2004 Practitioners' Questions and Answers
Note: The answers by the Department of Revenue to the questions below are not to be relied upon by taxpayers in lieu of a Private Letter Ruling and are not the kind of written information upon which a taxpayer may rely to request an abatement under the Taxpayer Bill of Rights. Where a conflict appears to exist between these answers and a form, instruction, regulation or bulletin issued by the Department, taxpayers are advised to follow the form, instruction, regulation or bulletin, contact the Department's Business Hotline at (217) 524-4772, or seek a Private Letter Ruling.
What do you do/Who do you contact at IDOR if a vendor refuses to refund sales tax payments made in error (the product was exempt or at the low rate) to the vendor in prior periods?
Response:
Do not contact the Department of Revenue in the situation described above. Under Illinois sales tax laws, retailers are not required to file claims for credit. The Department has no authority to compel sellers to file a claim for credit. Whether or not sellers refund the taxes paid and file claims for credit with the Department is a private matter between sellers and purchasers.
The Department’s regulations, 86 Ill. Adm. Code 130.1501, and Sections 6, 6a, and 6b of the Retailers' Occupation Tax Act describe the procedures used to obtain a credit for sales tax erroneously paid. Only persons who have actually paid tax to the Department can file a claim for credit. In order to submit claims for credit, taxpayers must first establish that they have either borne the burden of the tax or that they have unconditionally repaid the amount of tax to the vendees from whom they have collected the tax. Since retailers usually pay the tax to the Department, usually only retailers can file a claim for credit.
Q. What can vendors that have no Illinois locations do with excess Illinois sales tax credits (due to filing amended sales and use tax returns) that may take the vendors a number of years to use in their ordinary course of business?
Response:
86 Ill. Adm. Code 130.1510 describes the situations in which a cash refund may be given. If a claimant is entitled to a refund, a refund shall be made only from such appropriations made available for that purpose. If appropriations are not available for all claimants to receive cash refunds, the Department will make such refunds only in hardship cases. Two situations most likely to be considered hardship claims are mentioned in the above regulation. One is where the claimant has discontinued his business and the second is where the claimant will have a small volume of liability to the Department in the foreseeable future, but receives a large credit memorandum which will take a long time to use. If the claimant cannot obtain a hardship refund, he could consider selling the credit memorandum.
Q. On August 6, 2004 (request for additional support was first requested in April 2004) our client received a revised audit report (EDA-105) based on claims that were filed in September of 2003. The claims were based on a reduction of use tax resulting from the use of the Manufacturing Machinery and Equipment Exemption and the Manufacturer’s Purchase Credit. The original audit report was revised to eliminate the payment of interest on the portion of the claim applicable to the Manufacturer’s Purchase Credit. The reason cited by the Department for this reduction is that the MPC claims are considered to be a trade of one form of payment for another.
What is the Department’s authority for this position? Section 35 ILCS 735/3-2 provides that interest is not required if a refund or credit is approved within 90 days…. Even if the Department were to take a position that the MPC is used at the time the amended return is filed, why isn’t interest paid for the period after September 2003 until the refund or credit memorandum is issued?
Response:
In the scenario described, we believe that the taxpayer was engaged in what is commonly referred to as "trading MPC for cash." The common method for trading MPC for cash occurs when a retailer's customer comes back at a later date after a purchase of production related tangible personal property has occurred and requests that the retailer accept an MPC certificate in exchange for refunding the Use Tax that the customer had previously paid on that transaction. If the retailer agrees to the exchange and wants to get a credit from the Department for the amount of tax given to the customer, the retailer then must either report the MPC received on that month's sales tax return or file an amended return (claim for credit) for the period in which the original transaction occurred. See subsections (h) and (i) of Section 130.331 of the Department's administrative rules regarding MPC.
The use of the claim for credit procedure and the ability of a retailer to report such transactions on the retailer's current return was established by the Department as an accommodation in order to avoid creating a separate system for allowing these exchanges of MPC for cash. Under Section 6 of the Retailers' Occupation Tax Act, a claim for credit or refund will be granted if the taxpayer paid an amount of tax, penalty, or interest that was not due whether as the result of a mistake of fact or an error of law. In all situations when MPC is used, tax is due on the purchase and MPC is only used as a different method of payment of that tax liability.
Section 3-2 of the Uniform Penalty and Interest Act requires that interest be paid on any "overpayment of tax" if the amount is not refunded within a specified amount of time. When "trading MPC for cash" is the basis for a claim, no tax has been overpaid and only the type of payment method is being changed. Therefore, the interest payment provisions of Section 3-2 of the Uniform Penalty and Interest Act do not apply.
Q. Why should the taxpayer be compelled to sign a waiver for the convenience of the taxpayer and not the convenience of the IDOR? As part of a sales tax audit, the auditor requested the taxpayer sign a waiver extending the statue for six months. Due to other responsibilities, the auditor was unavailable for significant periods of time. The taxpayer did nothing to delay the audit.
Response:
Each audit and the related circumstances should be analyzed on their own merits, but there may be instances where it is appropriate for the waiver to be for the Department's convenience. Any subsequent waiver requests would be addressed based upon the facts from the time the last waiver was executed.
