Current through Register Vol. 48, No. 3, March 22, 2024
(A) Introduction:
Machines used in manufacturing, processing, compounding,
mining, or quarrying tangible personal property for sale, and the replacement
parts and attachments to such machines, are exempt from the sales and use tax
under Code Section
12-36-2120(17).
Materials or equipment which might constitute a machine or machinery when not
used for manufacturing, processing, compounding, mining, or quarrying tangible
personal property for sale are not exempted.
(B) General Guidance:
(1) A "machine used in manufacturing ...
tangible personal property for sale" is exempt from the sales and use tax. For
purposes of this regulation subsection (117-302.5), manufacturing includes
processing, compounding, mining and quarrying.
A machine qualifies for the exemption under Code Section
12-36-2120(17)
if the machine is integral and necessary to the manufacturing process and the
product being manufactured is being manufactured "for sale." A machine, which
includes every mechanical device or combination of mechanical powers, parts,
attachments and devices to perform some function and produce a certain effect
or result, is integral and necessary to the manufacturing process if it meets
all of the following:
(a) The machine
is used at a manufacturing facility. This exemption only applies to machines
used at a facility whose purpose is that of manufacturing a product "for sale."
It does not apply to machines used at a facility whose purpose is retailing,
wholesaling, distributing, or some other non-manufacturing purposes. For
example, machines used by a large industrial baker in manufacturing breads,
cakes, and pies for sale may be purchased tax free; however, similar machines
used by a "Ma & Pa" bakery on Main Street may not be purchased tax free
since they are used at a facility whose purpose is retailing.
(b) The machine is used in, and serves as an
essential and indispensable component part of the manufacturing process, and is
used on an ongoing and continuous basis during the manufacturing process. A
machine is not a part of the manufacturing process merely because it is
integral and necessary to the manufacturer. For example, machines used for
warehouse, distribution, or administrative purposes are integral and necessary
to the manufacturer, but not part of the manufacturing process.
(c) The machine must be substantially "used
in manufacturing ... tangible personal property for sale." The statute does not
require that the machine be used exclusively in manufacturing; however,
incidental manufacturing use will not qualify for the exemption. For purposes
of the exemption, more than one-third of a machine's use in manufacturing is
substantial.
Machines that meet the above requirements do not lose the
exemption because they do not have moving parts or because they are fixtures
upon the real estate where they stand. However, buildings and parts of
buildings, as well as other improvements which benefit the land generally and
may serve other users of the land, do not come within the exemption.
(2) Machine Parts:
Parts of machines, attachments, and replacements used, or
manufactured for use, on or in the operation of machines are also exempt,
provided the parts, attachments or replacements are used on or in the operation
of such machines, manufactured for use on or in the operation of such machines,
integral and necessary to the operation of such machines, and must be
customarily so used. These restrictions are interpreted to mean that the part
or attachment must be purchased in the form in which it will be used by the
manufacturer without any fabrication or alteration by him, except the usual and
customary minor adjustment, (except as stated in "Building of Machines") and
that it is a standard part or attachment customarily used and, further, that
the machine or machinery on which it is used would not do the work for which it
was designed if it were not used. This, of course, exempts all parts and
attachments without which the machine would do no work, and, in addition, it
exempts parts and attachments designed to increase the efficiency of the
machine.
(3) Building of
Machines:
Manufacturers, and contractors building machines for
manufacturers are entitled to purchase at wholesale, free of the sales or use
tax, materials used by them in the building of machines for the purpose of
manufacturing tangible personal property for sale. It should be noted that only
those materials are exempt to manufacturers or their contractors, which are
used by them in building machines for the purpose of manufacturing tangible
personal property for sale. This ruling would not be applicable to tangible
personal property for use as building materials from which there is erected a
"building." (See section on "Buildings" below.)
