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Illinois Sales Tax Exemptions – and the Grinch That Stole Them!

author photo of Christina Edson

Tis the season to be jolly, but not for the Illinois legislature. The legislature instead decided to be a Grinch, filing several anti-business tax amendments to H.B 293 on November 10, 2016. The amendments concerning sales tax included eliminating the rolling stock exemption, eliminating the manufacturing machinery and equipment exemption and reducing vendor discounts.

Eliminating an exemption might not be so Scrooge-esque but for the fact that the legislature has also let several other important exemptions expire in recent years. The manufacturer’s purchase credit (“MPC”), earned when purchasing exempt machinery and equipment and used to offset sales tax liability on future purchases of non-exempt production related tangible property, expired over 2 years ago. Taxpayers have not been able to earn MPC for purchases made since August 30, 2014, and any credits earned but not used are set to expire on December 31, 2016.

The sales and use tax exemption for graphic arts machinery and equipment, including repair and replacement parts used primarily in the production of graphic arts, also expired on August 30, 2014. The expanded temporary storage exemption also expired earlier this year on June 30, 2016.

While many other states have found ways to control spending while abiding by constitutional requirements to balance their budgets, Illinois, the country’s 5th largest state, has been facing arguably the worst state budget crisis in the country. In fact, the Illinois legislature hasn’t been able to pass a budget bill—currently the state is relying on a 6-month stopgap budget plan which will carry the state only until January, after not having a budget for a year.

Let’s hope this bill will not pass the legislature when they return on January 9th for the lame-duck session. Regardless, this type of slicing and dicing is likely to resurface throughout the year as the legislature tries to find revenue raising mechanisms to decrease the deficit. Nevertheless, the legislature should not rush to eliminate exemptions in an effort to manage their budget shortfall. Exemptions are not tax avoidance mechanisms or loopholes; rather, they are pro-growth tax policy initiatives that help stimulate economic and investment activity, job creation, and allow manufacturers to compete in global markets. Most states have these types of exemptions in place, and for good reason. They attract manufacturing as well as expansion and relocation of other types of businesses to their state, boosting revenue from multiple sources.

The Tax Foundation ranked Illinois #35 out of the 45 states that impose sales taxes in its 2017 State Business Tax Climate Index. Forbes said that Illinois received an “F” grade from small business owners rating states as the best and worst places to do business. If Illinois wants to attract businesses, it needs these exemptions to remain competitive and business friendly.

State lawmakers should learn from the Grinch---Maybe good fiscal policy doesn’t come from removing tax exemptions. Maybe good fiscal policy, perhaps… means a little bit MORE!

About the Author: Christina Edson is a Director in the Chicago office of True Partners Consulting.

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