2001 Practitioners' Questions and Answers

The following statement is included on IDOR Form CRT-61, certificate of Resale: "Note: It is the seller's responsibility to verify that the purchaser's registration or resale number is valid and active."

1. Please provide the Statute or Regulation section requiring the seller to verify the validity of the purchaser's registration or resale number.

2. If the seller is responsible for verification, how is this accomplished?

The requirement comes from Rock Island Tobacco and Specialty Company v. Department of Revenue, 87 Ill. App. 3d 476 (3rd Dist. 1980). In that case, the Department had audited a retailer and had disallowed 3 kinds of Certificates of Resale. The first was a group of certificates that were not signed by the owner of the purchasing business or someone named on the purchaser's registration with the Department. The court held that there was no reason why an employee or agent of the seller could not sign certificates of resale. The second was a group of certificates that the auditor found suspicious. That is, the auditor believed, based on the items being purchased or the quantity of the items being purchased, that the purchaser was going to use the items and not resell them. The court held that the certificates made a prima facie showing that the items were purchased for resale and the Department could not disallow them absent evidence that the purchaser used the items. Third, was a group of certificates that were proper on their face and that raised no suspicions that the items had been purchased for use rather than for resale. However, this group of certificates contained registration numbers or resale numbers that had not existed on the date the certificate was issued. The purchaser had made the purchases before it had registered with the Department or before it had obtained a resale number from the Department and had backdated the certificate of resale to the date of purchase after it had registered. In short, the registration numbers and resale numbers on these certificates were not active (they did not exist) on the date that the certificates were purportedly issued. The court held that it was proper for the auditor to disallow these certificates.

In order to verify that a registration number or a resale number is valid, the retailer can call the Department's:

• Springfield toll-free taxpayer assistance number (800) 732-8866
• Central Registration Division at (217) 785-3707
• Springfield business hotline number (217) 524-4772
• Chicago taxpayer assistance number (312) 814-5232

In addition, the retailer could call any one of the Department's ten district offices located around the State or visit the Department's website at www.revenue.state.il.us and e-mail inquiries regarding valid registration numbers.

The Department is preparing to file a proposed rulemaking to amend the Manufacturer's Purchase Credit (MPC) rules regarding the use of MPC on prior purchases when tax was previously paid on those purchases. We plan on beginning the formal rulemaking process within the next 30 days. These changes clarify how manufacturers and graphic arts producers report the use of MPC on prior qualifying purchases when they provide MPC certificates and request a refund of the amount of tax paid on those prior purchases. The rules explain that manufacturers and graphic arts producers may not use MPC certificates in those situations for purchases made outside of the statute of limitations for filing a claim for credit or refund.

Retailers and servicemen are not required to accept MPC certificates on prior purchases when tax was previously paid on those purchases. The proposed rule changes provide that retailers and servicemen accepting such MPC certificates after the sales have occurred may elect to either file claims for credit or refund or report the acceptance of such MPC certificates on their current sales and use tax returns. The rule changes also explain that retailers and servicemen may not file such claims or report the acceptance of such MPC certificates on their current sales and use tax returns if the original sales occurred outside of the statute of limitations for filing a claim for credit or refund. The rules will provide examples of how to report the acceptance of such MPC certificates.

This rulemaking explains that tangible personal property transferred to a manufacturer's or graphic arts producer's customer does not qualify as production related tangible personal property (such as paper and ink transferred by a graphic arts producer).

In addition, this rulemaking makes it clear that MPC is to be reported on the Sales and Use Tax Return (Form ST-1) as a credit and not as a deduction or exemption from gross receipts.

The Department is preparing to file a proposed rulemaking to amend the Manufacturer's Purchase Credit (MPC) rules regarding the use of MPC on prior purchases when tax was previously paid on those purchases. We plan on beginning the formal rulemaking process within the next 30 days. These changes clarify how manufacturers and graphic arts producers report the use of MPC on prior qualifying purchases when they provide MPC certificates and request a refund of the amount of tax paid on those prior purchases. The rules explain that manufacturers and graphic arts producers may not use MPC certificates in those situations for purchases made outside of the statute of limitations for filing a claim for credit or refund.

