2000 Practitioners' Questions and Answers

Waivers have the effect of extending the time to amend an MPC report for the use of MPC that has not expired at the time the waiver was executed. MPC expires the last day of the second calendar year following the calendar year in which the credit arose. Waivers do not revive expired MPC.

Waivers have different 3 effects:
1) extends the time period for issuing an NTL
2) extends the time period for filing claims
3) extends the time period for using non-expired MPC

As applied to the example in the question, the waiver would have been executed prior to December 31, 1999. The MPC that the taxpayer had earned for the year 1997 would expire on December 31, 1999. Because of the execution of the waiver, the MPC that was earned in 1997 would not expire until the end of the waiver period (December 31, 2000). The taxpayer can amend its ST-17s for the years 1997, 1998, and 1999 to report the use of any MPC earned in 1997 or later. However, any MPC that was earned in 1996 cannot be reported as used on any of these reports because that MPC expired on December 31, 1998 before the waiver was executed. In other words, the expiration date of the MPC earned in 1996 could not be extended unless a waiver was executed prior to December 31, 1998.

We do not believe that that these facts would constitute reasonable cause.

Issue
Unbundle books (ROT) and Seminar (Service - NT)

Source
1988 PLR

Facts
Illinois almost never turns a vendor into a multi-hatted vendor. Either a retailer or a serviceman.

Note exceptions:

• Dinner theater ass'n
• Home builder (contractor) sells plug-in appliances (retailer)
• Serviceman (SOT) sells over-the-counter (ROT) [but this is two separate businesses]

Argument
IDOR- seminar participant wants books & wants book for period beyond seminar. Accordingly, seminar provider is a retailer.

Comments

• With exception, almost all classifications of the vendor are determined by the nature of the vendor, not the wants of the consumer.
• Referencing auto servicemen, I want my car to work, I want my car to work after the repair, and I could buy the parts at retail and deliver them to the repairman.
• Does the seminar provider sell books without taking the seminar? If not, then the PLR is creating a retailer who does not hold himself out to the public as a purveyor of books.
• If the seminar provider is properly paying Use Tax:
  • Is the property cost to revenue a material cost (in 1990, we tried to adopt a 10% SOT rule - if books less than 10% are they material?)
  • Is the issue between UT v. ROT worth the legal battle?
• If the seminar provider is not paying Use Tax, is the DOR purpose to achieve a 19 year statute for assessment?

Classifications for tax purposes are made by looking at the nature of the transaction involved between the purchaser and the seller. Seminar providers are clearly in the business of providing information. However, as part of doing that, they also transfer tangible personal property. The property which they transfer generally has usefulness to others and value outside the seminar context. These materials are often used as reference materials or study aids by others. In many cases, the materials can be purchased by persons who do not attend the seminars. When persons engage in transferring these types of materials, they are acting as retailers of tangible personal property. The fact that they are also providing professional services as part of the same "bundle" does not obviate their liability for tax on the tangible personal property which they transfer. As you note, taxpayers can often wear two hats. For instance, if in the course of providing professional services, an architect transfers canned software to a client to assist the client in developing or visualizing design layouts, this transfer would be subject to Retailers' Occupation and Use Tax. In the course of building a home (a non-ROT liability), a construction contractor often transfers tangible personal property, such as ovens, microwaves and other appliances. While he does not incur ROT liability on his construction of a residence, he will incur ROT liability on the sale of the appliances.

Let's look at your example of the car mechanic. When a person takes his car to a mechanic, he generally doesn't care about the specific parts used to repair the car -- he goes to the repairman for his diagnostic skills. The parts transferred in the transaction do not really concern the customer. The customer just wants the car to run again. With the seminar participant, the property transferred is of greater interest. The books, tapes or other materials are often useful outside the seminar as reference materials or study guides. The fact that they can frequently be purchased outside of the seminar attests to their value to the seminar participants. The materials thus have use and value, in and of themselves. This value attaches to the materials whether they are transferred as part of a seminar, or outside of the seminar. Thus, while a seminar provider engages in nontaxable activities (instruction), he also engages in selling tangible personal property to seminar participants. He, in effect, holds himself out as a retailer of materials. As a result, the Department characterizes their transfer as a transaction subject to Retailers' Occupation Tax.

