Response July 26, 1995
Request
May 9, 1995
State Tax Commission
Attn: Commissioners
210 North 1950 West
Salt Lake City, UT 84134
RE: Potential Sales Tax
Exemption on Equipment Used in Manufacturing
Dear Commissioners:
For the last 40+ years, we have been one of the major drywall and
plastering contractors in the State of Utah.
About the time the XXXXX was built, we started manufacturing panels
which are attached to the exterior of a building. At the time, the XXXXX was the largest job for which we had
manufactured panels. Many times we
install the manufactured panels (as we did at the XXXXX), other times we simply
sell the panel (as we did for the XXXXX Airport).
In the past, these manufactured panels have been a small portion of the
work we have done. We are now finding
an ever increasing demand for this product and have now decided to go after
this market. In order to increase our
capacity, we have put our current office and warehouse up for sale and are
building a new facility in XXXXX.
In 1992, we became the XXXXX distributor for Metal Building and Piping
insulation. Unlike our other divisions,
our insulation division strictly sells insulation. The Metal Building portion of those sales required a
manufacturing process where we laminate vinyl sheeting to the insulation.
Demand for metal building insulation has also increased and we are
looking at purchasing another laminating machine in order to double our
manufacturing capacity.
We are also interested in moving into the area of hardboard insulation
lamination. We are currently supplying
foil-backed hardboard insulation for clean-room manufacturers and have been
disappointed in the quality of product we have been purchasing. In order for us to manufacture our own
laminated product, we will need to purchase a laminating machine built to our
specifications.
We respectfully request a written determination as to whether or not we
can purchase the panel shop equipment and the two insulation laminating
machines exempt from sales tax.
In order to help you with your determination, I offer the following
information as to how we project our sales to be impacted by our investment in
this manufacturing equipment.
**see file for graph illustrating totals for different products
manufactured by XXXXX, **
Your consideration of this matter will be greatly appreciated. Please feel free to contact me if you have
any questions.
Very truly yours,
XXXXX
XXXXX
RE: Advisory Opinion - Application of the Sales Tax
Exemption for Manufacturing Equipment to Panel Shop Equipment
Dear
XXXXX,
You
requested an opinion as to whether the purchase of panel shop equipment and
insulation laminating machines qualifies for a sales tax exemption as
manufacturing equipment. Our research
indicates as follows:
Machinery
Purchased for New or Expanding Operations
Sales
or leases of machinery and equipment by a manufacturer for use in a new or
expanding operations related to the manufacturing process in a Utah
manufacturing facility are exempt from sales tax. A manufacturing facility is defined as an establishment descried
SIC codes 2000-3999 of the 1987 Standard Industrial Classification Manual.
You
have described two types of new activities.
One is the manufacture of prefabricated plaster panels, which fits
within qualifying code 3275. The other
activity involves manufacturing a new insulation product by laminating plastic
sheeting to insulation, which appears to fit within qualifying code 3296. XXXXX Qualifies as a new or expanding
manufacturing operation because it is moving to a new facility and
substantially increasing its manufacturing activities.
Purchases
of panel shop equipment and insulation laminating machines for these
manufacturing operations are exempt from sales tax with the following
qualifications.
1. The exemption applies only to tangible
personal property, not real property or tangible property that is purchased and
becomes an improvement to real property.
2. Machinery or equipment with a useful economic
or accounting life of less than three years is not eligible for the exemption.
3. Machinery or equipment used for an activity
that is not part of the manufacturing process, such as equipment used to
transport or ship the final product, does not qualify for the exemption.
Replacement
Equipment
Manufacturing
machinery or equipment which is purchased as a normal operating replacement is
currently subject to sales tax.
Replacement equipment is defined as equipment which serves the same purpose
as existing equipment. If the existing
equipment is retired from service within 12 months before or after the purchase
of new equipment, the new equipment is considered replacement equipment.
The
state legislature recently passed a bill which phases in an exemption for
manufacturing replacement equipment over the next few years. The exemption rates which will apply to
replacement equipment are set out below.
1. For tax years beginning July 1, 1996, 30% of
the exemption is allowed.
2. For tax years beginning July 1, 1997, 60% of
the exemption is allowed.
3. For tax years beginning July 1, 1998, 100%
of the exemption is allowed.
Normal
operating replacements purchased before July 1, 1996 are fully taxable.
Construction
Activities
In
addition to the expanding manufacturing activities described here, XXXXX will
apparently continue its construction activities (SIC code 1742) in the same
facility. Under Utah State Tax
Commission Administrative Rule R865-19-85S, “ where distinct and separate economic
activities are performed a t a single physical location, each activity should
be treated as a separate establishment.”
Each of XXXXX’s business lines, then, is treated as a separate
establishment for purposes of the manufacturing equipment exemption. Since the construction activities constitute
a separate establishment which does not qualify as manufacturing facility,
purchases of machinery and equipment related solely to XXXXX’s construction
activities do not qualify for exemption.
Machinery or equipment purchased or lease for use in the manufacturing
activities and construction activities qualify for exemption only if the
use in construction activities is determined to be de minimis.
This
opinion is based only the facts presented in your letter. If additional facts arise which present new
questions, please feel free to request another advisory opinion.
For
the Commission,
Alice
Shearer
Commissioner