Illinois courts have issued three taxpayer-friendly manufacturing rulings in 2013 and 2014, underscoring the breadth of the exemption from use tax afforded to equipment and chemicals used in the process of manufacturing.

Cook County Circuit Court Holds Chemicals Effectuate a “Direct and Immediate” Change on a Product Being Manufactured and Thus are Tax-exempt

Most recently, in in PPG Industries, Inc. v. Illinois Dep’t of Revenue, No. 13 L 050140 (Cir. Ct. of Cook County, Ill. Sept. 9, 2014), the Circuit Court of Cook County, Illinois, reversed an administrative determination denying PPG a refund of use tax paid on its purchase of chemicals used in a manufacturing process, on the basis that the chemicals effectuated a “direct and immediate change” on the glass that was being manufactured.  The exemption at issue exempts from tax “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 sale or lease.”  86 Ill. Admin. Code § 130.330(c)(6); see 35 ILCS 105/3-50(4) (exempt “equipment” includes same).

The Circuit Court opinion found that the Administrative Law Judge’s opinion was clearly erroneous under the facts as presented at the hearing.  The Court rejected the ALJ’s finding that in order to be found to have a “direct and immediate” change on a product being manufactured, there must be a chemical reaction between the chemical for which the tax exemption is sought and the product being manufactured.  The Court determined that the glass being manufactured underwent “an observable direct and immediate physical change as a result of” the chemicals at issue, finding that nothing in the exemption requires that the direct and immediate change relate to a chemical change and not a physical one.  Additionally, the Court characterized a “direct” change as one in which after the chemicals at issue are added to the manufacturing process, “no additional steps or agencies in the manufacturing process intervene or are required to effect vital changes” on the product being manufactured.  It remains to be seen whether the Illinois Department of Review (Department) will appeal the decision.

Illinois Appellate Court Finds Gas Leasing Corporation Owes No Tax on Hazmat Fees or Cryogenic Systems 

On September 5, 2013, the Illinois Appellate Court issued a ruling in favor of ILMO Products Co. (ILMO), holding that ILMO did not owe Retailers’ Occupation Tax on the hazmat fees it charged in connection with its rentals of high pressure gas cylinders because the fees were part of a nontaxable rental and were not a taxable sale of gas.  ILMO Prods. Co. v. Ill. Dep’t of Revenue, 2013 IL App (4th) 120973-U (Sept. 5, 2013).  The Appellate Court also held that ILMO did not owe use tax on its purchase of cryogenic systems because the systems primarily were used as part of a manufacturing process.

The Appellate Court resolved the hazmat fee issue based on the parties’ pre-trial stipulations that the hazmat fee was a [...]

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