(4) Conveyances:
(a) The general rule with reference to
material handling machinery and/or mechanical conveyors is that such machinery
is subject to the tax up to the point where the materials go into process. The
machine feeding the first processing machine(s) is exempt. The last machine to
come within the exemption is that machine which discharges the finished product
from the last machine used in the process. Material handling machinery used for
transporting (in process) material from one process stage to another comes
within the exemption. Warehouse machinery used only for warehouse purposes,
loading and unloading, storing, transporting raw materials and finished
products, etc., is subject to the tax, unless exempt under the provisions of
Code Section
12-36-2120(51).
If material handling machinery is customarily used for a dual purpose, that is
partly for an exempt purpose and partly for a taxable purpose, and is not
otherwise exempt under the provisions of Code Section
12-36-2120(51),
the machinery may be purchased free of the tax under the machine exemption
(Code Section
12-36-2120(17)
) provided the exempt use represents a substantial portion of its use.
For example, the following conveyances are exempt:
(i) Wheeled conveyances known as "print
screen truck" used by a textile manufacturer in the movement of print screens
from a holding area to the exempt print machines, to the print screen washing
machine, and back to the holding area racks after the style or pattern is
changed and the print screen is washed.
(ii) Warehouse machines (e.g., forklifts)
that are used substantially to feed raw material into or onto the first
processing machine in the manufacturing process area in addition to being used
in loading, unloading, storing, and transporting raw materials from the
warehouse to the manufacturing area, or transporting finished products from the
manufacturing area to the warehouse.
(b) Conveyances are subject to the tax up to
the point where the materials go into the process. The last machine to come
within the exemption is that machine which discharges the finished product from
the last machine used in the process. Under this rule, the following conveyors
are subject to the tax:
(i) Conveyors used
solely by the taxpayer in the warehousing of raw materials and finished
goods.
(ii) Conveyors which are not
integral and necessary to the manufacturing process.
(iii) Piping leading to and from storage
tanks.
(iv) Piping, pumps, and well
connections installed for use by a manufacturer to supply the manufacturing
plant with water necessary for the manufacture of tangible personal
property.
(v) Warehouse machines
that are used for warehouse purposes, such as loading, unloading, storing,
transporting raw materials from the warehouse to the manufacturing area, or
transporting finished products from the manufacturing area to the
warehouse.
(5) Chemicals:
(a) Chemicals, including greases, oils,
lubricants, and coolants, used in an exempt manufacturing machine that are
essential to the functioning of the exempt machine during the manufacturing
process are integral, necessary, and indispensable to the manufacturing process
and are exempt as part of the machine. For example, the following are
situations in which chemicals, greases, oils, lubricants, and coolants are
exempt as part of an exempt machine:
(i)
Chemicals, greases, oils (motor oils, gear oils, chain oils), lubricants, and
coolants used in an exempt manufacturing machine when such items are integral
and necessary to the manufacturing process, such as those that are essential in
ensuring the functioning of the machine during the manufacturing process, and
the use of such items is an ongoing, continuous activity.
(ii) Chemicals used in an exempt pollution
control machine to abate or prevent pollution when such chemicals are integral
and necessary to the manufacturing process, such as the treating of wastewater
or otherwise preventing or abating pollution, and the use of such chemicals is
an ongoing, continuous activity.
(iii) Chemicals used to clean the exterior or
interior of an exempt manufacturing machine when the cleaning is integral and
necessary to the manufacturing process, such as those that are essential in
ensuring the quality of the product is maintained, and the use of such
chemicals is an ongoing, continuous activity.
(iv) Chemicals used to prevent corrosion in
an exempt manufacturing machine, such as an exempt boiler, when such chemicals
are integral and necessary to the manufacturing process, such as those that are
essential in ensuring the functioning of the machine during the manufacturing
process, and the use of such chemicals is an ongoing, continuous
activity.
