Illinois: Temporary storage exemption does not apply when goods returned to state

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Detailed Illinois Development

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Recently, an Illinois appeals court addressed whether the Tax Tribunal erred when it concluded that a taxpayer owed use tax on purchases of unused or so-called virgin solvent. The taxpayer provided parts cleaning solvent and parts washers to its customers. As part of its business, the taxpayer would also regularly drain used solvent from its customers’ washers and replenish the washers with recycled solvent.  The case involved the imposition of use tax on unused or virgin solvent that was mixed with the recycled solvent before being put in washers.  The virgin solvent was received and stored in Illinois until used at the customers’ locations in Illinois and elsewhere. After being used in customers’ washers, the virgin solvent, which was by then contaminated with debris and foreign chemicals, was returned to Illinois for recycling.  The taxpayer had originally claimed a temporary storage exemption from use tax for virgin solvent received and stored in Illinois; it remitted Illinois use tax when the virgin solvent was used in the state at a customer location. However, after an audit, the Department determined that the temporary storage exemption did not apply because the solvent on which the exemption was claimed was not used solely out of state; it was actually returned to Illinois— albeit in a contaminated and used form – when it was brought back into the state for recycling.  If the exemption did not apply, the taxpayer owed use tax to Illinois on the total amount of its virgin solvent purchase. After the Illinois Tax Tribunal upheld the Department’s assessment of use tax, the taxpayer appealed.

Before the court, the parties agreed that under a prior Illinois case, Shared Imaging LLC, property does not qualify for the temporary storage exemption if it has been temporarily stored in Illinois, shipped out-of-state, and then returned to Illinois for further storage. The taxpayer, however, argued that the used solvents returned to Illinois were a different product than the virgin solvents. Under this theory, the temporary exemption would continue to apply because the returned solvent would be different tangible personal property, meaning the virgin solvent had been used solely out of state. However, the appeals court held that the recycled solvents were essentially the same as the virgin solvents because they could be used for the same purposes, had the same chemical properties, and were handled in the same manner. Further, even if the products were different, the court noted that the used solvent was returned to Illinois and recycled multiple times before it was exhausted.  The court concluded that the taxpayer could not claim temporary storage for the virgin solvents because property that leaves the state and then returns to the state for further storage is not “temporarily stored” in the state. To claim the exclusion, the property must be temporarily stored in the state for sole use outside the state.  Please contact John Griesedieck at (312) 665-3024 with questions on Safety-Kleen Systems, Inc. v. Department of Revenue

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US