Illinois: No Sales and Use Tax Exemption for Electricity Used to Manufacture Products

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Detailed Illinois Development

The Illinois Department of Revenue recently issued a General Information Letter addressing whether electricity and natural gas used in manufacturing was exempt from Illinois sales and use tax. The taxpayer, in its request for a ruling, asserted that all the electric power and natural gas consumed in the process of manufacturing zinc plating should be exempt from sales and use tax under the state’s manufacturing and assembly machinery and equipment exemption. Under Illinois law, what is commonly known as “sales tax” is comprised of taxes under both the Retailers’ Occupation Tax Act and the Use Tax Act. There is an exemption that applies to purchases of manufacturing and assembly machinery and equipment. This exemption, as of July 1, 2019, was expanded to include production-related tangible personal property, defined as all tangible personal property used or consumed in a production-related process by a manufacturer in a manufacturing facility in which a manufacturing process takes place. Supplies and consumables used in a manufacturing process, including fuels, coolants, solvents, oils, lubricants and adhesives, are examples of uses of tangible personal property by manufacturers that are considered production related. The taxpayer argued that under the expanded exemption, the electricity and natural gas that it used should likewise be exempt. However, the Department explained that neither electricity nor gas services are taxed under the Retailer’s Occupation Tax Act or the Use Tax Act. Therefore, the manufacturing exemption was not applicable. Rather, electricity is taxed under the Electricity Excise Tax Law, to which there are limited exemptions, and the sale of gas services is subject to taxation under the Gas Revenue Tax Act, which does not have any type of general exemption for manufacturing use. For more information on ST 21-0010, please contact Drew Olson.


This Week's Developments

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US