Retailers and servicemen are not required to accept MPC certificates on prior purchases when tax was previously paid on those purchases. The proposed rule changes provide that retailers and servicemen accepting such MPC certificates after the sales have occurred may elect to either file claims for credit or refund or report the acceptance of such MPC certificates on their current sales and use tax returns. The rule changes also explain that retailers and servicemen may not file such claims or report the acceptance of such MPC certificates on their current sales and use tax returns if the original sales occurred outside of the statute of limitations for filing a claim for credit or refund. The rules will provide examples of how to report the acceptance of such MPC certificates.

This rulemaking explains that tangible personal property transferred to a manufacturer's or graphic arts producer's customer does not qualify as production related tangible personal property (such as paper and ink transferred by a graphic arts producer).

In addition, this rulemaking makes it clear that MPC is to be reported on the Sales and Use Tax Return (Form ST-1) as a credit and not as a deduction or exemption from gross receipts.

Currently, the enterprise zone building materials exemption requires that building materials purchased for incorporation into an Illinois enterprise zone be purchased from a retailer located in the jurisdiction that created the enterprise zone into which the materials will be incorporated. That will change on January 1, 2002.

Pursuant to the provisions of PA 91-954, on and after January 1, 2002, the enterprise zone building materials exemption will no longer require that the retailer who sells the building materials be located in a jurisdiction that created the enterprise zone into which the building materials will be incorporated. However, PA 91-954 is not unconditional in this regard. It also provides that any restrictions in effect at the retailers' location control the sale. Obviously, this will have an impact when building materials are purchased in one jurisdiction for incorporation into an enterprise zone created by another jurisdiction.

Restrictions

The general rule is to look for an enterprise zone ordinance in effect in the retailer's jurisdiction. Any restrictions in that ordinance govern the sale. Restrictions in the enterprise zone ordinance governing the enterprise zone into which the materials will be incorporated do not matter. There are 3 possible situations.

In the first situation, the retailer is located in the same jurisdiction that created the enterprise zone into which the materials will be incorporated. Here, the same enterprise zone ordinance is applicable to both the retailer and the enterprise zone into which the materials will be incorporated. Consequently, the exemption is available subject to any restrictions in that enterprise zone ordinance. (This is the only situation in which the exemption is available today and after 1/1/02 nothing will change with respect to this situation.)

In the second situation, the retailer is located in a jurisdiction that did not create the zone into which the materials will be incorporated and the retailer's jurisdiction has not created its own enterprise zone. Consequently, there is no enterprise zone ordinance in effect at the retailer's location. In this situation, anyone purchasing any building material from the retailer can claim the exemption so long as the material will be incorporated into any Illinois enterprise zone. This is true even though the enterprise zone into which the building materials will be incorporated has restrictions. In this situation, restrictions in the ordinance creating the enterprise zone into which the materials will be incorporated do not matter.

In the third situation, the retailer is located in a jurisdiction that did not create the zone into which the materials will be incorporated and the retailer's jurisdiction has created its own enterprise zone. In this situation, any restrictions in effect at the retailers' location control the sale. It is imperative that the retailer and the purchaser be familiar with the restrictions in the enterprise zone ordinance in effect in the retailer's jurisdiction. The exemption may or may not be available depending on the restrictions in effect at the retailer's location.

Example: The retailer is located in City A and City A's enterprise zone ordinance specifies that the exemption is available only to building materials to be incorporated into City A's enterprise zone. In this example, the exemption would be available to retailers in City A only when selling building materials to be incorporated into City A's enterprise zone.

Stated conversely, in this example, a construction contractor purchasing building materials for incorporation into City B's enterprise zone can not claim the exemption when purchasing those materials from a retailer located in City A.

Even if the ordinance in effect at the retailer's location does not require that the materials be incorporated into its specified zone, the example might still be unavailable if it contains other restrictions.

Example: The retailer is located in City X and City X's enterprise zone ordinance specifies that materials must be used in a project for which City X has issued a building permit. In this example, the exemption is available to retailers in City X only when selling building materials to be incorporated into City X's enterprise zone. This is because City X could not have issued a building permit for a project in any other jurisdiction.

Stated conversely, in this example, a construction contractor purchasing building materials for incorporation into City B's enterprise zone can not claim the exemption when purchasing those materials from a retailer located in City X. This is because City X could not have issued a building permit for a project in City B.

