Illinois Use Tax – Are You Properly Self-Assessing This Tax?
When you purchase items subject to sales tax from an Illinois vendor, the vendor normally properly charges you sales tax. However what happens when you purchase items from out of state, and that vendor is not required to collect sales tax on that purchase?
Illinois requires you to self-assess the sales tax; it’s called Use Tax and many businesses are not aware of the problems it can cause if the Illinois Department of Revenue (IDOR) schedules a sales and use tax audit. As the state looks for more ways to raise revenue, you can bet that increased sales and use tax audits are here.
This area tends to trap manufacturing companies the most. For many purchases a manufacturing company makes, from inventory to machinery and equipment, the business makes these purchases exempt from state sales tax. Where the manufacturer gets caught is failing to recognize the need to pay tax on the many items that are not exempt from sales tax: the items the IDOR does not consider to be “equipment”.
According to IDOR, equipment includes “any independent device or tool separate from any machinery but essential to an integrated manufacturing or assembling process.” This includes computers used to operate machinery, CAD systems, parts of machinery such as tool, dies, jogs, fixtures, patterns and molds. These items can be purchased free of state sales or use tax.
What cause the problems upon audit are items NOT considered EQUIPMENT. You need to either pay sales tax when you buy these items from your vendor, or self-assess the “use tax” and pay IDOR directly. The following are examples of items not exempt from sales or use tax:
- Hand tools
- Supplies (rags, cleaning compounds)
- Coolants
- Lubricants
- Adhesives
- Solvents
- Gloves, shoes, glasses, goggles, coveralls, aprons, masks, etc)
- Fuel oil
- Steam
- Refrigerants
- Water
This list is not comprehensive, but you can see that for some items used directly in the manufacturing process, there is a use tax liability that manufacturers need to be aware of.
This is an area that ALL businesses need to be aware of. Although we see manufacturers getting hit with sometimes large tax liabilities due to an IDOR audit, any business is subject to scrutiny on this issue.
Steve Trojan, CPA is owner of SMT & Associates, Inc, a Crystal Lake IL based tax and accounting firm, and Complete Payroll Inc, (www.completepayrollinc.com) a payroll processing firm.
