DAR File No. 27832

Tax Commission, Auditing

R865-19S-85

Sales and Use Tax Exemptions for New or Expanding Operations and Normal Operating Replacements Pursuant to Utah Code Ann. Section 59-12-104

NOTICE OF PROPOSED RULE

DAR File No.: 27832
Filed: 04/15/2005, 07:48
Received by: NL

RULE ANALYSIS

Purpose of the rule or reason for the change:

Section 59-12-103 indicates the sales tax treatment for charges for repair of tangible personal property. Section R865-19S-78 provided guidance on the tax consequences of repairs. Section 59-12-106 provides requirements for the sales ax exemption certificate. Language in Section R865-19S-78 that is redundant in this section is removed.

Summary of the rule or change:

The proposed amendment deletes reference to Section R865-19S-78 since that section no longer contains the language referred to and deletes language that is replaced by statute in a recent statutory amendment.

State statutory or constitutional authorization for this rule:

Section 59-12-104

Anticipated cost or savings to:

the state budget:

None--Any fiscal impacts were taken into account by H.B. 51 (2002), S.B. 147 (2003), and S.B. 127 (2005). (DAR NOTE: H.B. 51 is found at UT L 2002 Ch 117, and was effective 07/01/2002. S.B. 147 is found at UT L 2003 Ch 312, and was effective 07/01/2004. S.B. 127 is found at UT L 2005 Ch 158, and will be effective 07/01/2005.)

local governments:

None--Any fiscal impacts were taken into account by H.B. 51 (2002), S.B. 147 (2003), and S.B. 127 (2005).

other persons:

None--Any fiscal impacts were taken into account by H.B. 51 (2002), S.B. 147 (2003), and S.B. 127 (2005).

Compliance costs for affected persons:

None--Language is removed since it now appears in statute.

Comments by the department head on the fiscal impact the rule may have on businesses:

None--Language is removed since it appears in statute. Pam Hendrickson, Commission Chair

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Direct questions regarding this rule to:

Sheri McFall at the above address, by phone at 801-297-3901, by FAX at 801-297-3919, or by Internet E-mail at sherimcfall@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

06/01/2005

This rule may become effective on:

06/02/2005

Authorized by:

Pam Hendrickson, Commissioner

RULE TEXT

R865. Tax Commission, Auditing.

R865-19S. Sales and Use Tax.

R865-19S-85. Sales and Use Tax Exemptions for New or Expanding Operations and Normal Operating Replacements Pursuant to Utah Code Ann. Section 59-12-104.

A. Definitions:

1. "Establishment" means an economic unit of operations, that is generally at a single physical location in Utah, where qualifying manufacturing processes are performed. If a business operates in more than one location (e.g., branch or satellite offices), each physical location is considered separately from any other locations operated by the same business.

2. "Machinery and equipment" means:

a) electronic or mechanical devices incorporated into a manufacturing process from the initial stage where actual processing begins, through the completion of the finished end product, and including final processing, finishing, or packaging of articles sold as tangible personal property. This definition includes automated material handling and storage devices when those devices are part of the integrated continuous production cycle; and

b) any accessory that is essential to a continuous manufacturing process. Accessories essential to a continuous manufacturing process include:

(i) bits, jigs, molds, or devices that control the operation of machinery and equipment; and

(ii) gas, water, electricity, or other similar supply lines installed for the operation of the manufacturing equipment, but only if the primary use of the supply line is for the operation of the manufacturing equipment.

3. "Manufacturer" means a person who functions within a manufacturing facility.

4a) "New or expanding operations" means:

(i) the creation of a new manufacturing operation in this state; or

(ii) the expansion of an existing Utah manufacturing operation if the expanded operation increases production capacity or is substantially different in nature, character, or purpose from that manufacturer's existing Utah manufacturing operation.

b) The definition of new or expanding operations is subject to limitations on normal operating replacements.

c) A manufacturer who closes operations at one location in this state and reopens the same operation at a new location does not qualify for the new or expanding operations sales and use tax exemption without demonstrating that the move meets the conditions set forth in A.4.a). Acquisitions of machinery and equipment for the new location may qualify for the normal operating replacements sales and use tax exemption if they meet the definition of normal operating replacements in A.5.

5. "Normal operating replacements" includes:

a) new machinery and equipment or parts, whether purchased or leased, that have the same or similar purpose as machinery or equipment retired from service due to wear, damage, destruction, or any other cause within 12 months before or after the purchase date, even if they improve efficiency or increase capacity.

b) if existing machinery and equipment or parts are kept for backup or infrequent use, any new, similar machinery and equipment or parts purchased and used for the same or similar function.

B. The sales and use tax exemptions for new or expanding operations and normal operating replacements apply only to purchases or leases of tangible personal property used in the actual manufacturing process.

1. 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.

2. Purchases of qualifying machinery and equipment or normal operating replacements are treated as purchases of tangible personal property under R865-19S-58, even if the item is affixed to real property upon installation.

C. Machinery and equipment or normal operating replacements used for a nonmanufacturing activity qualify for the exemption if the machinery and equipment or normal operating replacements are primarily used in manufacturing activities. Examples of nonmanufacturing activities include:

1. research and development;

2. refrigerated or other storage of raw materials, component parts, or finished product; or

3. shipment of the finished product.

D. Where manufacturing activities and nonmanufacturing activities are performed at a single physical location, machinery and equipment or normal operating replacements purchased for use in the manufacturing operation are eligible for the sales and use tax exemption for new or expanding operations or for normal operating replacements if the manufacturing operation constitutes a separate and distinct manufacturing establishment.

1. Each activity is treated as a separate and distinct establishment if:

a) no single SIC code includes those activities combined; or

b) each activity comprises a separate legal entity.

2. Machinery and equipment or normal operating replacements used in both manufacturing activities and nonmanufacturing activities qualify for the exemption for new or expanding operations or for normal operating replacements only if the machinery and equipment or normal operating replacements are primarily used in manufacturing activities.

[E. Charges for labor to repair, renovate, or install tangible personal property shall be taxable or tax exempt as provided in R865-19S-78.

F.]E. The manufacturer shall retain records to support the claim that the machinery and equipment or normal operating replacements are qualified for exemption from sales and use tax under the provisions of this rule and Section 59-12-104.

[G. Vendors are required to obtain a tax exemption certificate upon which the purchaser certifies that the use of the machinery and equipment or normal operating replacements qualifies for exemption under Title 59, Chapter 12. Vendors must obtain a separate tax exemption certificate, or a purchase order that incorporates the appropriate language, including authorized signature, date and title, of the tax exemption certificate, from the purchaser for each purchase of exempt machinery and equipment, at the time of purchase.

H.]F. If a purchase consists of items that are exempt from sales and use tax under this rule and Section 59-12-104, and items that are subject to tax, the tax exempt items must be separately stated on the invoice or the entire purchase will be subject to tax.

KEY: charities, tax exemptions, religious activities, sales tax

[December 21, 2004]2005

Notice of Continuation April 5, 2002

59-12-104

ADDITIONAL INFORMATION

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For questions regarding the content or application of this rule, please contact Sheri McFall at the above address, by phone at 801-297-3901, by FAX at 801-297-3919, or by Internet E-mail at sherimcfall@utah.gov

For questions about the rulemaking process, please contact the Division of Administrative Rules (801-538-3764). Please Note: The Division of Administrative Rules is NOT able to answer questions about the content or application of these administrative rules.