Example: The retailer is located in City Y and City Y's enterprise zone ordinance specifies that the materials must be used in a project for which "a building permit" has been issued. In this example, the exemption would be available to retailers in City Y when selling building materials for incorporation into any Illinois enterprise zone so long as a building permit had been issued to the project by the appropriate local authority.

Stated conversely, in this example, a construction contractor purchasing building materials for incorporation into City B's enterprise zone can claim the exemption when purchasing from a retailer in City Y but only if the materials will be used in a project for which a building permit has been issued by the appropriate authority in City B.

Again, the restrictions contained in the enterprise zone ordinance in effect at the retailer's location control. Consequently, it is crucial that retailers and their customers be familiar with that ordinance and that all restrictions in it are observed. Restrictions contained in the ordinance governing the enterprise zone into which the materials will be incorporated do not matter.

Sales that bracket January 1, 2002

The effective date of PA 91-954 is January 1, 2002 and that raises the question concerning the application of the PA 91-954 to transactions that bracket January 1, 2002. In determining whether the provisions of a new statute related to an exemption are available to any particular sale, the Department looks to the date of the delivery to the purchaser. So, if a retailer located outside the jurisdiction that created the enterprise zone into which the materials will be incorporated accepted a purchase order and received payment prior to January 1, 2002 but the materials were not delivered to the purchaser until on or after January 1, 2002, the provisions of PA 91-954 would be applicable if all other requirements of the exemption were satisfied.

Further changes to the exemption are possible

It is possible that there will be legislative attempts to change the provisions of PA 91-954. We understand that there may be an effort to do away with restrictions altogether. If this effort is successful, the enterprise zone building materials exemption would require only that the materials be purchased for incorporation into real estate located in any Illinois enterprise zone. We understand there is also interest in doing away with the provisions of PA 91-954 altogether. If that effort is successful, the exemption would return to its previous form and the exemption would be available only when purchases are made from retailers located in the jurisdiction that created the enterprise zone into which the materials will be incorporated.

Recent legislation (P.A. 92-484) made several significant changes to the manufacturing machinery and equipment exemption. One change affects computers used in CAD/CAM systems. Prior to P.A. 92-484, "equipment" included computers only if they were used primarily to operate exempt machine and equipment in a CAD/CAM system. Public Act 92-484 broadened these provisions to exempt computers used primarily in a manufacturer's CAD/CAM system. In other words, computers no longer need to be used primarily to run exempt equipment in order to qualify for the exemption. They could, for instance, be used primarily in the design component of the CAD/CAM system and qualify for the exemption.

Public Act 92-484 also specifies that manufacturing equipment includes chemicals or chemicals acting as catalysts but only if the chemicals or chemicals acting as catalysts effect a direct and immediate change upon a product being manufactured or assembled for wholesale or retail sale or lease. This statutory change follows at the heels of a recent rulemaking change (adopted on May 2, 2001) which codified the Department's long-standing position that chemicals can qualify for the manufacturing machinery and equipment exemption. Although JCAR did not object to this rulemaking, it recommended that the Department seek legislation specifying that chemicals qualify for the exemption. Public Act 92-484 was the result of that effort.

A new regulation has been proposed which codifies the new changes to the manufacturing machinery and equipment exemption found in P.A. 92-484.

P.A. 92-0488, provides that "[b]eginning on January 1, 2002, the use of tangible personal property purchased from an Illinois retailer by a taxpayer engaged in centralized purchasing activities in Illinois who will, upon receipt of the property in Illinois, temporarily store the property in Illinois (i) for the purpose of subsequently transporting it outside this State for use or consumption thereafter solely outside this State or (ii) for the purpose of being processed, fabricated, or manufactured into, attached to, or incorporated into other tangible personal property to be transported outside this State and thereafter used or consumed solely outside this State" is exempt from sales tax.

