REQUEST LETTER

01-010

Response 6/29/01

Dear Mr. NAME

This letter is to request an Advisory Opinion from the state regarding the taxability of molds manufactured in Utah and sold to non-Utah entities.

The Utah State Tax Commission (USTC) recently completed a sales tax audit of COMPANY for the period April 1, 1997, to December 31, 1999. As part of that audit, EMPLOYEE (Utah State Sr. Tax Auditor) reviewed a petition for refund we had filed. The request for refund related to sales tax collected on the sale of a mold to a non-Utah manufacturer and stored in Utah. Our client had discussed the taxability of this transaction with the UTSC and was told that the sale by a Utah manufacture should be non-taxable. It had been our understanding that these sales should be taxable since the molds do not leave Utah and the client could not provide a Utah Exemption certificate claiming an exemption since they do not have nexus in Utah. NAME, in researching and discussing the issue with the UTSC, concluded that the petition should be granted and suggested that we obtain an Advisory Opinion from the USTC on this issue.

COMPANY located at ADDRESS, is a leader in the manufacturing of large custom mold thermoplastic components. COMPANY molds and finishes a wide variety of custom components for industries in filtration, electroplating, pulp and paper, pumps and valves, pipe fittings, machining and equipment, industrial batteries, food processing military and other customs engineered applications.

As part of the manufacture process COMPANY is often required to manufacture molds on behalf of their customers. COMPANY will perform the engineering and design of the mold and then outsource the actual machining of the mold. These molds are then used in Utah to manufacture the requested components. Little profit, if any, is realized on the sale of the mold. It is the manufacturing of the components where COMPANY realized profit. If COMPANY were to purchase these molds they would qualify under the manufacturing exemption. The majority of molds sold are customized to the clients’ specifications.

Therefore, the client requires they maintain ownership of the mold. Many of the customers do not have nexus in Utah and therefore cannot provide Utah exemption certificates. COMPANY is not in the business of manufacturing molds, but rather in using those molds to manufacture molded components.

It has been our understanding that if this mold does not leave the state, or if we do not obtain a Utah exemption certificate that it is necessary to collect sales tax on the sale of these molds. Therefore, we have been collecting and remitting sales tax on these sales. Having to charge sales tax on the sale of these molds puts COMPANY at a strategic disadvantage when trying to compete with other injection molders in states that exempt the manufacturing of molds as part of the manufacturing process. In most incidences, the sales tax, which can be quite substantial, becomes a major hurdle in maintaining current customers and obtaining new business.

The Utah Code exempts purchases of the following. It states under section 59-12-104:

The following sales and uses are exempt from the taxes imposed by this chapter:

(14) (a) the following purchases or leases by a manufacturer on or after July 1, 1995:

(i) machinery and equipment:

(A) used in the manufacturing process;

(B) having an economic life of three years; and

(I) to manufacture an item sold as tangible personal property; and

(II) in new and expanding operations in a manufacturing facility in the state; and

(ii) subject to the provisions of Subsection (14)(b), normal operating replacements that:

(A) have an economic life of three or more years;

(B) are used in the manufacturing process in a manufacturing facility in the state;

(D) do not include repairs and maintenance;

Under the administrative rule R865-19S-85. Sales and Use Tax Exemptions for New or Expanding Operations and Normal Operating Replacements Pursuant to Utah Code ann. Section 59-12-10, it states:

A. Definitions:

. . . .

3. “Machinery and equipment” means:

. . . .

b) any peripheral device that is essential to a continuous manufacturing process. Qualifying peripheral devices include bits, jigs, molds, or devices that control the operation of machinery and equipment, but do not include gas, water, or electricity systems that constitute real property improvements as provided in B.

Based on the Utah Code, molds are considered machinery and equipment for sales tax purposes and therefore exempt from sales tax. COMPANY issue would be that these molds are sold to non-Utah manufacturers and then become part of the manufacturing process in a Utah facility.

COMPANY understanding has been that these molds are taxable. Therefore we have been collecting and remitting sales tax. Based on discussion with NAME and the conversations one of our customers had with the USTC, it appears we have been in error when charging sales tax on sales of molds. Since sales tax on molds becomes a major issue when generating business, COMPANY is requesting this advisory opinion from the UTSC.

If you have any questions or need additional information please contact me at the above address or call me at #####.

NAME

Tax Manager

RESPONSE LETTER

DATE

NAME

ADDRESS

RE: Advisory Opinion – Manufacturing Exemption and the Sales of Molds

Dear NAME,

We have received your request for an advisory opinion concerning sales made by COMPANY. COMPANY manufactures and sells both custom molds and thermoplastic components that are made from the molds. While the thermoplastic components are shipped to COMPANY customers, the molds are stored at COMPANY in Utah in case the customers require additional components in the future. At issue is whether COMPANY sales of the molds that are stored in Utah are exempt from taxation under the manufacturing machinery and equipment exemption found in Utah Code Ann. §59-12-104(14).

The Section 104(14) exemption is available only to:

(a) the following purchases or leases by a manufacturer on or after July 1, 1995:

(i) machinery and equipment:

(A) used in the manufacturing process;

(B) having an economic life of three or more years; and

(I) to manufacture an item sold as tangible personal property; and

(II) in new or expanding operations in a manufacturing facility in the state; and

(ii) . . . normal operating replacements that:

(A) have an economic life of three or more years;

(B) are used in the manufacturing process in a manufacturing facility in the state;

(D) do not include repairs and maintenance;

For purposes of Section 104(14), Utah Admin. Rule 865-19S-85(A)(3) (Rule 85) defines “machinery and equipment” as:

a) electronic or mechanical devices incorporated into a manufacturing process from the initial stage where actual processing begins, through the completion of the finished end product, and including final processing, finishing, or packaging of articles sold as tangible personal property. This definition includes automated material handling and storage devices when those devices are part of the integrated continuous production cycle; and

You have provided information from which we make the following assumptions. First, the molds at issue are used in new or expanding operations in COMPANY manufacturing facility in Utah. Second, the molds have an economic life of three or more years and, under Rule 85, qualify as machinery and equipment used in a manufacturing process. Third, the molds are used to manufacture thermoplastic components, which are tangible personal property sold by COMPANY to its customers. If these assumptions are true, then COMPANYmay sell such a mold to a customer tax-free under the Section 104(14) exemption if the following two conditions are met.

(1) The purchaser claiming an exemption from sales tax on the purchase of the mold is itself a manufacturer as defined in Utah Code Ann. §59-12-102(15) (copy enclosed). Section 104(14) specifically provides that only purchases by a manufacturer may qualify for the exemption. Accordingly, a purchase of a mold by a non-manufacturer is, by definition, excluded from the exemption. The fact that COMPANY, the seller of the mold, is a manufacturer does not satisfy the requirement. COMPANY customer, who is the entity purchasing the mold, must itself be a manufacturer before the exemption may apply.

(2) COMPANY receives a completed Utah State Tax Commission Form TC721 exemption certificate from each customer claiming the exemption. Each exempt customer is required to enter on this form its Utah state sales tax number. Should your exempt out-of-state customer not have such a number, it may instead enter its sales tax number from the state where it is located. In case the customer does not have a sales tax number in any state, it should attach a letter to the form explaining why it is not required to register for sales tax purposes and instead enter its Federal ID number.

We should also point out that Utah Code Ann. §59-12-105 requires each purchaser of manufacturing machinery and equipment to report its exempt purchases to the Commission on its Utah sales and use tax return. Because an out-of-state entity without a Utah sales tax number is not required to file a Utah return, such an entity it is excused from the reporting requirements of Section 105. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

01-010