Current through September 18, 2024
Authority: IC 6-8.1-3-3
Affected: IC 6-2.5
Sec. 8.
(a) In
general, all purchases of tangible personal property by persons engaged in the
direct production, manufacture, fabrication, assembly, or finishing of tangible
personal property are taxable. The exemption provided in this regulation
[45 IAC 2.2] extends only to manufacturing machinery, tools,
and equipment directly used by the purchaser in direct production. It does not
apply to material consumed in production or to materials incorporated into
tangible personal property produced.
(b) The state gross retail tax does not apply
to sales of manufacturing machinery, tools, and equipment to be directly used
by the purchaser in the direct production, manufacture, fabrication, assembly,
or finishing of tangible personal property.
(c) The state gross retail tax does not apply
to purchases of manufacturing machinery, tools, and equipment to be directly
used by the purchaser in the production process provided that such machinery,
tools, and equipment are directly used in the production process; i.e., they
have an immediate effect on the article being produced. Property has an
immediate effect on the article being produced if it is an essential and
integral part of an integrated process which produces tangible personal
property.
-EXAMPLES-
(1)
Aluminum pistons are produced in a manufacturing process that begins, after the
removal of raw aluminum from storage inside the plant, with the melting of the
raw aluminum and the production of castings in the foundry; continues with the
machining of the casting and the plating and surface treatment of the piston;
and ends prior to the transportation of the completed pistons to a storage area
for subsequent shipment to customers. Because of the functional
interrelationship of the various steps and the flow of the work-in-process, the
total production process, comprised of such activities, is
integrated.
(2) The following types
of equipment constitute essential and integral parts of the integrated
production process and are, therefore, exempt. The fact that such equipment may
not touch the work-in-process or, by itself, cause a change in the product, is
not determinative.
(A) Air compressors used as
a power source for exempt tools and machinery in the production
process.
(B) An electrical
distribution system, including generators, transformers, electrical switchgear,
cables inside or outside the plant, and related equipment used to produce
and/or supply electricity to exempt manufacturing equipment used in direct
production.
(C) A pulverizer for
raw materials to be used in an exempt furnace to produce and/or supply energy
to manufacturing equipment used in direct production.
(D) Boilers, including related equipment such
as pumps, piping systems, etc., which draw water, or produce and transmit steam
to operate exempt machinery and equipment used in direct production.
(E) A work bench used in conjunction with a
work station or which supports production machinery within the production
process.
(F) Safety clothing or
equipment which is required to allow a worker to participate in the production
process without injury or to prevent contamination of the product during
production.
(G) An automated scale
process which measures quantities of raw aluminum for use in the next
production step of the casting process in the foundry.
(3) The following types of equipment
constitute essential and integral parts of the integrated production process
and are, therefore, exempt. The fact that such equipment is built in a manner
to service various pieces of exempt equipment, as an alternative to building
the equipment into each of the pieces of exempt machinery, is not
determinative.
(A) Pumping and filtering
equipment and related tanks and tubing used to supply lubricating and coolant
fluids to exempt drilling and cutting machinery.
(B) Cooling towers and related pumps and
piping used to cool, circulate, and supply water employed to control the
temperature of exempt furnaces and exempt machines used in the foundry and
machining areas.
(C) Pumping and
filtering equipment, including related tanks and tubing, is used to supply
lubricating and coolant fluids to both exempt and nonexempt equipment. On the
average, 90% of the fluid is used for the exempt equipment employed in direct
production and 10% is used for the nonexempt equipment. The taxpayer is
entitled to an exemption equal to 90% of the gross retail income attributable
to the transaction or transactions in which the equipment comprising the
production process was purchased.
(4) Because of the lack of an essential and
integral relationship with the integrated production system in Example (1), the
following types of equipment are not exempt:
(A) Equipment and furnishings located in the
administrative offices of the plant.
(B) Clothing or other equipment furnished to
workers that is used primarily for the workers' comfort and convenience if the
workers are able to participate in the production process without it.
(C) An electrical distribution system,
including electrical switchgear, transformers, cables, and related equipment
used to supply electricity to the administrative office building.
(D) A boiler used to produce steam for
general heating in the plant or administrative office building.
(E) A fire extinguisher hung on a wall inside
the plant.
(F) Ceiling lights for
general illumination in the plant area.
(G) Equipment used to remove raw materials
from storage prior to introduction into the production process or to move
finished products from the last step of production.
