99-013
Response June 9, 1999
REQUEST LETTER
September 8, 1998
Dear Commissioners:
Regarding: Sales or use tax exemption for new or
expanding operations and normal operating replacements.
One of our clients, who is a manufacturer, has among
its machinery and equipment the following items:
1. A transformer,
located outside the manufacturing facility, connected to equipment within the
building by power lines which run through the walls of the building. The
transformer transforms the voltage in the power received from the utility
company to the voltage level that is required by the manufacturing process.
2. A
rectifier, located inside the manufacturing facility, which is connected to the
transformer and other equipment by power lines. The rectifier changes the
electrical current from AC to DC.
3. Bus bars
which hold conductors in place. Once the transformer and the rectifier have
done their work, the power is delivered to the manufacturing process by the
conductors.
The application of electricity is an essential part of
the manufacturing process, and the pieces of equipment mentioned above are
dedicated solely to that manufacturing process. Electricity, in this instance,
is used to create a chemical reaction necessary to the production of the
product.
Under the circumstances, it seems reasonable that
these pieces of equipment would qualify for the exemption. We would appreciate
your opinion.
Sincerely,
NAME
RESPONSE
LETTER
June 9, 1999
NAME
COMPANY
ADDRESS
RE: Application
of the Manufacturing Equipment Exemption to Electrical Components
Dear NAME,
We have received your request concerning the
application of the manufacturing equipment exemption to components installed to
provide electricity. To qualify for the
manufacturing equipment exemption, Utah Code. Ann. '59-12-104(14) requires that the components be
machinery and equipment that (1) have an economic life of three or more years,
(2) are used in a manufacturing facility in the state to manufacture an item
sold as tangible personal property, and (3) are used in the manufacturing
process. You have represented that the
electrical components meet all these criteria if such electrical components are
deemed Amachinery or equipment.@
Machinery and Equipment. Assuming
that all the other criteria are met, whether the electrical components are
deemed Amachinery and equipment@ will determine if the electrical components qualify for the
exemption. Utah Admin. Code
R865-19S-85(A)(3)(b) provides that Amachinery
and equipment@ does not Ainclude
gas, water, or electricity systems that constitute real property improvements
as provided in B.@ Subsection
(B) of the rule provides as follows:
The sales and use tax exemptions ... apply only to
purchases or leases of tangible personal property used in the actual
manufacturing process. The exemptions do not apply to purchases of real
property or items of tangible personal property that become part of the real
property in which the manufacturing operation is conducted. If a separate
gas, water, or electrical supply line is installed solely for the operation of
the manufacturing equipment, the gas, water, or electrical supply line is an
accessory to the manufacturing equipment rather than a part of the real
property. (Emphasis added).
Thus, the rule provides that electrical components are
deemed Amachinery and equipment@ for purposes of the exemption only if they are installed solely for the operation of the
manufacturing equipment.
You have stated that the electrical components are Adedicated solely to the manufacturing process.@ If the
electrical components provide lighting for the manufacturing facility, they may
be dedicated solely to the manufacturing process, but they are not installed
solely for the operation of the equipment.
Other use not relating directly to the equipment would also disqualify
the electrical components from being deemed Amachinery
and equipment.@ For example,
if any of the electricity that is transformed by the transformer is used for a
purpose outside the operation of the manufacturing equipment, the transformer
is not Amachinery and equipment.@ However, if the electrical
components are installed on a separate line that is used only to operate (i.e.,
run) qualifying manufacturing equipment, the components themselves will also be
exempt.
Whether an electrical supply line is separate and
installed solely for the operation of manufacturing equipment will be based on
all the facts and circumstances, all of which would be subject to review and verification
by our auditors, and, accordingly, cannot be decided here. However, the discussion above should help
you determine whether the electrical components at issue here qualify for the
manufacturing equipment exemption.
Please contact us if you have any other questions.
For the Commission,
R. Bruce Johnson
Commissioner
^^