The legislation provides that the Department shall, pursuant to the rules it adopts, issue permits to any taxpayer in good standing with the Department who is eligible for the exemption. The permit issued will authorize the holder to purchase tangible personal property from retailers without paying sales tax, to the extent and in the manner specified in the rules. Taxpayers will be responsible for maintaining all necessary books and records to substantiate the use and consumption of all such tangible personal property outside the State.
The Department has drafted regulations for this legislation. Under the proposed regulations, the term "centralized purchasing" means the procurement of tangible personal property by persons having facilities outside Illinois, who purchase tangible personal property solely for use or consumption at those out-of-State facilities, who take delivery of that tangible personal property in Illinois and who temporarily store that tangible personal property in Illinois prior to transporting it to its out-of-State facilities for use or consumption solely outside Illinois. Persons who want to take advantage of the new exemption must apply in writing to the Department to obtain an Expanded Temporary Storage permit.

To claim the exemption, permit holders must provide their Illinois suppliers with a certification that the tangible personal property received in Illinois will be temporarily stored in Illinois as provided in the statute. Blanket certificates or percentage certificates of exemption may be provided if all of the permit holder's purchases, or a known percentage, will qualify for the exemption.

In the event that tangible personal property for which the exemption has been claimed does not qualify for the exemption, the purchaser will have to pay the tax that would have been due, in the same form that the retailer would have paid the tax (i.e. Retailers' Occupation Tax and local Retailers' Occupation Tax if applicable), at the rate applicable at the location of the retailer from which the tangible personal property was purchased. Also, if tangible personal property for which the expanded temporary storage exemption has been claimed, and which has been temporarily stored in Illinois and transported outside this State for use or consumption is returned to Illinois for temporary storage, no tax is incurred.

The answer to this question depends upon whether the corporation making the transfer is in the business of selling that type of tangible personal property. If the corporation making the transfer is in the business of selling that type of tangible personal property, then it will incur Retailers' Occupation Tax liability on that transfer. The gross receipts subject to tax will be whatever consideration (stock, securities, money, or other property) the transferring corporation receives in exchange for that transfer. See 86 Ill. Adm. Code 130.401.

If the corporation making the transfer is not in the business of selling that type of tangible personal property, the sale may qualify as an occasional sale and would not be subject to Retailers' Occupation Tax liability. See 86 Ill. Adm. Code 130.110.

The following are a number of issues that would have to be addressed if the current version of the Streamlined Project were to be adopted by the State of Illinois.

• Destination sourcing. Illinois allocates local sales tax based on where a sale takes place - where the purchase order is accepted (origin sourcing). The Streamlined Project requires sourcing local taxes to where the merchandise is delivered (destination sourcing). Other than for over-the-counter sales, this change would completely change allocation of local taxes in Illinois. Local jurisdictions could be winners or losers (Chicago would likely lose).
• Changing the Sales Tax Rate on Food, Medicine, and Medical Appliances. The Streamlined Project prohibits a state from having multiple state sales tax rates after December 31, 2005. If Illinois were to join the system, this would mean that the State would no longer be able to have a different State sales tax rate on food, medicine, and medical appliances beginning January 1, 2006. Eliminating the 1% rate of tax on such items would result in an approximate loss of 309 million dollars for local governments in this State. Raising the tax rate on such items would result in a tax increase of approximately 1.2 billion dollars (approximately 994 million in state revenue and 206 million in local revenue).
• Uniform Definitions. The Streamlined Project requires uniform definitions of taxable and non-taxable items. For example, the definition provided by the Project of "prepared food" is significantly different than the types of food that are taxed at a lower rate in Illinois. Under the Project's "prepared food" definition, a grocery store selling doughnuts that the store itself baked would be subject to the high rate of tax, but identical doughnuts that were baked by a supplier and sold by the grocery store would be subject to the low rate of tax.
• Collection of tax by third parties. Illinois law provides that the sellers are responsible for the sales tax incurred on their sales. The Streamlined Project allows certified third parties to collect the tax and remit the tax to the State on behalf of the sellers. The sellers under such a method would no longer be liable for the tax and, unless the state can show the seller has committed fraud or made a material representation, the seller is no longer subject to audit for those sales. This method could lead to abuses and loss of state revenue.
• Costs. The Streamlined Project would require Illinois to provide monetary reimbursements to both sellers and the third party tax collectors for implementing new technology based tax collection methods. The monetary costs are in addition to the non-monetary costs involved with the system such as the amnesty for back taxes, reduced audit capability, and the administrative costs associated with changing both the State's tax collection systems and all of the private businesses tax collection systems in this State.