manufacturing and production sales tax exemptions:...
TRANSCRIPT
Manufacturing and Production Sales Tax
Exemptions: Not Just for Manufacturers Leveraging Tax-Savings Opportunities as States Create and Expand Reach of Exemptions
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WEDNESDAY, SEPTEMBER 18, 2013
Presenting a live 110-minute teleconference with interactive Q&A
Susan Traylor Bittick, Principal, Ryan, Austin, Texas
Stephanie Gilfeather, Senior Multistate Tax Consultant, Deloitte Tax, Seattle
Chris Wallace, Senior Manager of State and Local Tax, Weaver LLP, Dallas
Scott Edwards, Shareholder, Lane Powell, Seattle
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Manufacturing and Production Sales Tax Exemptions: Not Just for Manufacturers Seminar
Chris Wallace, Weaver LLP
Scott Edwards, Lane Powell
Sept. 18, 2013
Susan Traylor Bittick, Ryan LLC
Stephanie Gilfeather, Deloitte Tax
Today’s Program
Introduction and Overview
[Scott Edwards]
Legislative Developments
[Susan Traylor Bittick, Stephanie Gilfeather]
Jurisdictions with Broad Manufacturing Exemptions
[Stephanie Gilfeather]
Exemptions for Activities Outside of Direct Production
[Chris Wallace]
Slide 4 - Slide 17
Slide 65 - Slide 80
Slide 43 - Slide 64
Slide 18 - Slide 42
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
9 9 ©2013 Lane Powell PC
Manufacturer’s Sales Tax
Exemptions
Introduction and Overview
Scott Edwards
Co-Chair, State and Local Tax
Lane Powell, PC
206.223.7010
10 10 ©2013 Lane Powell PC
Introduction
• Common Exemption -Approx. 37 of 45 Sales Tax
States
• Caveat - This presentation is a survey of concepts
generally but not universally applicable to sales tax
exemptions for manufacturing machinery. Each
state's statutes and interpretive authorities are
different. Similar or identical language may be
interpreted differently from state to state. There are
often other requirements in addition to those
discussed here.
11 11 ©2013 Lane Powell PC
Basic Elements
• Machinery & Equipment
• Used Directly
• Manufacturing Operation
(or other qualifying operation)
–Research & Development
–Testing
12 12 ©2013 Lane Powell PC
Machinery & Equipment
• Definitions Vary
– Arkansas – facilities which cause a recognizable &
measurable action
• Fixtures, Support Structures
• Repair Parts
• Installation Labor
• Pollution Control Equipment
13 13 ©2013 Lane Powell PC
Typical Exclusions
• Hand Powered Tools
• Property w/ useful life less than 1 year
• Buildings (except M&E that becomes a
physical part of the building)
• Fixtures not integral to manufacturing
operation
14 14 ©2013 Lane Powell PC
Used Directly
• Acts upon or interacts with TPP
• Conveys, transports, handles or temporarily stores
TPP at site
• Controls, guides, measures, verifies, aligns,
regulates or tests TPP
• Provides physical support for, or access to, TPP
15 15 ©2013 Lane Powell PC
Used Directly – continued
• Produces power for or lubricates M&E
• Produces other TPP for use in a
qualifying operation
• Places TPP in a container or package
• Integrated Plant Theory v. Physical
Transformation Theory
16 16 ©2013 Lane Powell PC
Dual Use-differing treatment
• Exclusive Use
• Primary or Predominant Use
• Proportional Use
17 17 ©2013 Lane Powell PC
Manufacturing
• Processing, assembling, producing,
combining, refining, fabricating
• Materiality of change?
• Sometimes industry specific
–Agriculture, Lumber, Mining
–Clean Rooms
• Resulting in goods for sale
18 18 ©2013 Lane Powell PC
Manufacturing Operation
• Manufacturing of articles, substances or
commodities for sale as TPP
• Begins where raw materials enter
manufacturing site
• Generally must be used at a manufacturing
site (operation may have multiple sites)
• Cogeneration facility for power consumed at
site & project is integral part
19 19 ©2013 Lane Powell PC
Manufacturing or Not?
• Concrete
• Electricity
• Food Products
• Lumber
• Printing and Publishing
• Rock Crushing
20 20 ©2013 Lane Powell PC
Some Current Issues
• Telephone as manufacturing
• Big box retailer as manufacturer
• When do computers qualify as
manufacturing equipment
2013 Developments in Manufacturing Exemptions
2013: A banner year for manufacturing exemptions in key states
like Florida and California, but others should not be overlooked.