If the seminar provider does not separate out the selling price of the tangible personal property transferred, the Department will use its best information and judgment to assign a value to that property. There is no "de minimis" rule under ROT. The transfer of tangible personal property will always trigger tax liability, regardless of whether it constitutes 10% or 35% of the seminar fee. The Department of Revenue is charged with enforcing the tax laws as written, and this includes observance of applicable statutes of limitation.

Section 3 of the Illinois Use Tax Act imposes a tax upon the privilege of using tangible personal property in Illinois which is purchased at retail from a retailer. The tax is imposed at the rate of 6.25% of the selling price of the tangible personal property so used. Section 2 of the Use Tax Act defines "use" as

[t]he use by any person of any right or power over tangible personal property incident to the ownership of that property ….

When a person makes a donation of property or otherwise gives the property away without consideration to another, he is considered to have "used" that property in such a way as to trigger Use Tax liability. He exercises control over the disposition of the property consistent with the definition of "use" found in Section 2 of the Use Tax Act. This position has long been articulated in the Department's regulations (see, 86 Ill. Adm. Code 150.305 (c).

The Department has a long history of letter rulings specifying that cellular phone providers that give away phones incur Use Tax base upon their cost price of the phones. By giving the phones away, they are considered the users of the phones. This particular application of the donor/donee rule was in fact so frequently asked that it was included as an example in a recent rulemaking change to Section 150.305.

Of course, a cellular provider may determine that he wants to sell the phone, even for a minimal amount, rather than give it away. In this case, his prudent tax planning will reap benefits.

The Department does not consider the different outcomes listed above to be "anomalies that have nothing to do with economic reality." The outcomes are dictated, not by the Department of Revenue, but by the "realities" of the Retailers' Occupation Tax Act and the Use Tax Act. Taxpayers are free to structure their activities in the manner most beneficial to them under the tax laws. If they fail to do so, the Department has no authority to either broaden or narrow statutory provisions in such a way as to reach the result desired by the taxpayer.

Sales Tax/Precision Farming Exemption

Effective June 30, 1998 Public Act 90-605 amended the statutory exemption on farm machinery and equipment to include precision farming equipment such as soil testing sensors, computers, software, and global positioning and mapping systems. If a farmer purchases a planter monitor that is installed on his planter or a yield monitor that is installed on his combine he could use these in conjunction with a global positioning system to obtain and record planting, crop and yield data. The data can be entered into software programs where it interacts with other pertinent data such as specific fields, planting rates and dates, soil types, longitude and latitude, in order to produce different field or farm maps. Mapping software allows these maps to be enhanced by grid size and the data can be layered so that multiple data such as soil type, yields, etc. can be displayed simultaneously for review by the farmer to help him decide what variables are affecting the different parts of the fields. It is clearly within the statutory language that the farmer can claim the farm machinery and equipment exemption on his purchase of the monitors, computer, and software.

The question is about another farmer who hires a soil testing service to perform essentially the same function. This farmer retains a company who takes soil samples in specific areas of the fields in conjunction with a global positioning system to obtain information about the soil's moisture and other qualities such as pH to develop field maps that recommend variable amounts of inputs such as lime, phosphate or nitrogen, on different parts of the field. Can a non-farmer claim the exemption when it purchases these precision farming items?

Yes, the exemption applies whenever the precision farming equipment will be used primarily in production agriculture. If purchased and used by a business as described in the question, the exemption can be claimed.

It is important to remember the items must be used primarily in production agriculture and primarily means more than 50 %. That is, in order to claim the exemption the user must use the computers, software and monitors primarily in precision farming activities. The use of computers to record and process crop management information gathered by yield monitors and soil-testing sensors constitutes precision farming. The use of computers to record and process other farm related information such as accounts payable, correspondence or marketing does not constitute precision farming.

For more information see the Department's regulation, 86 Ill. Adm. Code 130.305, which incorporates new language regarding the precision farming exemption.

Generally, retailers who purchase telephone cards from telephone service providers and then resell the cards to customers for marked-up prices are not responsible for collecting and remitting the tax from their customers. The tax is incurred at the time the telecommunications originate or are received in a taxable manner. The amount of telecommunications charges for which the cards are redeemed by the telephone service providers should include any amount of Telecommunications Excise Tax incurred. The telephone service providers charge the phone calls and the tax against the balance of the cards, as they are responsible for collecting and remitting the tax.