(5) A computer is used to control and monitor
various aspects of the plating and surface-treatment operations in Example (1).
The computer is located in a separate room in a different part of the plant
from the plating and surface-treatment operations but is connected to the
equipment comprising those operations by means of electrical devices. The
computer equipment, including related terminals, printer, and memory, data
storage, and input/output devices, is exempt because its use in this manner is
an integral and essential part of the integrated production process.
(6) A computer is used to process accounting,
personnel, and sales data. The computer is taxable because its use in this
manner is not an integral and essential part of the integrated production
process.
(7) A computer is used 40%
of the time to perform the functions described in Example (5) and 60% of the
time to perform the functions described in Example (6). The taxpayer is
entitled to an exemption for the computer equipment, including related
equipment such as that described in Example (5), equal to 40% of the gross
retail income attributable to the transaction or transactions in which the
computer equipment was purchased.
(8) A manufacturer of high technology
electronic equipment uses microscopes to enable technicians to produce
miniaturized products which could not otherwise be produced. The microscope is
essential and integral to the production process. The microscopes are exempt
from tax.
(9) A manufacturer of
printed circuit boards uses a computerized locator system to assist and direct
employees in placing components in their correct positions on printed circuit
boards. The system visually demonstrates the location on the board requiring a
component and at the same time dispenses the appropriate component for
insertion by the employee. The locator system is an essential and integral part
of the integrated production process and is, therefore, exempt.
(10) An electrical distribution system,
including electrical switchgear, transformers, cables, and related equipment,
is used to supply electricity to both equipment used in production and to an
administrative office building. On the average, 90% of the electricity is used
for the equipment employed in direct production and 10% for the administrative
office building. The taxpayer is entitled to an exemption equal to 90% of the
gross retail income attributable to the transaction or transactions in which
the equipment comprising the electrical distribution system was
purchased.
(d)
Pre-production and post-production activities. "Direct use in the production
process" begins at the point of the first operation or activity constituting
part of the integrated production process and ends at the point that the
production has altered the item to its completed form, including packaging, if
required.
-EXAMPLE-
(1) The
production of pharmaceutical items is accomplished by a process which begins
with weighing and measuring out appropriate ingredients, continues with
combining and otherwise treating the ingredients, and ends with packaging the
items. Equipment used to transport raw materials to the manufacturing plant is
employed prior to the first operation or activity constituting part of the
integrated production process and is taxable. Weighing and measuring equipment
and all equipment used as an essential and integral part of the subsequent
manufacturing steps, through packaging, qualify for exemption. Equipment which
loads packaged products from the packaging step of production into storage, or
from storage into delivery vehicles, is subject to tax.
(e) Storage equipment. Tangible personal
property used in or for the purpose of storing raw materials or finished goods
is subject to tax except for temporary storage equipment necessary for moving
materials being manufactured from one (1) machine to another or from one (1)
production step to another.
(1) Temporary
storage. Tangible personal property used in or for the purpose of storing
work-in-process or semi-finished goods is not subject to tax if the
work-in-process or semi-finished goods are ultimately completely produced for
resale and in fact resold.
(2)
Storage containers for finished goods after completion of the production
process are subject to tax.
(3)
Storage facilities or containers for materials or items currently undergoing
production during the production process are deemed temporary storage
facilities and containers and are not subject to tax.
-EXAMPLES-
(1)
Purchases of refrigeration equipment used in milk product production during the
production process are exempt. However, refrigeration equipment used to store
milk products subsequent to production is taxable.
(2) Parts undergoing various machining
operations are transported from a machine operation to a storage rack where
they are held for periods of time, as required by the processing schedule for
the next machine operation in the integrated production process. The length of
time required for storage in the processing schedule is not determinative. As
the processing schedule dictates, the parts are removed from the storage racks
and transported to the next machine operation. The storage racks are
exempt.
(3) Finished goods are
placed in the packages in which they will be delivered to customers, and the
packages are loaded onto storage pallets which are used only in a finished
goods storage area. The pallets are taxable.
(4) A metal and alloy manufacturer pulverizes
raw materials for use in an exempt furnace. Weigh bins utilized for the
temporary storage of the exempt materials after pulverization and prior to use
in the exempt furnace are exempt.
(5) Replacement parts for manufacturing
equipment are kept in storage bins in the plant "store". The storage bins are
taxable because they do not store work-in-process or semi-finished
goods.
(f) Transportation
equipment.
