99-007 Response May 4, 1999

99-007

Response May 4, 1999

REQUEST LETTER

Dear Chairman McKeown.

As you may know, the COMPANY is expanding their CITY plant to enhance our manufacturing organization We have taken on new contracts that require additional space and employment needs at this particular plant. This expansion will include new manufacturing and administrative services, along with the renovation of our current building that will support additional equipment used in our manufacturing process.

COMPANY is a manufacturing firm that produces control motions in a broad spectrum of essential uses. COMPANY has over ##### product lines for hydraulic, pneumatic and electromechanical application in some ##### industrial and aerospace markets. SPECIFIC DESCRIPTION.

This expansion will require new support equipment that will include two new centrifugal chillers, which will be used exclusively in the manufacturing facility, and a new boiler system that service both manufacturing primary and secondary operations. These two essential pieces of equipment are a projected investment of #####. Below is a list of operations these two pieces are involved in through the manufacturing process at the CITY plant.

The facility supports several test stands in their laboratory areas. These stands are used in both research and development; as well as quality assurance analysis. When performing various test procedures, the chiller units aid by creating atmosphere variables on flying conditions to ascertain data endurance on COMPANY components that involve military and commercial aircraft. These lest stands simulate the environmental conditions required by the Federal Aviation Commission prior to certification of full component usage.

Quality assurance test stand procedures guarantee the life cycle of the aircraft components by introducing variation temperature conditions for fatigue performance as specified by the Federal Aviation Commission, military and commercial sectors.

In the manufacturing environment, machining centers must maintain balance temperature

conditions to control unnecessary heat build-up that could fatigue both tools and parts during development. Potential weakness of metal composition can jeopardize metal tensile strength that would render the part as scrap.

The chiller units further aid and guarantee product integrity by controlling impurities from inflicting mechanical defects that would reduce performance capability.

Additionally, the expansion will include a SPECIFIC DESCRIPTION.

We recently met with the INDIVIDUAL, deputy director of the Department of Community and Economic Development, and INDIVIDUAL, director of Business Development at the State office. They informed Parker of the possibility of receiving the exemption of sales and use of the purchase or lease of new equipment or machinery for manufacturing facilities. It is for this reason that I am writing this letter.

COMPANY is looking for additional clarification on this tax incentive and whether it can be used on specific equipment, SPECIFIC EQUIPMENT. The CITY plant is doing the preliminary development work on this expansion and is in need of this tax information in order to make a prudent decision for obvious financial reasons.

I look forward to discussing this matter with you further. I would be happy to come to Utah to meet regarding this situation in order to determine what tax incentives are available for this particular expansion. Please feel free to contact me at #####.

I wish to thank you in advance for your cooperation and assistance regarding this project's development.

INDIVIDUAL

COMPANY

RESPONSE LETTER

May 4, 1999

COMPANY

ADDRESS

RE: Utah=s Manufacturing Equipment Exemption and its Application to Equipment Purchases at COMPANY CITY.

Dear NAME,

We have received your advisory opinion request concerning the purchase of new equipment for your company=s facility located in CITY UTAH (FACILITY). You have asked if the contemplated purchase of two new SPECIFIC EQUIPMENT would qualify for a sales and use tax exemption for manufacturing equipment under Utah Code. Ann. '59-12-104(14). In addition, you have asked how this exemption would relate to possible expansions in newly vacated floor space at the facility.

Equipment. Section 59-12-104(14) allows a sales and use tax exemption on purchases of machinery and equipment with an economic life of three or more years if used in the manufacturing process to manufacture an item sold as tangible personal property and if used in a manufacturing facility in Utah.

COMPANY SPECIFIC INFORMATION Thus, the CITY facility is a Utah manufacturing facility and is designated as code 3728 in the 1987 Standard Industrial Classification (ASIC@) Manual. The control systems are items sold as personal property. We will also assume that the chillers and boiler have an economic life of three or more years. Still, before the manufacturing equipment exemption would apply, we must determine whether the chillers and boiler system are machinery and equipment used in the manufacturing process.