For example:
– New Mexico: Expanded gross receipts deduction for sales of
tangible property to manufacturers to include property consumed in
the process of manufacturing. To be phased-in over five years,
starting in 2013.
– Arkansas: Partial refund of 1% of state sales and use tax on
machinery and equipment or replacement parts to modify, replace,
or repair manufacturing equipment, effective July 1, 2014. Also
applies to labor used to install or repair the eligible equipment.
Previous exemption was limited to replacement machinery, and the
exemption required that substantially all of the machinery and
equipment be physically replaced with new machinery.
23
2013 Developments in Manufacturing Exemptions, cont.
– Wisconsin: Created exemption for machinery and equipment used
in manufacturing and biotechnology research in 2009; fine-tuned it
in 2013.
2013 amendments:
» Clarified that a member of a combined group qualified for the
exemption if at least one member of the combined group is
engaged in manufacturing or engaged primarily in biotechnology
research, and
» Provided that a qualifying business must be engaged in
manufacturing at a building that is assessed as manufacturing
property under Section 70.995, state statutes.
24
Pre-2013 Developments in Manufacturing Exemptions
During a five-year period leading up to 2013, manufacturing
exemption legislation was sparse with just one notable trend:
How utilities used in the manufacturing process should be taxed.
Examples:
– Rate Reductions:
Arkansas and Louisiana both cut their tax rates applicable to utilities
used in manufacturing.
» Arkansas actually cut its rate twice: First in 2007 and then again in
2008 (separate meters required for the manufacturing area).
» Louisiana cut its rate in 2008, then eliminated the tax entirely on
electricity and natural gas used in manufacturing.
25
Pre-2013 Developments in Manufacturing Exemptions,
cont.
– Temporary Repeals/Scaled-Back Utilities Exemptions:
Colorado eliminated the sales tax exemption on utilities on January 1,
2010, but reinstated effective July 1, 2012.
Kansas temporarily reduced the look-back period for a refund on
sales tax on exempt utilities in 2011, reducing it to 12 months.
Effective July 1, 2012, the state reinstated the original 36-month look-
back period for refunds.
Indiana reduced the look-back period for a refund of sales tax paid on
exempt utility meters to 18 months in 2011. Effective July 1, 2012, the
state restored the prior 36-month look-back period.
26
Pre-2013 Developments in Manufacturing Exemptions,
cont.
– Georgia: New exemption on utilities used in manufacturing:
2013 is the first of a four-year phase-in of a full exemption covering utilities
used in manufacturing in Georgia.
Applies to state sales tax and local tax except taxes dedicated to education.
Applies generally to all energy “necessary and integral” to the production of
tangible personal property at a Georgia manufacturing plant.
Energy includes: natural or artificial gas, oil, gasoline, electricity, solid fuel,
wood, waste, ice, steam, water, or other materials necessary and integral for
heat, light, power, refrigeration, climate control, processing, or any other use in
any phase of the manufacture of tangible personal property.
Phased in:
» 25% exempt in 2013.
» 50% exempt in 2014.
» 75% exempt in 2015.
» 100% exempt in 2016.
27
Targeted Changes to Manufacturing Exemptions
Some state legislatures enacted or considered targeted changes
to manufacturing exemptions. Examples:
– Washington, effective April 11, 2011:
Expanded the definition of a manufacturer to include printers of
newspapers and other materials.
Class A or exceptional quality biosolids by a wastewater treatment
facility are considered to be manufacturing.
– Oklahoma, effective August 26, 2011:
Added businesses classified under NAICS Code 324110 (i.e.,
Petroleum Refineries) to the definition of a manufacturer.
28
Targeted Changes to Manufacturing Exemptions, cont.
– Texas: Does “Manufacturing“ Include Oil and Gas Production?
House Bill 3113, filed in 2013, would have amended the
manufacturing exemption to provide that “bringing oil or gas to the
surface of the earth is not considered manufacturing, fabricating or
processing for ultimate sale.”
Died without a hearing.
Filed in response to Southwest Royalties, Inc. v. Combs et al. , now
pending before the state’s Third Court of Appeals, in which taxpayer
seeks refund for taxes paid on downhole equipment under the
manufacturing exemption.
