96-055
Response
April 3, 1996
Request
February
20, 1996
Dear
Mrs. Shearer
This
letter represents our request for an advisory opinion from the Tax Commission's
Auditing Division. Under the exclusion rule in Utah Code Section 59-12-104(15)
and Administrative Rule R865-19s-85, tax exemption is requested for the
following capital project:
PROJECT AMOUNT REF. NO.
XXXXX $$$$$ XXXXX
The attached funding request of $$$$$ is to expand
and automate the XXXXX which your office considered to be tax exempt from the
information we previously provided. The purchase of automation equipment still
represents equipment for use in new or expanding operations and excludes normal
operating replacements. This automation of a new product line is necessary for
XXXXX to maintain it's market presence in the safety catheter market.
If you feel further explanation and documentation is
necessary, please contact me at XXXXX. I can meet with you, at your
convenience, at your office or our Sandy, Utah facility.
Sincerely,
XXXXX
Alice Shearer
Commissioner
Utah State Tax commission
160 East Third South
Salt Lake City, Utah 84134
Dear Mrs. Shearer
This letter represents our request for an advisory
opinion from the Tax Commission's Auditing Division. Under the exclusion rule
in Utah Code Section 59-12-104(15) and Administrative Rule R865-19s-85, tax
exemption is requested for the following capital project:
PROJECT AMOUNT REF. NO.
XXXXX $$$$$ XXXXX
The attached funding request of $$$$$ is to purchase
equipment which will enable us to enter into the XXXXX (XXXXX) and Mid-Line
product markets. The purchase of this equipment represents new or expanding
operations and excludes normal operating replacements. As indicated in the
attached funding request, this is the first funding stage of a project with a
capital spending scope of $$$$$.
If you feel further explanation and documentation is
necessary, please contact me at $$$$$. I can meet with you, at your
convenience, at your office or our Sandy, Utah facility.
Sincerely,
XXXXX
XXXXX
Re: Request for Advisory Opinion for Manufacturer's
Machinery and Equipment Exemption.
Dear XXXXX
We have received your requests, dated February 20,
1996, and March 8, 1996, for exemptions on machinery and equipment that your
corporation plans to purchase. As a matter of convenience we will address these
two requests together. In order for the Tax Commission to give you a specific
Advisory Opinion, we require more information regarding the machinery and
equipment you intend to acquire.
According to R865-19S-85 of the Tax Commission
Rules, the manufacturing exemption for machinery and equipment only applies to
"new or expanding operations," as opposed to "normal operating
replacements." The rule defines "new or expanding operations" as
"manufacturing, processing, or assembling activities that: (1) are substantially
different in nature, character, or purpose from prior activities; (2) are
begun in a new physical plant location in Utah; or (3) increase production or
capacity." See R865-19S-85(A)(3)(a)(1)-(3), emphasis added.
In contrast to "new or expanding
operations" the rule defines "normal operating replacements" as
"machinery or equipment that replaces existing machinery or equipment
of a similar nature, even if the use results in increased plant production
or capacity." See R865-19S-85(A)(6), emphasis added.
In your request of February 20, 1996, you requested
an exemption for "XXXXX." Your request letter defines the purpose of
this project as to "expand and automate the XXXXX" which the Tax
Commission previously considered tax exempt. The letter further states that
"the purchase of automation equipment still represents equipment for use
in new or expanding operations and excludes normal operating
replacements."
Our concern with this recent request is that the
XXXXX equipment is essentially replacing existing machinery or equipment (the
XXXXX) of a similar nature. It appears that both sets of equipment have the
similar purpose of producing the XXXXX. The only difference is that one is
manual while the other is automated. Under these circumstances, although the
automated equipment may increase plant production, the machinery possibly falls
into the "normal operating replacements" and will therefore not
eligible for the exemption.
We need more detailed information to determine if
this evaluation is correct. Specifically, please disclose how the automated
equipment is "substantially different in nature, character, or
purpose" from the prior manual activity. From the brief description in your
request letter it is impossible for us to properly determine if the automated
equipment is "similar in nature" or "substantially
different" to the manual equipment.
Also, please disclose what will happen to the
existing machinery and equipment. If the existing machinery or equipment is
kept as a back up, infrequently used, or retired from service within 12 months
before or after the purchase of new equipment, then the new equipment is
considered as a replacement and not eligible for exemption. See R865-19S-85(A)(6)(a)-(b)
Though replacement equipment is, initially, not
exempt, the state legislature recently passed a bill that phases in an
exemption for manufacturing replacement equipment over the next few years. The exemption
rates that 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.
Finally, for both the XXXXX and the XXXXX, please
describe how each piece of equipment will be used. The exemption applies only
to equipment or machinery used as "part of the integrated continuous
production cycle." See R865-19S-85(A)(1)-(2). Also, the useful or economic
life of the equipment must be at least three years. See R865-19S-85(D). From
the information you provided, it appears that the machinery and equipment for
both projects have a life of ten years, which if correct, would qualify for the
exemption.
We appreciate your willingness to work with us in
the past. By providing this on for the Tax Commission we will be able, quickly
and properly, to advise you on the extent of your new machinery and equipment
exemption. If you have other questions, Please let us know. We look forward to
receiving this further information from you.
For the Commission,
Alice Shearer,
Commissioner