Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
139.010,
139.470,
139.480,
241.010,
243.030,
243.040
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
131.130(1) authorizes the
Department of Revenue to promulgate administrative regulations for the
administration and enforcement of Kentucky tax laws.
KRS 139.480
exempts specified property from sales and use taxes. This administrative
regulation interprets the sales and use tax law as it applies to exemption
qualification for "machinery for new and expanded industry."
Section 1. Definitions.
(1) "Directly used in the manufacturing or
industrial processing process" is defined by
KRS
139.010(12).
(2) "Industrial processing" is defined by
KRS
139.010(17).
(3) "License" is defined by
KRS
241.010(34).
(4) "Machinery" means machines, in general,
or collectively; also, the working parts of a machine, engine, or instrument;
such as, the machinery of a watch. (Webster's New International Dictionary).
This definition does not require machinery to have working parts and be able to
perform a function in and of itself, as a "machine" would. The machinery of a
manufacturing operation is composed of all the components making up the
process, including the fixed and nonmoving parts as well as the moving parts.
This is illustrated in the example of the machinery of a watch.
(5) "Machinery for new and expanded industry"
is defined by
KRS
139.010(19).
(6) "Manufacturing" is defined by
KRS
139.010(20).
(7) "Plant facility" is defined by
KRS
139.010(28).
(8) "Premises" is defined by
KRS
241.010(44).
(9) "Recycled materials" is defined by
KRS
139.010(31).
Section 2. Requirements for Exemption. The
machinery and the appurtenant equipment necessary to the completed installation
of the machinery, together with the materials directly used in the installation
of the machinery and appurtenant equipment, which are incorporated for the
first time into new or existing plant facilities or licensed premises as
provided in
KRS
139.010(19), or which are
installed in the place of existing machinery having a lesser productive
capacity, and which are directly used in a manufacturing or industrial
processing operation shall be exempt from the sales and use tax. In summary,
the following four (4) specific requirements shall be met before machinery
qualifies for exemption:
(1) It shall be
machinery.
(2) It shall be used
directly in the manufacturing or industrial processing process.
(3) It shall be incorporated for the first
time into:
(a) Plant facilities established in
this state; or
(b) The premises of
alcohol beverage producers in this state that include a retail establishment
licensed under
KRS
243.030 or
KRS
243.040.
(4) It shall not replace other
machinery.
Section 3.
Analysis of Requirements.
(1) It shall be
machinery.
(2) It shall be used
directly in the manufacturing or industrial processing process. Machinery shall
be intimately involved in production in order to be considered used "directly"
in the manufacturing or industrial processing process. The fact that machinery
is necessary for a manufacturing or industrial processing process shall not
automatically qualify it for exemption. A single manufacturer may, within its
primary manufacturing process, have more than one (1) production activity.
(a) Primary manufacturing process.
1. The primary manufacturing process is the
production operation resulting in a finished product which will be transferred
from the producing plant for distribution to customers or for further
processing at another plant site. Production begins at a point where the raw
material enters a process and is acted upon to change its size, shape, or
composition or is transformed in some manner. Production ends when the finished
goods are packaged or ready for sale. Packaging is considered complete when the
product is in the container in which it is normally received by the
purchaser.
2. All activities
preceding the point of introduction of the raw material into the manufacturing
process and following the point at which the finished product is packaged or
ready for sale are not production activities and the machinery used therein
shall be subject to tax.
3. Storage
facilities, including those provided for the storage of in-process materials
which have been removed from the production line to await further processing,
are not used directly in the manufacturing process and shall be subject to tax.
Proximity of storage facilities to the production line is immaterial.
(b) Contributory or secondary
manufacturing process. This activity generally falls into one (1) of four (4)
categories:
1. The manufacture of industrial
tools to be used in the manufacturing process. Examples include the manufacture
of dies, patterns, rolls, molds, cutters and cutter blades, and like property.
The exemption for machinery used shall be determined by the same criteria used
for determining the exemption provided in the primary manufacturing
process.
2. The processing of
materials which do not become an ingredient of the finished product but are
consumed as industrial supplies directly in the primary manufacturing process.
Examples include water cooling systems, bottle washing preparatory to filling,
and chemical processes whereby the chemical is used as a catalyst directly on
the product being manufactured. This machinery exemption begins at the point
where the material is acted upon to condition it for use in the manufacturing
process or at the point where it performs a function itself, if it is not acted
upon prior to that point. The exemption ends when the material leaves the
process.
3. Electrical machinery
and similar equipment used directly in the operation of other machinery which
is used directly in the manufacturing process.
4. Machinery used exclusively for quality
control of in-process material or the efficient operation of machinery.
Examples are air cooling or air conditioning systems, control panels, exhaust
systems, and similar activities.
(3) It shall be incorporated for the first
time into plant facilities or licensed premises established in this state. To
meet this requirement, the machinery shall be installed in this state for the
first time and it shall be incorporated into plant facilities or licensed
premises in this state. Machinery which has been once installed into
manufacturing facilities or licensed premises in this state may be subject to
tax when subsequently sold by that manufacturer. Machinery purchased and
delivered in Kentucky shall be subject to tax when the machinery is not
acquired for installation in Kentucky.
(4) It shall not replace other machinery. New
machinery purchased to replace other machinery in the plant or licensed
premises shall be subject to tax unless the new machinery increases the
consumption of recycled materials at the plant facility or licensed premises by
not less than ten (10) percent, performs a different function, manufactures a
different product, or has a greater productive capacity, measured by units of
production, than the machinery replaced.
(a)
Modification of existing machinery may qualify for exemption if the
modification is to perform a different function or manufacture a different
product. Modification of existing machinery is not replacement machinery but
maintenance of existing machinery; therefore, modifications that merely provide
a greater productive capacity as measured by units of production shall not
qualify for exemption.
(b)
Modification of existing machinery that results in automation of non-automated
functions without performance of a different function or manufacture of a
different product shall not qualify for exemption.
Section 4. Pursuant to
KRS
139.470(22), charges for
labor or services to apply, install, repair, or maintain tangible personal
property directly used in manufacturing or industrial processing process shall
not be subject to sales and use tax if the charges for labor or services are
separately stated. Purchasers may issue a fully completed "Certificate of
Exemption Labor or Services on Manufacturing Equipment," Form 51A360, or
"Streamlined Sales and Use Tax Agreement-Certificate of Exemption," Revenue
Form 51A206, to claim the applicable exemption for the labor or service charges
on tangible personal property directly used in the manufacturing or industrial
processing process.
Section 5. In
all cases where a question arises concerning the exemption of machinery for new
and expanded industry, the burden of proof that each qualification has been met
shall be on the one seeking the exemption.
Section 6. Forms. The forms referenced herein
may be inspected, copied, or obtained, subject to applicable copyright law, at:
(1) The Kentucky Department of Revenue, 501
High Street, Frankfort, Kentucky 40601;
(2) A Kentucky Taxpayer Service Center,
Monday through Friday, 8:00 a.m. to 4:30 p.m.; or
(3) The Department or Revenue Web site at
http://revenue.ky.gov.
STATUTORY AUTHORITY:
KRS
131.130(1)