Trial judge initially issued bench ruling for the taxpayer, then, reversed
himself after hearing additional evidence on a motion for
reconsideration.
» Based his reversal on the taxpayer’s failure to show that the
equipment at issue directly causes physical changes to the
petroleum. 29
Targeted Changes to Manufacturing Exemptions, cont.
– Texas: Cranes Used in the Manufacturing Process:
House Bill 2047, did not pass but will be re-filed in 2015.
Intended to clarify that certain cranes used in the manufacturing of
large off-shore drilling platforms are exempt.
» Covered cranes used to position, place, or hold property, while the
manufacturing process is occurring.
» Intended to distinguish cranes used in this manner from those used
for intraplant transportation.
Drafted outside of Tax Code Section 151.318, the manufacturing
exemption, but clearly a manufacturing bill.
30
Targeted Changes to Manufacturing Exemptions, cont.
– California: “Green“ Manufacturing:
California created an exemption for manufacturing equipment used to
produce alternative energy.
» Unique program, administered by California Energy and Advanced
Transportation Authority; effective March 24, 2010–January 1,
2021.
» Controversy surrounded this program. It was rewritten effective
January 1, 2013 as the state’s “Advanced Manufacturing”
Exemption, applicable to purchases made by manufacturers in the
fields of science, engineering, and information technology for use in
“advanced manufacturing.”
» “Advanced manufacturing” means processes that create new or improve
existing materials, products, and processes; also includes
advancements in manufacturing systems used to produce materials and
products.
» Qualifying system advancements must increase sustainability and
efficiency.
31
Targeted Changes to Manufacturing Exemptions, cont.
– California: Special Treatment for Makers of “Drones“:
California Assembly Bill 1326 filed in 2013.
Would exempt certain property purchased for use in “unmanned aerial
vehicle manufacturing.“
Would cover “component parts, devices used to operate or maintain
machinery used in the manufacturing process, computers, software,
machinery for pollution control and fuel used during drone production.”
It would also allow exemptions for expenses related to building drone
manufacturing sites.
32
Florida: Expands Its Manufacturing Exemptions
Florida has inched toward a full manufacturing exemption over a
period of years.
– Since 1996, the State exempted purchases of utilities used in the
manufacturing process.
– It has also exempted machinery and equipment for some select
industries, but had no across-the-board manufacturing exemption
until 2006 when it enacted an exemption for manufacturing
machinery and equipment used for new and expanded
businesses.
To qualify, an expansion initially had to show an increase in production
of at least 10%, lowered to 5% effective January 1, 2013.
– Also effective January 1, 2013, added an exemption for certain
items used in manufacturing and fabricating aircraft and gas
turbine engines.
33
Florida: Expands Its Manufacturing Exemptions, cont.
Florida House Bill 7007 (2013) expanded the exemption beyond
new and expanded businesses.
– It’s temporary – in effect from April 30, 2014 through April 30, 2017.
– Applies to businesses whose primary business operations at the
location where the machinery and equipment is located falls within
NAICS Codes 31–33.
» The general “manufacturing” codes cover printing, wood
production, manufacturing paper, food, pharmaceuticals, plastic,
etc.
» “Primary” business activity means more than 50% of the activities
conducted at the location.
– Covers industrial machinery and equipment, defined to mean
three-year depreciable property.
– Must be used in an “integral part” in the manufacturing, processing,
compounding, or production of tangible personal property for sale.
34
Florida: Expands Its Manufacturing Exemptions, cont.
– Includes parts and accessories if purchased prior to the date the
machinery and equipment is placed in service.
– Does not include:
Buildings and structural components of buildings unless they are so
closely related to the machinery and equipment that it houses or
supports the machinery and equipment and would be expected to be
replaced when they are.
Heating and air conditioning unless sole justification is to meet
requirements of the production process.
– Florida Department of Revenue (DOR) has posted a sample
Exemption Certificate which the purchaser can issue to the seller.
If the buyer provides a signed exemption certificate, the seller can rely
on it, and the DOR may only go after the buyer if it believes the
transaction did not qualify for the exemption.
35
Florida: Expands Its Manufacturing Exemptions, cont.
While the change is commonly referred to by practitioners as an
“expansion“ of the existing manufacturing exemption, the
Florida Department of Revenue does not view it that way.
– In its most recent policy statement, the Department noted that the
exemption “does not replace the exemption for qualifying
purchases by new or expanding businesses under 212.08(5)(b) &
(d) which remains in effect without change.”