MACHINE. The SPECIFIC INFORMATION at the CITY facility must meet performance specifications dictated both by the customer and the Federal Aviation Commission. These specifications set forth guidelines as to how the system parts and the metal in them must react to variations of heat and cold in simulated conditions. To test these systems and parts, the CITY facility has a laboratory testing area where Atest stands@ simulate environmental conditions.

The MACHINE will serve several purposes at the CITY facility. The primary purpose of the MACHINE would be in the laboratory testing area to produce the cold temperatures necessary to simulate variable temperature conditions in the test stands. After the systems and parts meet the required specifications in the simulated conditions, they can be certified for use. While most of the laboratory use of the MACHINE would be to ensure that the system parts meet specifications, a portion of their use (perhaps 10%) would be devoted purely to research and development carried forth in the laboratory.

Another use of the MACHINE would be to provide a cool environment for certain machines in the manufacturing process. The manufacturing facility itself is not air conditioned. However, certain machines in the manufacturing process (approximately 10 machines) require air conditioning. The cool temperatures control unnecessary heat build-up that could fatigue both tools and parts associated with these machines.

Section (B) of Utah Admin. Code R865-19S-85 (ARule 85") provides that the manufacturing equipment exemption does not apply to items of tangible personal property that become part of the real property in which the manufacturing operation is conducted. The nature of a cooling system would suggest that it is attached to the real property in such a way that it becomes part of the real property. Aiding in this conclusion is the fact that cooling ducts are attached to the chillers and transmit cooled air to different areas of the manufacturing facility, including the various machines in the manufacturing facility. Accordingly, if the chillers are attached so as to become real property, they would not qualify for the manufacturing equipment exemption.

Even were the chillers considered separate from the real property, section (C) of Rule 85 disqualifies machinery or equipment from the exemption when that machinery or equipment is used for an activity that is not part of the manufacturing process, unless that use is de minimis. ADe minimis@ is defined in section (A) of the rule to mean that an Aitem=s use in nonqualifying activities is inconsequential in relation to the item=s use for qualifying activities.@

Approximately 10 % of the use of the chillers is to cool areas of the manufacturing facility where machines need a controlled temperature environment, while another 10% or so of the use is for research and development. Neither of these uses, totally about 20% of the chillers= use, is a part of the manufacturing process to produce the aircraft control systems. This is not an inconsequential amount and, thus, does not qualify as de minimis use. Accordingly, the chillers are disqualified from the exemption even without considering whether the primary use of the chillers (i.e., laboratory testing of the parts) is part of the manufacturing process.

Boiler System. The boiler system would serve two purposes. First, it would be used in the laboratory testing area in the same fashion as the chillers; i.e., to simulate the temperature variations necessary to meet the required specifications. Second, the boiler system would be used to provide heating for the Ogden facility. The boiler system would be used approximately 50% for each of these purposes.

The boiler system would not qualify for the exemption. First, it is unlikely that the system is not attached so as to become part of the real property. Second, its use to provide heating for the CITY facility is a use that is not part of the manufacturing process. This alone is a nonqualifying activity that would employ 50% of the boiler system=s use. This nonmanufacturing use is not an inconsequential use and, thus, does not meet the de minimis standard. Accordingly, the boiler system would not qualify for the manufacturing equipment exemption.

Expansion. Approximately ##### square feet of space in the manufacturing facility had been occupied by a cafeteria. That space has been vacated, and COMPANY is contemplating using the space as manufacturing floor space. You have asked how the manufacturing equipment exemption might apply if the space is converted to use as manufacturing space.

There is no exemption that applies to the costs incurred in converting nonmanufacturing floor space into manufacturing floor space. Nevertheless, COMPANY would be eligible for the manufacturing equipment exemption for any qualifying purchases of machinery and equipment that will occupy that floor space. The requirements for the manufacturing equipment exemption have been explained above. Please note, however, that as of July 1, 1998, the 100% exemption applies not only to machinery and equipment used in new or expanding operations but also to machinery and equipment that are normal operating replacements.

Please contact us if you have any other questions.

For the Commission,