In some situations, however, retailers purchase telecommunications units from telephone service providers and sell them at retail to their customers. In these situations, the retailers would be required to register as telecommunications retailers and collect and remit Telecommunications Excise Tax. The tax base would be the amounts charged to card purchasers for taxable services subsequently provided. When the cards are sold in Illinois, the Department presumes that the calls will originate or terminate in this State. Retailers purchasing telecommunications units have the burden of establishing that the charges are exempt from Telecommunications Excise Tax. The only way to properly document such exemptions would be through records of the telephone service providers. Therefore, as a practical matter, since the retailers will not know at the time of sale what taxable services cardholders will consume, some retailers charge the tax on the full sales prices of the cards.

This will change beginning January 1, 2001 under P.A. 91-0870. The new legislation provides that prepaid calling arrangements will be considered tangible personal property subject to sales tax regardless of the form in which those arrangements may be embodied, transmitted, or fixed by any method now known or hereafter developed. Beginning January 1, 2001, prepaid telephone calling arrangements will not be considered telecommunications subject to the Telecommunications Excise Tax.

Under the provisions of Section 2-5(33) of the Retailers' Occupation Tax Act, added by Public Act 91-637, gross receipts from proceeds from the sale of personal property, including food, purchased through fundraising events for the benefit of a public or private elementary or secondary school, a group of those schools, or one or more school districts if the events are sponsored by an entity recognized by the school district that consists primarily of volunteers and includes parents and teachers of the school children are exempt from Retailers' Occupation Tax. However, this exemption does not apply to fundraising events (i) for the benefit of private home instruction or (ii) for which the fundraising entity purchases the personal property sold at the events from another individual or entity that sold the property for the purpose of resale by the fundraising entity and that profits from the sale to the fundraising entity. 35 ILCS 120/2-5(33); see also 86 Ill. Adm. Code 130.120 and the Department's proposed regulation, 86 Ill. Adm. Code 130.2009, published at 24 Ill. Reg. 7470, Issue #21, 5/19/00 (currently being prepared for adoption). Similar provisions were also added to the Use Tax Act. 35 ILCS 105/3-5(27).

In order for the exemption to apply, the following requirements must be met. First, the fundraising event must be for the benefit of the school. If the event benefits others, the exemption does not apply. For instance, if a parent-teacher association ("PTA") sells clothes donated to it by parents and gives a portion of the sales proceeds back to the donors, the exemption is inapplicable because this sale benefits the donors. If, however, the PTA sold donated clothes and the entire proceeds benefited the school, the exemption would be applicable.

Second, the fundraising event must be sponsored by an entity recognized by the school district. A school district must grant approval to the entity, in the form of a written certification, to sell tangible personal property for the purpose of benefiting the school, school district, or school districts. In the case of fundraising events benefiting a private school that is not part of a school district, the private school must grant approval to the entity, in the form of a written certification, to sell tangible personal property for the purpose of benefiting the school.
Finally, the entity sponsoring the fundraising event must be comprised primarily of volunteers, including parents and teachers of the school children.

As stated above, the exemption does not apply to situations in which the fundraising group purchases items that it will in turn sell, from a supplier who (1) sells the items to the fundraising group for the purpose of resale and (2) profits from the sale to the fundraising group. For example, the exemption does not apply to a fundraising group that purchases complete, ready-to-sell items, such as greeting cards, wrapping paper, holiday ornaments, candy bars, and frozen pizzas, for resale from a supplier who profits from the sale to the fundraising group. However, the exemption applies when a PTA purchases items that it will use in making a meal for a spaghetti dinner fundraiser (e.g., spaghetti sauce, meatballs, bread, and soft drinks) from a supermarket. In this case, the items purchased by the PTA are not complete and ready-to-sell items. Rather, the PTA must prepare the items for the fundraising event. The PTA may use its exemption identification number ("E" number) to purchase the food items tax-free at the supermarket (however, if the fundraising group does not have an "E" number, it would be required to pay tax to the supermarket). The proceeds from the spaghetti dinner would be exempt from Retailers' Occupation Tax.