36
Contacts:
Susan Traylor Bittick
Principal and Practice Leader, Public Affairs
Ryan, LLC
512.476.0022
California’s New Partial
Sales Tax Exemption
Stephanie Gilfeather,
Senior Tax Consultant
Deloitte Tax LLP
September 18, 2013
New Partial Sales & Use Tax Exemption
On July 1, 2013, Governor Brown signed into law Assembly
Bill 93 which provides for a statewide partial sales and use
tax exemption for the purchase of manufacturing and
research and development equipment. The exemption is
now codified in Cal. Tax Code
6377.1.
• Exemption applies to the state portion of the sales tax
rate (4.1875%); local and district sales tax rates still apply
• The exemption is available to qualified persons
(as defined), without an application process
• The exemption applies to qualified purchases
beginning July 1, 2014
39
“Qualified Person” – Engaged in a line of business included
in NAICS Codes 3111-3399 and 541711 & 541712
Includes the Following Industries:
Food Manufacturing Cement Manufacturing
Bakeries and Tortilla Manufacturing Steel Product Manufacturing
Beverage Manufacturing Machine Shops
Apparel Manufacturing Computer and Electronics Products
Wood Product Manufacturing Electrical Equipment Manufacturing
Printing Aerospace Products Manufacturing
Petroleum Refining Shipbuilding
Plastic Product Manufacturing R&D in Biotechnology
Medical Equipment Manufacturing R&D in Physical, Engineering and
Life Sciences 40
New Partial Sales & Use Tax Exemption – Qualified Property
Qualified property includes machinery and equipment with a useful life
greater than one year, used primarily (more than 50%) in manufacturing,
processing, fabricating, refining or recycling of tangible personal property,
as well as research and development, anywhere in California • Includes “qualified tangible personal property purchased for use by a
qualified person to be used primarily to maintain, repair, measure, or test
any qualified tangible personal property.” Cal. Tax Code
6377.1(a)(3).
• Special purpose buildings and foundations used as an integral part of the
manufacturing, processing, refining, fabricating, or recycling process, or
that constitute a research or storage facility used during those processes
are eligible. Cal. Tax Code
6377.1(7)(A)(iv).
• Construction contractors furnishing and installing qualified property for
a qualified purposes may also be eligible
41
New Partial Sales & Use Tax Exemption – Considerations
• Effective for purchases beginning July 1, 2014
• Each qualified person is limited to $200 million in purchases
each calendar year. Cal. Tax Code
6377.1(e)(1)(a).
– Purchases in excess of $200 million are subject to tax at the
full tax rate
• Available for leased equipment classified as ‘continuing
sales’ and ‘continuing purchases.’ Cal. Tax Code
6377.1(f).
• Qualifying purchases must remain in California and
be used in a qualified activity for the first 12 months • Qualified purchasers must provide vendors with an
exemption certificate
42
Senate Bill 1128 (“SB 1128”)
SB 1128, enacted on September 27, 2012, provides a
sales and use tax exclusion for “advanced manufacturing”
• Means manufacturing processes that improve existing,
or create entirely new materials, products, and
processes through the use of science, engineering, or
information technologies, high-precision tools and
methods, a high-performance workforce, and
innovative business or organizational models utilizing
in specified technology areas
• Includes micro and nano-electronics, semiconductors,
advanced materials, integrated computational
materials engineering, nanotechnology, additive
manufacturing and industrial biotechnology
43
Senate Bill 1128 (“SB 1128”), cont’d
• Provides 100% exclusion from California sales and use tax
• Each approved project may not exceed $100 million for each calendar
year. Cal. Pub Res Code
26011.8(h).
• Administered by California Alternative Energy and Advanced
Transportation Finance Authority (“CAEATFA”)
• Questions continue to exist regarding the details (e.g., necessary
reporting requirements) and CAEATFA’s administration of this program
(e.g., application not yet available as of September 1.)
44
Expanding the Machinery & Equipment Exemption
While some state manufacturing exemptions limit qualified
activities to the manufacture of traditional tangible personal
property, others have enacted broad exemptions which also
apply to the manufacture of non-traditional tangible
property. Broad exemptions may be achieved through the
enactment of:
• A more expansive definition of “manufacturing,” or
• A separate, industry-specific exemption
47
Electricity Production as “Manufacturing”
Examples of states which define electricity production to qualify
as a manufacturing operation:
• Kansas: “Electricity power generation” is included in the list of
“manufacturing or processing business.” K.S.A.