(b) Situations
in which the chemicals would not qualify as a part under the machine exemption
and would therefore be subject to the sales and use tax, include:
(i) Chemicals used to clean non-exempt
machines, such as storage tanks.
(ii) Chemicals used to clean floors, walls,
and other parts of the manufacturing facility.
(iii) Paint used on exempt manufacturing
machines to prevent corrosion of the machines is not exempt from the tax as a
machine used in manufacturing tangible personal property for sale. (Note: This
is different from the chemicals used to prevent corrosion in exempt machines,
such as exempt boilers, since the painting of the machine is not an ongoing,
continuous activity. It is a maintenance activity. The chemicals, unlike the
paint, are integral and necessary to the operation of the machines since they
are essential in ensuring the functioning of the machine during the
manufacturing process and are used on an ongoing, continuous basis.)
(iv) Chemicals, greases, oils (motor oils,
gear oils, chain oils), lubricants, and coolants used in an exempt
manufacturing machine when such items are not integral and necessary to the
manufacturing process, such as those that are not essential in ensuring the
functioning of the machine during the manufacturing process. For example,
grease used on a part that has been removed from an exempt manufacturing
machine when such grease has been placed on the part to protect it while it is
in storage and not being used is subject to the tax since the grease is not
integral and necessary to the functioning of the part or the machine during the
manufacturing process.
(6) Maintenance:
Maintenance machines used at a manufacturing facility are not
exempt from the tax as a machine used in manufacturing tangible personal
property for sale.
Machines that are used to maintain non-exempt machines
(machines that are not integral and necessary to the manufacturing process), or
are not used on an ongoing, continuous basis to maintain exempt manufacturing
machines (machines that are integral and necessary to the manufacturing
process) are maintenance machines and are not exempt from the tax as machines
used in manufacturing tangible personal property for sale.
The following machines are maintenance machines and therefore
subject to the sales and use tax:
(a)
Pressure washing machines and ultrasonic cleaning machines used to clean
non-exempt machines or parts, such as storage tanks.
(b) Machines used to clean floors and other
parts of realty (e.g., machines used in removing sawdust from the floor of a
sawmill).
(c) Machines, such as
maintenance machines, which are not integral and necessary to the manufacturing
process.
(d) Machines, such as
pressure washing machines and ultrasonic cleaning machines, used to clean
exempt manufacturing machines or parts when the cleaning of the exempt
manufacturing machine or part is not integral and necessary to the
manufacturing process, such as those that are not essential in ensuring the
functioning of the exempt machine or part during the manufacturing process or
those that are not essential in ensuring the quality of the product is
maintained. In addition, if the cleaning is not an ongoing, continuous
activity, then the machines are not integral and necessary to the manufacturing
process.
(7) Storage:
Machines used at a manufacturing facility for storage are not
exempt from the tax as a machine used in manufacturing tangible personal
property for sale. For example, the following machines are for storage and
therefore taxable:
(a) Racks used to
store raw materials or finished goods.
(b) Storage tanks used to store raw
materials, gasses, or water.
(c)
Racks and tanks used to store a finished product while it cures.
Note: See example of exempt warehouse machines in Section
(B)(4)(a)(ii).
(8) Buildings:
A building which houses a manufacturing process, and the
various parts of such a building, are not exempt from the tax as a machine, or
a part or attachment to a machine, used in manufacturing tangible personal
property for sale. For example, the following parts of a building are not
exempt:
(a) Paint or sealant used to
seal the floor or walls of the manufacturing area of a building to provide
chemical resistance in the event of a spill.
(b) Paint used on the floor of the textile
manufacturing area of a building to facilitate the threading of machines so
that employees can more easily see the thread.
(c) Paint used on exempt manufacturing
machines to prevent corrosion of the machines.
Note: Paint is not integral and necessary to the operation of
the manufacturing machines. This is different from the chemicals used to
prevent corrosion in exempt machines, such as exempt boilers. Such chemicals,
unlike the paint, are exempt when such chemicals are integral and necessary to
the functioning of the exempt machine during the manufacturing process and the
use of these chemicals to prevent corrosion is an ongoing, continuous activity.
