97-020
Response April 14, 1997 and April 24,
1997
April
21 1997
Dear
Ms. Rees,
I'm
writing to request reconsideration on the Manufacturing Sales Tax Exemption in
regards to my business and manufacturing process.
I
own a frozen cookie dough company. Two years ago I started out with a
residential freezer to freeze the cookie dough. Last year I purchased a walk in freezer to accommodate the
growing business. My product is "frozen" cookie dough. The freezer is
necessary for me to produce my product and is an integral part of my
manufacturing process. My company is listed under the SIC Code 2045.
In
Tax Bulletin 17-96, it states that "...legislation provided a sales tax exemption
for purchase or lease of machine and equipment:
1) used in the manufacturing process;
2) having an economic life of three or more
years;
3) used to manufacture an item sold as
tangible personal property; and
4) used in new or expanding operations in a
manufacturing facility in Utah.
I
feel that my manufacturing process meets these requirements and I kindly
request your advisory opinion.
Sincerely,
NAME
April
14, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - Manufacturing equipment exemption.
Dear
NAME,
We have received your request for
information about the applicability of the manufacturing equipment sales tax
exemption to your purchase of a walk-in freezer. We assume for purposes of this opinion that the walk-in freezer
is a free-standing unit rather than a built-in freezer that is considered part
of the building. A built-in freezer
that has been converted to real property is not eligible for the exemption. We
offer the following tax guidance:
Two sales tax exemptions apply to
purchases of manufacturing equipment.
First, a 100% sales tax exemption applies to equipment and machinery
purchased or leased for use in new or expanding manufacturing operation which falls
within codes 2000 - 3999 of the Standard Industrial Classification Manual
(1987).
Second, a partial exemption is
available for purchases of normal operating replacements.
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, the new, similar
equipment that serves the same or similar purpose is considered replacement
equipment. Because you describe your purchase as a replacement for the
residential-type freezer that you used in the past, it appears that this
purchase is a purchase of a normal operating replacement.
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.
(C) beginning July 1, 1998, 100% of
the exemption applies.
Equipment used for an activity that
is not part of the manufacturing process does not qualify for exemption. Refrigeration and storage of raw materials
or finished manufactured product are nonqualifying activities. For purposes of this opinion, we note that
your final product is frozen dough.
We assume, therefore, that freezing the dough is an integral step in the
manufacturing process. If the freezer
is used for both qualifying and nonqualifying activities, the the exemption
only applies if the use for nonqualifying activities is de minimis. That is, the item’s use in nonqualifying
activities is inconsequential in relation to the item’s use for qualifying
activities.
If your purchase meets the
qualifications for normal operating replacement and you purchased the freezer
on or after July 1, 1996, you may request a refund of 30% of the sales tax
directly from the vendor by presenting the vendor with an exemption
certificate. The Tax Commission will
allow the vendor a credit for the refunded tax.
Please let us know if you have other
questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner
April
18, 1997
Utah
State Tax Commission
Attn: Joe B. Pacheco
210
North 1950 West
Salt
Lake City, Utah 84134
Dear
Mr Pacheco,
This letter is to follow up our
conversation today. After receiving your letter dated April 14,1997, I felt
there was a misunderstanding as to the purchase of our walk-in freezer.
I failed to clarify that the walk-in
freezer was an "expansion" of our current operations and the original
residential freezer we were using is still being used. In paragraph 2 of your
letter you stated that "100% sales tax exemption applies to equipment and
machinery purchased or leased for use in new or expanding manufacturing
operation...". Therefore, with this clarification, I would ask you to
review your previous advisory opinion to see if we do qualify for the 100%
sales tax exemption.
Thank
you for your time.
Sincerely
NAME
April
24, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - walk-in freezer
Dear
NAME,
We have received your request for
clarification on the manufacturing exemption as it applies to your purchase of
a walk-in freezer. If the freezer
increases production capacity and it was not purchased as a substitute for the
other freezer, then it qualifies for the 100% exemption. To restate the conditions, if the new
freezer was purchased within 12 months of the date that an old freezer was
retired or if the old freezer is kept as a backup only, the new freezer is
considered a normal operating replacement.
If the walk-in freezer is used for nonqualifying purposes, the exemption
does not apply unless the nonqualifying use is very insignificant in relation
to the freezer’s overall use.
We hope this clarification is
helpful.
For
the Commission,
Joe
B. Pacheco,
Commissioner