Current through September 2, 2024
Sections 63-3622, 63-3622D, 63-3622HH, Idaho Code.
01.
In General. Section 63-3622D, Idaho Code, known as the production exemption, provides an exemption from sales and use taxes for certain tangible personal property used in production activities. The production activities include:
a. A manufacturing, processing, or fabrication operation primarily devoted to producing tangible personal property that it will sell and is intended to be ultimately sold at retail.
b. The following types of businesses may also quality for the exemption, even though they perform services and do not actually sell tangible personal property:
i. The business of custom farming or operating a farm or ranch for profit.
ii. The business of contract mining or operating a mine for profit.
iii. Businesses devoted to processing tangible personal property for use as fuel for the production of energy.
02.
Qualifying Businesses. The production exemption applies only to a business or a separately operated segment of a business that primarily produces tangible personal property which is intended for ultimate sale at retail.
a. For the purposes of this rule, a separately operated segment of a business is a segment of a business for which separate records are maintained and which is operated by an employee or employees whose primary employment responsibility is to operate the business segment.
b. The production exemption does not include the performance of contracts to improve real property, such as road or building construction, or to service-related businesses not devoted to the production of tangible personal property for ultimate sale at retail.
c. To qualify for the production exemption, a business sells the products it produces or processes. The only exceptions are businesses primarily devoted to processing fuel to be used for the production of energy; custom farming; and contract mining.
03.
Exempt Purchases. As applied to manufacturing, processing, mining, or fabrication operations, sales and purchases of the following tangible personal property are exempt, except as limited by other subsections of this rule:
a. Raw materials that become an ingredient or component part of the product which is produced.
b. Equipment and supplies used or consumed primarily and directly in the production process and which are necessary or essential to perform the operation. To qualify, the production use is the primary use of the equipment and supplies and they will be used directly in the production process.
c. Chemicals and catalysts consumed in the production process which are used directly in the process but which do not become an ingredient or component part of the property produced.
d. Repair parts, lubricants, hydraulic oil, and coolants, which become a component part of production equipment.
e. Fuel, such as diesel, gasoline, and propane used in equipment while performing production exempt activities.
f. Chemicals and equipment used in clean-in-place systems in the food processing and food manufacturing industries.
g. Safety equipment and supplies required by a state or federal agency when used directly in a production area.
h. Equipment such as cranes, manlifts, and scissorlifts used primarily to install production equipment.
i. Equipment used primarily to fabricate production equipment.
j. Equipment and supplies used in the performance of a quality control function which is an integral and necessary step in maintaining specific product standards.
04.
Production Process Beginning and End. The production process begins when raw materials used in the process are first handled by the operator at the processing plant or site. The production process ends when the product is placed in storage, however temporary, ready for shipment or when it reaches the final form in which it will be sold at retail, whichever occurs last. See Rule 083 of these rules regarding farming.
05.
Taxable Purchases. The production exemption does not include any of the following:
a. Motor vehicles required to be licensed by Idaho law. A motor vehicle required to be licensed, but not actually licensed, is taxable. A motor vehicle not required to be licensed is exempt under the production exemption only if it meets the tests in Subsection 079.03 of this rule.
b. Repair parts for any equipment which does not qualify for the production exemption.
c. Office equipment and supplies.
d. Safety equipment and supplies used somewhere other than a production area, such as an office, or which are not required by a state or federal agency even if used in a production area.
e. Equipment and supplies used in selling and distribution activities.
f. Janitorial equipment and supplies, other than disinfectants used in the dairy industry to clean pipes, vats, and udders, and clean-in-place equipment and chemicals used in food processing or food manufacturing.
g. Maintenance and repair equipment and supplies which do not become component parts of production equipment, such as welders, welding gases, shop equipment, etc.
h. Transportation equipment and supplies.
i. Aircraft of any type and supplies.
j. Paint, plastic coatings, and similar products used to protect and maintain equipment, whether applied to production equipment or other equipment.
k. Other incidental items not directly used in production.
l. Fuel used in equipment while performing activities that do not qualify for the production exemption.
m. Recreation-related vehicles as described in 63-3622HH, Idaho Code, regardless of use.
n. Parts to repair recreation-related vehicles.
o. Equipment used primarily to construct, improve, alter or repair real property.
06.
Real Property. The production exemption applies only to tangible personal property. It does not apply to real property or to tangible personal property purchased with the intention of becoming improvements or fixtures to real property. The production exemption does not apply to equipment and materials primarily used to improve real property.
07.
Change in Primary Use of Property. If tangible personal property is purchased for a use which qualifies for the production exemption but later is used primarily for another purpose, it becomes taxable at its fair market value when it ceases to qualify for the exemption. For instance, a loader may be used primarily in a mining operation when purchased. If the primary use of the loader is later changed from mining to road building, it becomes taxable at its fair market value when it ceases to be used for mining. If tax is paid on tangible personal property because no exemption applies at the time of purchase, and the property later becomes eligible for the production exemption, no refund is due the owner.
08.
Transportation Activities. Equipment and supplies used in transportation activities do not qualify for the production exemption.
a. Transportation includes the movement of tangible personal property over private or public roads or highways, canals, rivers, rail lines, through pipelines or slurry lines, or on private or public aircraft.
b. Transportation includes movements of tangible personal property from one separate location which is a continuous manufacturing, processing, mining, fabricating or farming activity to another separate location which is a continuous exempt activity or process.
c. Transportation includes movement of raw materials, except farm produce, from a point of initial extraction or severance or importation to a point where processing, manufacturing, refining or fabrication begins. See Rule 083 of these rules regarding farming.
09.
Exemption Certificate. To claim the production exemption the customer must complete an exemption certificate for the seller's records. See Rule 128 of these rules.
10.
Special Rules. Special rules apply to irrigation equipment, contractors, loggers, and farmers who act as retailers. Refer to the specific rules relating to those subjects.
Effective March 31, 2022
