed primarily to be used or played with by children which, when a coin or coins of a denomination not larger than $0.50 are inserted, are dispensed in equal portions, at random, and without selection by the customer.

Sales/Use Tax Exemption Expanded to Machines and Parts of Vending Machines

Regulation 130.332 - Effective January 1, 2002, the Retailers' Occupation Tax does not apply to sales of machines and parts for machines used in commercial, coin-operated amusement and vending business if a use or occupation tax is paid on the gross receipts derived from the use of the commercial, coin-operated amusement and vending machines.

The exemption applies to these machines and replacement parts so long as the owner, operator, or user of the machine incurs a use or occupation tax liability. Examples of incurring a use or occupation tax liability include the sale of tangible personal property subject to Retailers' Occupation Tax through a vending machine and the awarding of "prizes" resulting from the operation of an amusement machine on which a use tax liability is incurred.

Prior to January 1, 2002, only automatic vending machines used in the preparation and serving of hot food and beverages qualified for the exemption.

Graphic Arts Equipment Exemption Expanded to Include Chemicals and Catalysts

Regulation 130.325 - Effective August 23, 2001, pursuant to the related change in statute, exempt equipment includes chemicals or chemicals acting as catalysts but only if the chemicals or chemicals acting as catalysts affect a direct and immediate change upon a graphic arts product. The Department originally attempted to apply a "useful life greater than one year" test as well as a requirement that the chemicals be amortized or depreciated. The Department dropped these requirements and adopted only the "direct and immediate change" test.

Manufacturing M&E Exemption to Include CAD/CAM Systems and Chemicals

Regulation 130.330 - Effective August 23, 2001, pursuant to the related change in statute, exempt equipment includes computers used primarily in a manufacturer's computer-assisted design, computer assisted manufacturing (CAD/CAM) system. For example, a computer used 25% of the time operating exempt machinery and equipment (CAM System) and 75% of the time in design (CAD System) will now qualify for the exemption.

Prior to August 23, 2001, a computer used in the manner described in the preceding sentence would not have qualified for the exemption because it did not primarily (over 50% of the time) operate exempt machinery and equipment.

In addition, the exemption now includes chemicals that affect a direct and immediate change upon a product being manufactured or assembled for sale or lease. Previously, only chemicals acting as catalysts qualified for the exemption.

Regulation Clarifies Reporting of Manufacturing Purchase Credits

Regulation 130.331 - This regulation amends the Retailers' Occupation Tax rules to clarify how manufacturers and graphic arts producers report the use of MPC on prior qualifying purchases when they have "exchanged" their MPC for a refund of the amount of tax paid on those prior purchases. The regulation provides a detailed explanation that manufacturers and graphic arts producers may not make such an "exchange" regarding purchases made outside of the statute of limitations for filing a claim for credit or refund.

Private Letter Rulings to be Automatically Revoked After 10 Years

Administrative Procedures Act, Section 1200.110 - Beginning July 1, 2002, every letter ruling is revoked on the date that is 10 years after the date of issuance of the ruling or July 1, 2002, whichever is later. No ruling may be cited or relied upon for any purpose after the date of its revocation, and the ruling will cease to bind the Department after the date of revocation. Taxpayers entitled to rely on the opinion contained in a particular letter ruling must apply for a new letter ruling prior to the aforementioned revocation date.

Gross Charges Clarified for Purposes of the Telecom Excise Tax

Regulation 495.100 - "Gross Charges" for telecommunications services are clarified to be the "amount paid" which means the amount charged to the taxpayer's service address in this state regardless of where such amount is billed or paid. In addition, the definition of "service address" is further clarified to mean the location of telecommunications equipment from which the telecommunications services are originated or at which telecommunications services are received by the taxpayer.

If you have any questions regarding the Illinois Department of Revenue Draft Regulations, please call Jim Kranjc, Senior Manager in Charge of the Chicago office of Ryan & Company at 630.515.0477 x173822. You can also reach Mr. Kranjc by e-mail.