(1) Tangible personal property used
for moving raw materials to the plant prior to their entrance into the
production process is taxable.
(2)
Tangible personal property used for moving finished goods from the plant after
manufacture is subject to tax.
(3)
Transportation equipment used to transport work-in-process or semi-finished
materials to or from storage is not subject to tax if the transportation is
within the production process.
(4)
Transportation equipment used to transport work-in-process, semi-finished, or
finished goods between plants is taxable, if the plants are not part of the
same integrated production process.
-EXAMPLES-
(1) A
manufacturer of clay pipe uses forklift tractors to transport the pipe from the
machine in which it is formed to the kiln. The forklift tractors are
exempt.
(2) A metal and alloy
manufacturer pulverizes raw materials for use in an exempt furnace. Weigh bins
are utilized for the temporary storage of the exempt materials after
pulverization and prior to use in an exempt furnace. Transportation equipment
used to transport the pulverized raw material to and from the weigh bins is
exempt.
(3) A forklift is used
exclusively to move work-in-process from a temporary storage area in a plant
and to transport it to a production machine for processing. Because the
forklift functions as an integral part of the integrated system comprising the
production operations, it is exempt.
(4) A forklift is used exclusively to move
finished goods from a storage warehouse and to load them on trucks for shipment
to customers. The forklift is taxable because it is used outside the integrated
production process.
(5) A forklift
is regularly used 40% of the time for the purpose described in Example (3) and
60% of the time for the purpose described in Example (4). The taxpayer is
entitled to an exemption equal to 40% of the gross retail income attributable
to the transaction in which the forklift was purchased.
(6) A truck is used to transport
work-in-process between different buildings which are part of an overall plant
facility that constitutes an integrated production process. The truck is
exempt.
(7) A truck is used for the
same purpose as described in Example (6). However, the two buildings in the
plant facility are located on opposite sides of a federal highway, and the
truck must be registered with the Indiana bureau of motor vehicles for highway
use because it crossed the highway in transporting the work-in-process between
buildings. The truck is exempt, notwithstanding its registration for highway
use.
(8) A truck is used on the
federal highway and must be registered with the Indiana bureau of motor
vehicles for highway use. The truck is used to transport a finished component
part from the last step of a production process to be introduced into another
integrated production process at another business location. The truck is
taxable.
(9) A truck is used 40% of
the time for the purpose described in Example (6) and 60% of the time for the
purpose described in Example (8). The taxpayer is entitled to an exemption
equal to 40% of the gross retail income attributable to the transaction in
which the truck was purchased.
(10)
A crane is used to unload a barge delivering raw materials to a steel plant
where the raw materials are stockpiled in a storage yard adjacent to the plant.
The crane is taxable.
(11) A crane
is used to move stockpiled materials to the next step of production for
processing. Stockpiling allows moisture to drain and evaporate from washed
stone, thereby reducing moisture levels to a standard generally acceptable to
stone purchasers. The crane is exempt.
(12) A crane is used 40% of the time for the
purpose described in Example (8), and 60% of the time to move raw materials
from the stockpile to a production machine for processing. The taxpayer is
entitled to an exemption equal to 60% of the gross retail income attributable
to the transaction in which the crane was purchased.
(g) "Have an immediate effect upon the
article being produced": Machinery, tools, and equipment which are used during
the production process and which have an immediate effect upon the article
being produced are exempt from tax. Component parts of a unit of machinery or
equipment, which unit has an immediate effect on the article being produced,
are exempt if such components are an integral part of such manufacturing unit.
The fact that particular property may be considered essential to the conduct of
the business of manufacturing because its use is required either by law or by
practical necessity does not itself mean that the property "has an immediate
effect upon the article being produced". Instead, in addition to being
essential for one of the above reasons, the property must also be an integral
part of an integrated process which produces tangible personal property.
-EXAMPLES-
(1) The
manufacturing equipment utilized for the production of plastics consists of an
interconnected system which contains among its components a coal fueled boiler,
heat exchangers, vacuum jets, process heating vessels, distillation/stripping
columns, related equipment, and piping. All elements of this integrated
production process are exempt from tax.
(2) Steam generators used to heat water which
is used in mixing and warming component materials in the manufacture of
ready-mixed concrete are exempt from tax.
(3) The manufacturer of certain extruded
rubber products uses an interconnected production process of an air compressor,
an air dryer, and injection molding machines which work together to force
rubber through dies in order to form the desired shapes. The component parts of
the production process are exempt since the production process has an immediate
effect upon the article being produced.
