Response
July 3, 1990
July
3, 1990
XXXXX
Re: Manufacturer's Sales Tax Exemption
Dear
XXXXX:
This
letter is in response to your May 9, 1990 request for a Tax Commission ruling
on whether certain purchases of machinery and equipment qualify for sales tax
exemption under §59-12-104(16).
Although
your inquiry was framed as a request for a declaratory judgement, Tax
Commission policy is to initially treat all such inquiries as requests for
advisory opinions. As such, it was referred to the Tax Commission's Auditing
Division for their analysis and recommendations. The division recommendation is
as follows:
1. XXXXX's manufacturing facility in XXXXX,
Utah has undergone an expansion and does qualify for sales or use tax exemption
on qualifying machinery purchases and leases.
2. The projects listed below are eligible for
tax exemption:
a.
Project 03170 - Calini Bag Maker.
b.
Project 46155 - CPP Line Enhancement.
c.
Project 46163 - Cracker Line Increase.
d.
Project 46174 - Biscuit Line.
e.
Project 46177 - Bar Coding Continuation.
f. Project 46179 - Short Goods Line.
g.
Project 46183 - Third Cookie Line.
h.
Project 46187 - CPP Checkweighers.
i. Project 46190 - Retail and Food Service
Danish.
j. Project 46196 - Danish Line Upgrade.
k.
Project 46200 - Biscuit Line Checkweighers.
l. Project 46201 - Vac-U-Hoist System.
3. Project 46169 - IBM System 38 Upgrade and
Project 46172 - Mainframe Computer UPS System do not qualify for exemption
because they are not manufacturing or production equipment. In order for
computer hardware for software to qualify as manufacturing equipment, it must
be an internal part of the actual production process. As an example, a computer
used to operate a production machine would qualify as manufacturing equipment.
Based
on the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these
facts, this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgement and be appealable to the Utah State Supreme Court. A
notice of appeal rights is attached.
For
the Commission,
Joe
B. Pacheco
Commissioner
May
9, 1990
Utah
State Tax Commission
Attention:
XXXXX
160
East Third South
Salt
Lake City, UT 84134
Dear
Commission:
This
letter serves as a request for declaratory judgement as to certain items of
manufacturing equipment installed in the XXXXX plant operation in XXXXX, Utah.
XXXXX is a subsidiary of XXXXX.
It
is our position that these items qualify for Utah sales and use tax exemption
for manufacturing machinery and equipment in new or expanded operations
pursuant to USA Section 59-12-104(16) and Rule R865-85S.
The
attached information provides an explanation of our position, including
detailed descriptions of each capital project and how the new installations
serve to expand the operations of the XXXXX plant. Additional questions with
respect to these installations can be answered by XXXXX, Plant Engineer at
XXXXX.
If
you have any further questions, please contact the undersigned at XXXXX.
Very
truly yours,
XXXXX
Vice
President - Taxes
Basis
of Exemption
Utah
Code Annotated (UCA) Section 59-12-104(16) provides that "machinery and
equipment purchased or leased by a manufacturer for use in new or expanded
operations (excluding normal operating replacements, which includes replacement
machinery and equipment even though they may increase plant production or
capacity, as determined by the commission) in any manufacturing facility in
Utah."
Utah
Administrative Code Rule (Rule) R865-85S expands by defining
"machinery" to include machines used in the manufacturing process
including final processing, finishing or packaging, and to include automated
material handling and storage machinery when part of the integrated continuous
production cycle. "Equipment" is defined to include
"devices necessary to the control
or operation of machinery and equipment qualifying under this rule even though
not located in the specific manufacturing area ." "New or expanded
operations" means activities which: a) are substantially different in
nature, character, or purpose from prior activities; b) are begun in a new
physical plant location in Utah; or c) increase production or capacity (subject
to the normal operating replacement limitations). "Normal operating
replacements" means machinery or equipment which replaces existing
machinery or equipment of a similar nature, even if the use results in
increased plant production or capacity (emphasis added).
Our
interpretation of these provisions can be summarized as follows: 1) That if an
installation replaced similar equipment that performed the same or similar
function, then the installation was taxable. 2) That if a new function was
performed by new equipment such that no "replacement" occurred (such
as automating previously manual tasks) and there was increased production or
capacity, then the installation was exempt.
We
are also including as exempt; pursuant to the definition of
"equipment" in Rule R865-85S, computer equipment used predominately
to control new exempt installations.
Project
Descriptions
The
following are project descriptions obtained from the Project Authorizations for
projects identified as exempt under the manufacturing exemption, followed by the
rationale for the exemption.
Project
03170 - Calini Bag Maker Installation:
Purchase and installation of support equipment for the Calini Bag Maker
that makes bags for the XXXXX ( a prior exempt installation of a new production
line.
This
project provides support equipment for the exempt new production line, and
should also therefore be exempt.
Project
46155 - CPP Line Enhancement: Purchase and installation of equipment to
increase line efficiencies, reduce labor, improve yields and meet quality requirements.
Installation
of a Moline makeup section will perform tray denesting to eliminate manual
placement of trays between the Rheon discharge and proofer infeed. Current
depanner is not designed to handle CPP trays, causing excessive pan damage. New meat slicer has the capability to apply
all garnishes required for product, eliminating manual application. Mushroom depositor will perform a function
now done entirely by hand. New cheese shredder can apply two kinds of cheese,
eliminating the manual application of one type.
This
project primarily relates to new types of equipment or equipment performing new
functions that increase production and capacity, and should be exempt.
Project
46163 - Cracker Line Increase: Purchase new rotary cutter assembly, extend oven
infeed and discharge ends, and install a new computerized scaling system with
conveyors to increase production rates on the XXXXX.
