Response
October 29, 1992
October
29, 1992
XXXXX
Re:XXXXX
Dear
XXXXX:
Your
request for an advisory opinion that XXXXX's purchase of a XXXXX System (XXXXX)
qualifies for exemption under § 59-12-104(15) as manufacturing machinery has been
referred to the Auditing Division for their analysis.
It
is the division staff recommendation that:
According
to your letter, the CIM system is used approximately 25% of the time in non
manufacturing processes. Rule R865-19-85S B.4. only allows the exemption if non
qualifying use of equipment is de minimis. Twenty five percent use in non
manufacturing processes is not de minimis and so the purchase of the CIM system
does not qualify for exemption under 59-12-104(15).
Based
upon 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 judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.
To
arrange for Americans with Disabilities Act accommodations, please contact the
Tax Commission at (801) 530-6920, (801) 530-6077 or TDD (801) 530-6269 allowing
three working days notice.
For
the Commission,
Joe
B. Pacheco
Commissioner
Utah
State Tax Commission
ATTENTION:
Joseph Pacheco
160
East 300 South
Salt
Lake City, Utah 84134
Dear
Mr. Pacheco:
I
enjoyed the opportunity to speak with your office today, because of your busy
schedule you were unavailable but your support staff was able to assist me.
Once the commissioners have finished reviewing the enclosed information, I ask
that you contact me to arrange a meeting.
At that time we would like to make a presentation regarding this
important matter.
Thank
you for your time and efforts. We understand you are very busy but we would
greatly appreciate a prompt response, it would be very beneficial for XXXXX. If
you have any questions or concerns please do not hesitate to call me at XXXXX.
Sincerely,
XXXXX
Tax
Consultant
Utah
State Tax Commissioners
Commissioners
Quorum
160
East 300 South
Salt
Lake City, Utah 84134
RE:
Declaratory Judgement Pursuant to Tax Commission Rule R861-1-5A
Dear
Commissioners:
XXXXX,
a tax consulting firm located in XXXXX, Utah, is working in behalf of XXXXX, a
Pennsylvania based aluminum extruder.
XXXXX has expanded their current operations from Pennsylvania by opening
a new manufacturing facility in XXXXX, Utah. The products produced are personal
property goods sold to other manufacturers, who normally perform an added value
service prior to being sold to another. Their five year business plan projects
to capitalize in excess of thirty million dollars of high technology extrusion
equipment. XXXXX's long term plans will
provide many new jobs for Utah and particularly for the XXXXX County area.
XXXXX,
requests that the Commissioners review in detail the enclosed information
pertaining to XXXXX's recent purchase of a XXXXX (Computer Integrated
Manufacturing System). According to the following information, we further
request that the Commissioners find agreement that this particular purchase
qualifies for the new and expanding exemption for manufacturing equipment.
XXXXX's
business plan for the XXXXX facility calls for a hi-tech aluminum extrusion
plant with the ability to be cost effective and efficient. They will accomplish
this by utilizing the most up to date technology in both equipment and
computers available in their field.
XXXXX realizes that in order to remain competitive it requires the use
of computers integrated with their manufacturing equipment and process. With
the use of computers, XXXXX optimizes
time and minimizes waste when ever possible.
The
predominant use of the XXXXX is the integral planning, tracking, and the
control of the manufacturing process. The computer is integrated with each
piece of manufacturing equipment to ultimately optimize each aluminum log or
billet to extrude customer sections to an optimal manufacturing recipe.
It
is further integrated with the billet heater, to monitor temperatures and the
length of time the billet stays within the heater. The billet heater brings the
billets up to a certain optimum temperature. This allows the preheated billet
to be more pliable and used immediately in the extrusion process. The log is
then cut to precise measurements by the log shear. Each length is predetermined
by the computer software taking into consideration the type of extrusion and
the requirements of the job. The billet is then fed into the extrusion press
where up to 3000 tons of force is used to push the billet through a
configuration (die) to produce an extruded product. The extrusion is
meticulously measured by the computer to minimize waste. The extruded product
is then stretched via double pullers and cut to length.
The
manufacturing equipment referred to in the preceding paragraph (heater, press,
runout table, pullers and the oven) are all manufacturing processes that are
controlled by the CIM System. The process up to this point, where the product
is extruded, stretched, and cut, is accomplished solely through the CIM system.
Obviously, individuals are needed to assist in visually monitoring the
manufacturing process.
Once
the lengths are cut according to the order, they are manually loaded onto carts
and proceed through the bake ovens. As previously mentioned the temperature,
length of stay and heating cycles of the ovens are controlled through the CIM
System. In the event of a process malfunction, the CIM System will
automatically shut down the production process and will not allow the system to
continue until the problems are eliminated.
Legal
Aspects for Determination:
Pursuant
to U.C.A. 59-12-104(15) a specific sales and use tax exemption is allowed upon
sales or leases of machinery and equipment purchased or leased by a
manufacturer for use in new or expanding operations in any manufacturing
facility in Utah. XXXXX fits both
criteria of falling within the manufacturing section of the SIC Code between
2000 - 3999 and the CIM system is not replacement equipment .XXXXX' s XXXXX
facility falls within a category of the SIC Codes of 3354 Aluminum Extruded
Products (Page 178 Standard Industrial Classification Manual 1987) In order to
be within full compliance we then turn to U.C.A. R865-19-85S which details all
qualifying criteria.