(4) Equipment which constitutes an essential
and integral part of the integrated process is exempt. The fact that such
equipment is built in a manner to service various pieces of exempt equipment,
as an alternative to building the equipment into each of the pieces of exempt
machinery, is not determinative.
The production of flat-rolled metal products requires that an
oil mixture, which serves as both a rolling lubricant and a coolant, be
continuously sprayed on sheets in the rolling mill. Spent oil is simultaneously
removed and passed through a filtering process which is interconnected with the
rolling mill, after which the oil is resprayed onto the sheets. The rolling
mill and oil filtration process are exempt.
(5) A metal manufacturer uses a variety of
electrically-powered production equipment which has differing voltage and power
requirements. Power cables used to bring electricity to the manufacturer's
plant are taxable. Switch gears, transformers, conduits, cables, controls,
rectifiers, and generators which are interconnected with the production
equipment and serve as an electrical distribution system for such equipment are
exempt from tax. Items used to distribute electricity for general lighting and
space heating are taxable.
(6)
Computers which are interconnected with and control other production machinery
or are used to make tapes which control computerized production machinery are
exempt from tax.
(7) Computers
which produce designs which are not sold as products are not exempt. Thus,
computer-aided design is a non-exempt function.
(8) A computer is used 40% of the time for
the purpose described in Example (6) and 60% of the time for the purpose
described in Example (7). The taxpayer is entitled to an exemption equal to 40%
of the gross retail income attributable to the transaction in which the
computer was purchased.
(9) For
security reasons, a mesh screen is installed around the parts and equipment
"store" in a manufacturing plant. Because the screen has no physical or
functional interrelationship with other parts of the integrated production
process, it does not have an immediate effect on the article being produced and
is taxable.
(h)
Maintenance and replacement equipment.
(1)
Machinery, tools, and equipment used in the normal repair and maintenance of
machinery used in the production process which are predominantly used to
maintain production machinery are subject to tax.
(2) Replacement parts, used to replace worn,
broken, inoperative, or missing parts or accessories on exempt machinery and
equipment, are exempt from tax.
-EXAMPLE-
A manufacturer of sheet metal repairs and upgrades used
machinery by replacing worn or broken parts and adding new elements and
features available in state-of-the-art equipment. All items which become
components of the upgraded machinery are exempt from tax. However, all tools
and equipment used to repair or upgrade used machinery would be taxable.
(i) Testing and
inspection. Machinery, tools, and equipment used to test and inspect the
product as part of the production process are exempt.
-EXAMPLE-
Selected parts are removed from production according to a
schedule dictated by statistical sampling methods. Quality control equipment is
used to test the parts in a room in the plant separate from the production
line. Because of the functional interrelationship between the testing equipment
and the machinery on the production line and because of the product flow, the
testing equipment is an integral part of the integrated production process and
is exempt.
(j) Managerial,
sales, and other non-operational activities. Machinery, tools, and equipment
used in managerial sales, research, and development, or other non-operational
activities, are not directly used in manufacturing and, therefore, are subject
to tax. This category includes, but is not limited to, tangible personal
property used in any of the following activities: management and
administration; selling and marketing; exhibition of manufactured or processed
products; safety or fire prevention equipment which does not have an immediate
effect on the product; space heating; ventilation and cooling for general
temperature control; illumination; heating equipment for general temperature
control; and shipping and loading.
(k) "Direct production, manufacture,
fabrication, assembly, or finishing of tangible personal property" is
performance as a business of an integrated series of operations which places
tangible personal property in a form, composition, or character different from
that in which it was acquired. The change in form, composition, or character
must be a substantial change, and it must result in a transformation of
property into a different product having a distinctive name, character, and
use. Operations such as compounding, fabricating, or assembling are
illustrative of the types of operations which may qualify under this
definition.
(l) Energy equipment.
(1) Equipment used to modify energy purchased
from public utilities purchased for the production process is exempt if the
equipment is used to modify the utilities for use by exempt
equipment.
(2) Equipment used to
create energy that could otherwise be purchased exempt from a public utility
for use by exempt equipment is exempt.
(3) When any equipment qualifies as essential
and integral to the production process and also is used in an alternative
nonessential and/or non-integral manner, the exemption shall only apply to the
percentage of use of the equipment used in the exempt manner.