Paint is not integral and necessary to the functioning of the machine "during
the manufacturing process" and painting the machine is not an ongoing
continuous activity.
(d)
Foundations (consisting of pilings, pile caps, elevated slab, and slab on
grade) of a building in which exempt manufacturing machines are the plant
manufacturing process or system as a whole.
(e) Structural steel, steel decking, and
checker plate of a building in which exempt manufacturing machines are
housed.
(f) Hangers and supports
used in a manufacturing building to route exempt process piping from one area
of the manufacturing process to another area of the manufacturing process via
pipe racks and cable trays.
(g)
Architectural roofing and siding enclosing a manufacturing building housing
exempt manufacturing machines.
(h)
Pipe, valves, fittings, etc., regardless of size, which are purchased by paper
manufacturers specifically for use in drinking water lines, fire protection
lines, or for transmission of water from source to water treatment plant, or
from water treatment plant itself.
(i) Piping furnished and installed along with
pump houses and well connections by a contractor when intended for use by a
paper manufacturer to supply his plant with the water necessary to the
manufacturer of paper.
(j) Power
lines bringing electricity into the plant.
(k) All wires, fixtures, etc., used in
lighting.
(9)
Administrative Machines, Furniture, Equipment and Supplies:
Administrative machines, furniture, equipment, and supplies,
such as office computers used for word processing, recordkeeping, employee
payroll, customer billing, purchasing, accounting, and similar purposes, office
furniture, office supplies, such as pens, pencils, paper, and similar items,
educational material, or items used for the personal comfort, convenience, or
use of employees, are not machines used in the process of manufacturing
tangible personal property for sale and are not exempt from the tax.
(10) Protective Clothing
Protective clothing worn by an employee working in the area in
which the manufacturing process occurs does not qualify as a machine and is not
exempt from the tax as a machine used in manufacturing tangible personal
property for sale under Section
12-36-2120(17).
However, "clothing and other attire required for working in a Class 100 or
better as defined in Federal Standard 209E clean room environment" is exempt
under the provisions of Section
12-36-2120(54).
(C) Other Examples of
Exempt Manufacturing Machines and Machine Parts:
The following are additional examples of machines or machines
parts exempt from the tax, provided they are (1) used at a manufacturing
facility, (2) used in, and serve an essential and indispensable component part
of the manufacturing process, and are used on an ongoing and continuous basis
during the manufacturing process, and (3) used substantially in manufacturing
tangible personal property for sale:
(1) Buffing machines used to buff the cot of
an exempt textile spinning machine to maintain the yarn quality at a consistent
level.
(2) Traveling water screens
used to filter water from a river, lake, or other water source at a water
treatment plant processing water for sale.
(3) Quality control machines used in a lab at
a manufacturing facility to test sample products being manufactured for
sale.
(4) Pressure washing machines
and ultrasonic cleaning machines, used to clean exempt manufacturing machines
or parts, when the cleaning of the exempt manufacturing machine or part is to
ensure the functioning of the exempt machine or part during the manufacturing
process or to ensure the quality of the product is maintained.
(5) Machines or machine parts used in
removing sawdust from saws in a sawmill that are either attached to the sawing
mechanism or are essential in ensuring the quality of the product is
maintained.
(6) Trucks too large to
be lawfully used upon the highways of this state, when used in quarry pits for
transporting rock or granite from the blasting site to the crushing
machine.
(7) Sand handling and sand
condition machines used by manufacturers for conditioning and transporting,
while in process, and for use in mold making.
(8) Tanks which are a part of the chain of
processing operations.
(9) Patterns
which become parts or attachments for molding machines when purchased by a
manufacturer for his use.
(10)
Machines used in making molds from sand for use in manufacturing tangible
personal property for sale.