The
cracker oven was extended a total of thirty feet and a band preheater added to
improve bake time and increase production. Per XXXXX, new conveyors were
installed to provide diversionary storage that allows the production line to
avoid total shutdowns, generating a production increase. Finally, the new scale
system has workable weight controls that were lacking from the prior scale,
reducing product loss, and also provides an interface with the new conveyor
systems.
This
project, therefore, primarily relates to new installations and new functions,
all of which serve to increase production, and should be exempt.
Project
46169 - IBM System 38 Upgrade: Upgrade the System 38 computer to a model 400
(lease was elected over a purchase).
The
System 38 does not allow for additional on-line, real-time information needed for
bar coding project (see below), automatic warehousing, floor terminals, and
future data processing requirements. Upgrade will allow reliable data to be
accessed on a more timely basis for improved inventory control, reduced
production cost, and better quality control of product shipped.
The
computer upgrade relates primarily to performing new computer-controlled
manufacturing functions, and the project should be exempt.
Project
46172 - Mainframe Computer UPS System: Purchase and installation of a mainframe
UPS (uninterrupted power supply) system.
With
no UPS system currently in existence, all computer-supported plant operations,
including CAM, are adversely affected by power fluctuations and resultant
system shutdown. Data will be saved and some hardware will receive greater
protection, resulting in increased production.
Since
computer-controlled production operations are favorably affected by this
improvement, the project should be exempt.
Project
46174 - Biscuit Line 1 Additional Depositor:
Purchase and installation of a combination cookie depositor and hi-speed
wire cut machine. The new depositor will be located downstream from the
existing depositor and dedicated to producing XXXXX.
The
current cookie depositor on Line 1 deposits all varieties of cookies produced
on the line, which is predominately the XXXXX. Under "Project
Freshness" guideline, this depositor must be changed over frequently to
produce the various cookie types. The new depositor will be dedicated to XXXXX
only, and will operate while the other depositor is undergoing changeover. This
will reduce line downtime, increasing plant capacity and production.
Since
the new depositor increases plant capacity and production, and is not a
replacement of an existing machine, this project should be exempt.
Project
46177 - Bar Coding Continuation: Purchase install bar coding equipment. Bar
coding will provide significant improvements to inventory control, product
freshness and distribution management.
Under
this project, new bar coding equipment is added to current production lines.
Additional conveyors and support equipment must also be installed. Bar coding
of the product will lower inventory levels, improve product freshness, provide
quicker response to orders, improve internal control and allow better planning.
Since
the definition of "machinery" under Rule R865-85S includes product
packaging and automated material handling equipment when part of the integrated
continuous production cycle, and the bar coding project serves to increase
plant capacity and production, this project should be exempt.
Project
46179 - Short Goods Line Improvements For Increased Reliability and System
Optimization: Purchase and install dies washer thereby reducing possibility of
damaging the dies during manual cleaning process and allowing compliance with
industry practice guidelines. Purchase and install steam and hot water
injection system to provide final dryer climate conditions for pasta. Install a
pneumatically actuated pasta bag stacking system.
Various
improvements are provided under this project to the short goods line installed
under a prior project. The majority of the project is for new machinery and
equipment performing new functions designed to improve reliability and
production operations.
Since
new functions are being performed and no equipment is being replaced, and plant
production will be increased, this project should be exempt.
Project
46183 - Third XXXXX Line: Provide funds to cover the cost of equipment,
material and labor to install a cookie line and packaging equipment to produce
XXXXX and XXXXX. Also provides funds to
add chocolate enrobing equipment to existing XXXXX line # 2, to permit
manufacture of fully enrobed XXXXX.
This
project provides for the installation of new equipment necessary to make and
package new products, and clearly falls within the manufacturing exemption
guidelines.
Project
46187 - CPP Checkweighers: Purchase and installation of new hi-speed
checkweighers with SPC capability on the CPP line.
It
is impractical to upgrade the current checkweighers to provide SPC capability.
The new checkweighers will provide SQC/SPC capability to the CPP line,
improving yields due to more accurate weighing and control capabilities added
by the SPC feature.
The
new checkweighers are not "normal operating replacements" because
they perform new functions beyond the capability of the previous equipment, and
the project should therefore be exempt.
Project
46190 - Retail and Food Service Danish: Purchase and installation of equipment
to enable the plant to manufacture both retail and food service danish.
This
project provides for the installation of equipment necessary to manufacture new
products, and clearly falls within the manufacturing exemption guidelines.
Project
46196 - Danish Line Upgrade: Purchase and installation of equipment to increase
danish production line speeds and to automate depanning operation.
New
mechanical equipment is being added to the new danish line (see Project 46190)
to increase production capability, and this project should therefore be exempt.
Project
46200 - Biscuit Line Checkweighers: Purchase and installation of two hi-speed
checkweighers with SPC capability on biscuit line #1.
The
current checkweighers do not have the capability to provide real-time data
necessary for SPC/SQC analysis. The new checkweighers will provide SQC/SPC
capability to the line, improving yields due to more accurate weighing and
control capabilities added by the SPC feature.
The
new checkweighers are not "normal operating replacements" because
they perform new functions beyond the capability of the previous equipment, and
the project should therefore be exempt.
Project
46201 - Vac-U-Hoist Systems: Installation of a vac-u-hoist system to eliminate
the manual lifting of ingredient bags by operators of the XXXXX and XXXXX
mixers.
The
installation of the systems will allow the operator to batch with less
spillage, physical exertion and time, resulting in a more efficient operation.
The project should therefore be exempt.
Detailed
transactions by project to which the manufacturing exemption provisions apply
are scheduled in Section III.