Q. A corporation is a manufacturing company and owns a jet used to transport executives, customers, etc. in the course of its business, but is not a common carrier.
Its attorneys have advised that for liability purposes the plane should be placed in a separate entity. The separate entity is a disregarded entity for federal and Illinois income tax purposes. The disregarded entity will not be leasing the plane to a charter service or any other common carrier, nor will it be a common carrier for hire itself. The disregarded entity has no need to register for sales and use taxes on its own.
Query:
If the disregarded entity is not separately registered for sales and use taxes (and is not required to be registered), is the transfer of the plane from the manufacturing company to the disregarded entity a taxable event under the sales, use, or aircraft use tax of Illinois, or is the transfer ignored if both companies are covered by the same registration?
Response:
The transfer of the jet from the manufacturing company to the disregarded entity created by the manufacturing company is a taxable event. This answer assumes that the disregarded entity is a separate legal entity created by the manufacturing company. This answer also assumes that the transfer of the jet to this separate legal entity took place on or after July 1, 2003 (the effective date of Public Act 93-24 which created the Aircraft Use Tax Law). Based on these two assumptions, tax is due on the transaction under the Aircraft Use Tax Law (35 ILCS 157/10-1 et seq.). Tax is due under that Act for the privilege of using the aircraft in this State, whether it is acquired by gift, transfer, or purchase.
For the purposes of the Aircraft Use Tax, whether an entity is required to be registered with the Department of Revenue to make retail sales in Illinois is irrelevant. Rather, the Aircraft Use Tax is triggered if the transaction is between two separate legal entities. In this case, the actions taken by the manufacturer to protect itself for liability purposes, that is, ensuring that the jet is held by a completely separate legal entity, are the same actions that trigger the imposition of the Aircraft Use Tax on the transfer of the jet from the manufacturer to the disregarded entity.
The fact that the separate legal entity is a disregarded entity for federal and Illinois income tax purposes does not change the outcome under the Aircraft Use Tax Law.
Q
. A switch engine is used to take cars from where they are set out by a railroad (or other common carrier), and transfer them between the railroad and a plant for loading and unloading. Before deregulation, switching was a function handled almost solely by railroads. However, this is a function that, in some areas, railroads will no longer handle, or for which railroads have raised their charges to a prohibitive level. Thus manufacturers often have no choice but to acquire a switch engine to handle the switching function.
From time to time, the Illinois Department of Revenue has rendered opinions through private letter rulings, general information letters, etc., holding that certain items, which normally would not be exempt from the Illinois “sales” and use tax, are exempt from such tax, as such items act in place of, or substitute for, items that are normally exempt.
For instance, under PLR ST 89-0651, an overhead crane which functioned as a “back-up” to a coil car which, when working, would position coils of steel on an uncoiler; the crane was held to be exempt under the manufacturing machinery and equipment exemption, even though it would not usually be considered exempt as it served an area preceding the first stage of production.
Perhaps a better example would be chemicals that have been considered as exempt machinery and equipment in numerous rulings issued by the Department over a course of several years (for instance, chemicals that etch a product instead of using a machine to do the etching).
Using this “analogy logic”, can switching engines, operated by a manufacturer, be considered exempt, assuming that the cars handled by the switch engine will be carrying materials in interstate commerce, as the manufacturer uses this equipment to perform a function of a common carrier for hire?
Response:
No. “Analogy logic” is perhaps too broad a term to describe the factors that led the Department to consider chemicals exempt under the manufacturing exemption. In the case of chemicals, the Department recognized that there were cogent arguments for recognizing that while a chemical was not what would commonly be understood as a piece of equipment, it performed the same function as exempt equipment, and it met all the other requirements imposed upon exempt equipment. The Department felt that the statute could support this interpretation and proposed a regulation to codify this policy. JCAR examined this regulation and issued no objections. Later, the sales tax statutes were amended to include this approach, as well.
When a statutory exemption contains specific requirements, however, we cannot exempt a substitute item merely because it fulfills the same function as the traditional item. The substitute item must still meet the requirements for the exemption. An example of a situation where a substitute item would not qualify for an exemption, despite serving the same function, is in the graphic arts equipment exemption. This exemption was tied for many years to specific traditional-type printing processes described in the U.S. Standard Industrial Classification Manual. As printing went “hi-tech,” the industry argued that the new technologies should be exempt, since they performed the same function as the traditional printing equipment. The Department felt it could not take this approach, given the specific statutory requirements. Instead, it sought a statutory change which referenced the North American Industry Classification System provisions governing printing, which included these hi-tech processes.
Taxation of digital equivalents is another example of this issue. The Department does not currently tax music or books that are downloaded, because they are not tangible. Yet, they serve the same function as tangible items. In contrast, some states using “analogy logic” tax these items, or are considering taxation.
Unlike the chemicals, the switching engines purchased and used by a manufacturer to load and unload product will not meet the basic requirements of the rolling stock exemption. That is, the manufacturer is not an interstate carrier for hire, nor are the switching engines it purchases utilized by an interstate carrier for hire for use as rolling stock moving in interstate commerce. An item must meet one of these two basic tests before it can be purchased as exempt rolling stock. Because the items fail this test, they cannot be exempted.