The
XXXXX used for the CIM process is necessary for the control and operation of
the equipment yet located in the office portion of the plant. These
circumstances fall well within the statutes and guidelines established for this
specific exemption. Looking at U.C.A. R865-19-85S(12) which states
"Equipment" meaning any independent device separate from the
machinery but essential to an integrated or continuous manufacturing or assembly
process, or any subunit comprising a component of any machinery or auxiliary
thereof, including such items as dies, jigs, patterns, molds, and similar items
used in manufacturing,
processing,
or assembling. Qualifying equipment also includes devices necessary to the
control or operation of machinery and equipment qualifying under this rule even
though not located in the specific manufacturing area.
It
is true that a majority of the CIM system is integrated with and used in the
manufacturing process and that approximately 25% of the computer is used for
other non manufacturing processes. Other processes include; sales order entry,
invoicing, and cost system, etc. Yet, as stated, the non qualifying activities
are de minimis compared to the qualifying activities. U.C.A. R865-19-85S(14)
states "Machinery or equipment purchased or leased for use in activities
which may qualify it for exemption, as well as other activities will not lose
the exemption if the use in the nonqualifying activities is determined to be de
minimis. Nonqualifying activities are activities such as maintenance or
production of tangible personal property that is not sold in arms length
transactions.
Included
in this information packet are two detailed maps prepared by XXXXX's CIM
department. A detailed description of each module in the computer, and its use
and function, add the final touch to a very specific, fully automated, computer
aided manufacturing facility. Note that XXXXX's CIM department suggests that
the CIM systems use is 75% in the manufacturing process. It is truly state of
the art technology.
XXXXX's
major concern is their desire to be in compliance with Utah's sales and use tax
laws. They are also aware that certain privileges are available to them
according to applications to existing laws. These incentives greatly aid
XXXXX's ability to operate profitably in a very competitive industry, and are
among the reasons why Utah was selected as the site for their new facility.
Since
it has been established that the predominant use of the XXXXX CIM computer
system in the manufacturing process, XXXXX requests the Commissioners for the
State Tax Commission agree with the opinion that the computer qualifies for the
new and expanding equipment exemption. Thank you for your time and effort in this
most important matter. I appreciate your interest and ask for a response at
your earliest convenience. If questions arise concerning the nature of the
equipment or if further explanation is needed please do not hesitate to call.
My telephone number is XXXXX.
Sincerely,
XXXXX
Tax
Consultant
UTAH
SYSTEM
FUNCTIONAL
DESCRIPTION
1. The Utah system contains the following
system modules:
Administrative
1. Sales Order Entry
2. Invoicing
3. Stores Inventory/Purchasing/AP Invoicing
4. Cost System
Manufacturing
1.
Production Planning
2.
Production Scheduling
3.
Inventory Control
4.
Production Reporting
5.
Material Movement
6.
Shipping System
7.
Computer Integrated Manufacturing System
2.
The Administrative Modules are those modules that provide mechanized systems in
administrative areas of the company. These modules provide the ability to enter
sales orders, invoice customers for product shipped, track production costs,
and purchase material. These are clearly administrative functions.
3. The Manufacturing Modules are those that are
required as part of the manufacturing process. These systems are directly used
by personnel on the shop floor and are required to manufacture, produce, and
track production. They are integral to the operation because the Utah system is
a paperless factory environment. All of the necessary operating information is
controlled via computer terminals located throughout the factory. A brief
description of each is as follows:
Production
Planning
The
Production Planning System is a set of computer programs that plans the
required specification and quantity of raw material (log) required to produce
each order in the plant.
Production
Scheduling
The
Production Scheduling System schedules the orders that are to be produced. It
sequences the orders in the most optimum fashion based on tooling requirements,
raw materials required, date promised, etc.
Inventory
Control
The
Inventory Control System tracks the quantity on hand for raw material,
extrusion work in process, and finished goods inventory. All data required as
part of the system is directly input by shop floor personnel.
Production
Reporting
The
Production Reporting System collects production information on each step of the
manufacturing process. Each operation on the shop floor has a computer terminal
that is used to report production. Shop floor personnel using the system
include the Extrusion Operator, Extrusion Saw Operator, Age Operator, CTL
Operator, Marking Operator, and all Packing personnel.
Material
Movement
All
material (raw material, work in process, and finished goods) is tracked through
each step of the manufacturing process via bar codes and radio frequency
computer terminals located throughout the plant.
Shipping
System
The
Shipping System is utilized by the Traffic Office to plan and load trucks for
shipment. It provides the Traffic Office with the ability to plan truck
requirements and produces all of the necessary paperwork for shipment.
Computer
Integrated Manufacturing System
The
CIM system is integrated to the Extrusion Press. The computer system is
comprised of a computer hooked directly to the press PLC controls. The system
contains a recipe module that has the necessary PLC set points for each part
produced. These set points are automatically downloaded to the press for each
order. The system also contains programs that statistically monitor every
aspect of the extrusion process. Process parameters that are out of statistical
control cause automatic alarms to be set on the press control panel. The system
also contains the necessary programs to diagnose press downtime problems. It
should be noted that the CIM system is an integral part of the manufacturing
control process, and is in the preparatory stage of implementation.
4.
It is clear that the system is predominantly used in the manufacturing area.
Seventy-five percent of all computer equipment (terminals, printers, radio
units, etc.) are located on the shop floor versus in administrative areas. From
a number of processing modules point of view, 7 of 11 system programs are for
the shop floor versus administrative areas. Lastly, from a user point of view,
there are only 4 administrative people in the Utah organization versus 20 shop
floor people using the system at this point in time.