97-009

Response February 28, 1997

January 27, 1996

Dear Sir:

The purpose of this correspondence is to request an advisory ruling from the Tax Commission concerning a sales and use tax exemption sought by COMPANY A for the purchase of equipment used in a manufacturing process.

Utah Code Ann. Section 59-12-104 provides a sales tax exemption or machinery and equipment purchased by a manufacturer for use in new or expanding operations subject to limitations dealing with normal operating replacements.

These limitations are unclear to COMPANY A concerning our $$$$$ capital purchase of a new dryer used to dry the XXXXX from the XXXXX prior to processing in the mill. COMPANY A position is in favor of allowing the exemption based on the following issues:

1) The new dryer is not a "normal operating replacement" because the old dryer is fully operational and is being replaced only because predicted business levels have exceed the operational capacity.

2) The new dryer's maximum operational capacity is 110 tons per hour compared to 75 tons per hour for the old dryer. This is a 47% increase. Our actual operational standards applied to our normal daily production rates are 85 tons per hour versus 60 tons per hour respectively or a 42 % operating capacity.

3) COMPANY A air quality permit from the Department of Environmental Quality - Division of Air Quality is rated at 110 tons per hour for the new dryer compared to 80 tons per hour for the old dryer, a 37.5% gain. Additionally, this permit allows for an increase in annual XXXXX processed to 869,000 tons annually from 632,000 tons.

4) The air quality permit also requires that the old dryer be fully disengaged and removed from the premises by MMDDYY.

On behalf of XXXXX, I ask that the Tax Commission respond to this request as soon as possible to ensure appropriate and timely accounting for this capital project.

Sincerely,

NAME

February 28, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Sales Tax Exemption for Manufacturing Equipment.

Dear NAME,

We have received your request for guidance pertaining to the manufacturing exemption. As we understand your situation, you are purchasing a new dryer for your manufacturing operation. The new dryer replaces the dryer that is currently in use, and it will increase your manufacturing capacity. The old dryer will be retired from service later this year. For purposes of this opinion, we assume that the activity in question falls within one of the qualifying SIC codes. On the basis of the stated facts we offer the following guidance:

Under section 59-12-104 (15) of the Utah Code, purchases or leases of manufacturing equipment are exempt from sales tax, but the exemption is subject to the limited exemption for normal operating replacements. Normal operating replacements are allowed a partial sales tax exemption as follows:

(A) beginning July 1, 1996, through June 30, 1997, 30% of the exemption applies.

(B) beginning July 1, 1997, through June 30, 1998, 60% of the exemption applies.

To qualify for the 100% exemption on the purchase or lease of new manufacturing equipment,

the equipment must have an economic life of three or more years and it must be used in in new or expanding operations in a manufacturing facility in the state. Equipment is considered a normal operating replacement if it has an economic life of three or more years and it is used to replace or adapt an existing machine to extend the normal estimated useful life of the machine.

Under Utah Administrative Rule R865-19S-85, equipment is considered to be a “normal operating replacement” if it serves the same or a similar purpose as equipment retired from service within 12 months before or after the purchase date. If existing equipment is kept for back-up or infrequent use, any new equipment that serves the same or similar purpose is considered replacement equipment. That fact that the new equipment increases capacity is not determinative.

From the facts in your request letter, it appears that the new dryer is purchased to replace the existing dryer that will be retired from service later this year. Although the new dryer increases capacity, it is still a normal operating replacement under the terms of the statute and rule. Therefore, the purchase is eligible for a partial sales tax exemption.

You may be interested to know that there is a case concerning normal operating replacements pending before the Supreme Court. The outcome of that case may impact our administrative rule in the future.

If you have other questions, please let us know.

For the Commission,

Joe B. Pacheco,

Commissioner