United States

Illinois: Metallurgical Coke Used in Manufacturing Zinc Powder Not Exempt from Use Tax

Oct 23, 2017
From KPMG TaxWatch

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The Illinois Independent Tax Tribunal recently held that a taxpayer owed use tax on Metallurgical coke (coke) used and consumed in its kilns during the process of manufacturing zinc powder and zinc dust. As part of a complex, multi-step process, the coke at issue was used in kilns to heat electric arc furnace (EAF) dust to a certain specific temperature where impurities could be stripped out. The end result of the process was the production of saleable zinc powder or zinc dust. The key issue before the Tribunal was whether the coke used by the taxpayer was considered a chemical or a chemical acting as a catalyst so that the taxpayer’s purchase of the coke was exempt from use tax under the state’s manufacturing machinery and equipment exemption. Under Illinois law, equipment includes 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 wholesale or retail sale or lease.

At the outset, the Tribunal noted that to qualify for the exemption, the chemicals must effect “a direct and immediate” change upon the product being manufactured. In the Department’s regulation, an example of a qualifying chemical was acid applied to etch copper off the surface of a printed circuit board during the manufacturing process. Thus, the issue was whether the coke at issue immediately and directly caused a change to the zinc being processed and sold by the taxpayer. The Tribunal concluded that the “direct and immediate” answer was no. Simply placing coke next to the zinc did not create a chemical reaction. Rather, the heating of the coke created a series of chemical reactions that took place over several hours and resulted in the creation of several compounds and gases that were all necessary to produce the change to the product. The Tribunal concluded that the taxpayer’s argument failed because it relied on collapsing and conflating all the steps within the process into one continuous and singular chemical reaction. Please contact Drew Olson at 312-665-2897 with questions on Horsehead Corp. v. Illinois Dep’t of Revenue

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.