(11)
Machines used in measuring, or weighing, and packaging by manufacturers to put
the product in condition for sale on the open market for the purpose for which
it was produced.
(12) Transformers,
capacitors and voltage regulators used in manufacturing and processing tangible
personal property for sale, used by producers or distributors of electricity
which process the electricity, and all transformers used by other manufacturers
as a part of their manufacturing machinery.
(13) Machines used by cotton ginners in their
processing operations.
(14)
Pasteurizing machines, cooling machines, mechanical separators, homogenizing
machines and bottling machines used by dairies in processing milk for sale. The
machine exemption does not extend to cover milking machines.
(15) Boiler tubes used in repairing boilers
used to furnish heat or power used in manufacturing tangible personal property
for sale.
(16) Machines used by
persons in the business of producing scrap iron and other metals from junk for
resale to steel mills and/or foundries, such as hydraulic baling presses (to
compress sheet steel into bales), cranes (to feed scrap metals to baling
press), and alligator shears (to cut scrap steel to predetermined
sizes).
(17) Machines used by
dental laboratories in manufacturing for sale plates, bridgework, artificial
teeth and other prosthetic devices.
(18) Machines used in processing and
manufacturing by electric power companies including all producing stationary
machines in an electric power generating house, stationary, processing machines
located in substation houses and transformers, pole or otherwise.
(19) Starters, switches, circuit breakers and
other electrical equipment which are parts of, or attachments of machines, come
within the machine exemption. In order to be exempt this equipment must be
either attached directly to the machine or be immediately adjacent thereto.
Switchboards and control boards and cabinets controlling the general electrical
supply system are not considered to be parts or attachments of machines used in
manufacturing. (Note, however, that, switchboards, automatic or manually
operated, which serve to operate exempt machinery may be classified a part or
attachment thereto, provided, same are attached thereto or located within the
same structure or compound.) The general rule is that power distribution
machinery for operating machines used in manufacturing tangible personal
property which starts at the main switch within the factory building or
compound is exempt.
(20) Machines
used in the wood preserving process by persons engaged in the business of
treating lumber or lumber products (wood preserving) which they own and treat
for sale.
(21) Gas pressure
regulators located in the lead off from the gas main.
(22) Machines used in the meatpacking process
by meatpackers whose activities include the curing of meats and the production
of animal by-products such as lard, sausages, or tankage.
(23) Machines used by ice manufacturers in
manufacturing ice for sale.
(24)
Machines used to condition air (including humidification systems) for quality
control during the manufacturing process of tangible personal property made
from natural fibers and synthetic materials. This exemption applies to the
pipes and duct used to distribute the processed air to the production areas
within the plant.
(25) Recording
instruments attached to manufacturing machines.
(26) Machines used by a manufacturer in the
tire recapping process.
(27)
Machines used by municipalities in processing or compounding water for
sale.
(28) Belting purchased for
use on a particular machine used in manufacturing tangible personal property
for sale even though such belting may not be purchased to the exact length
required.
(29) Machines purchased
by persons in the business of collecting old and used paper (waste paper) for
the purpose of grading, sorting and packaging the same for sale or resale to
paper mills.
(30) Insulation for
pipe coverings, tank coverings, and boiler insulation purchased by a paper
manufacturer from the vendor in its final prefabricated form for a specific
insulation job, provided it does not have to be cut and fitted at the paper
mill. Certain fabrication is permissible around valve openings, pipe openings
at pipe joints, etc. Note, where insulation is purchased in blocks, such blocks
are to be considered as taxable, except as noted above with respect to the
purchase of material in building a machine used in manufacturing tangible
personal property for sale.
(31)
Electrical equipment used as direct controls of machinery used in manufacturing
is considered as part of manufacturing machinery.
(32) Machines used for the generation of
electricity, such as boilers, engines, condensers, generators, and transformers
and their attachments.