79-
3606(kk)(2)(D).
• New York: “Machinery or equipment for use or consumption
directly and predominantly in the production of…electricity…by
manufacturing, processing” is exempt. N.Y. Tax. Law
1115(a)(12).
• Pennsylvania: “Electricity for non-residential use” is included
in the statutory definition of “tangible personal property,” 72
P.S.
7201(m). The definition of “sale at retail” does not
include “[t]he manufacture of tangible personal property.” 72
P.S.
7201(k)(8)(ii)(A).
48
Exemption for Electricity Used in Manufacturing
These exemptions take a variety of forms.
• Nebraska: “Sales and purchases of such energy sources
or fuels [electricity, coal, gas, fuel oil etc.] are exempt when
more than fifty percent of the amount purchased is for use
directly in processing, manufacturing, or refining.” Neb.
Code.
77-2704.13(2).
• Texas: There is an exemption for “gas and electricity when
used directly in manufacturing.” 34 Tex. Admin. Code
3.300(d)(13).
11
Reduced Levy Upon Receipts from the Sale of
Electricity to a Manufacturer
• Arkansas: “Beginning July 1, 2014, in lieu of the gross receipts or
gross proceeds tax…there is levied an excise tax on gross
receipts or gross proceeds derived from the sale of natural gas
and electricity to a manufacturer for use directly in the actual
manufacturing process at the rate of one percent (1%)” rather
than the gross receipts rate of 2.625%. Ark. Code
26-52-
319(a)(1)(A). On July 1, 2015, the rate will decrease to 0%. Ark.
Code.
26-52-319(a)(1)(B)(i).
11
Telecommunication Services
Certain states exempt machinery & equipment used in the
provision of telecommunications services. Some broadly exempt
all equipment purchased by the telecommunication business
while others exempt only specific equipment listed in the statute.
• Arizona: Arizona provides a broad-based exemption for
“[t]angible personal property sold to persons engaged in
business classified under the telecommunications
classification.” AZ. Rev. Stat.
42-5061(B)(3).
• New York: The exemption is for “[t]angible personal property
for use or consumption directly and predominantly in the
receiving, initiating, amplifying, processing, transmitting,
retransmitting, switching or monitoring of switching of
telecommunications services for sale or internet access
services for sale or any combination thereof.” N.Y. Tax. Laws
1115(a)(12-a). 51
Distribution Industry
Washington provides a partial exemption to “[w]holesalers or third-party
warehousers who own or operate warehouses or grain elevators and
retailers who own or operate distribution centers.” The partial exemption
applies to the state portion of the sales tax rate (3.25%); local and district
sales tax rates still apply. RCW
82.08.820.
• “For grain elevators with bushel capacity of one million but less than
two million, the remittance is equal to fifty percent of the amount of tax
paid.”
• “For warehouses with square footage of two hundred thousand or
more and for grain elevators with bushel capacity of two million or
more, the remittance is equal to one hundred percent of the amount of
tax paid for qualifying construction, materials, service, and labor, and
fifty percent of the amount of tax paid for qualifying material-handling
equipment and racking equipment, and labor and services rendered in
respect to installing, repairing, cleaning, altering, or improving the
equipment.”
52
Printing Industry
The printing industry qualifies for manufacturing exemptions in
some states. For example:
• Indiana: “Commercial printing shall be treated as the
production and manufacture of tangible personal property.”
Ind. Code
6-2.5-5-3(a)(2).
• Pennsylvania: The statutory definition of “manufacture”
includes “the publishing of books, newspapers, magazines
and other periodicals and printing.” 72 P.S.
7201(c)(2).
14
Newspaper Printing
• Kansas: “Newspaper printing” is included in the list of
“manufacturing or processing business.” K.S.A.
79-
3606(kk)(2)(D).
• Texas: “The production of a publication for the
dissemination of news of a general character of a general
interest that is printed on newsprint and distributed to the
general public free of charge…is considered
‘manufacturing…” Tex. Tax Code
151.318(o).
15
Bakeries
Bakeries qualify for a manufacturing or processing
exemption in certain states. For example
• Maryland: “The sales and use tax does not apply to a
sale of equipment that is used by a retail food vendor to
manufacture or process bread or bakery goods for resale
if: (1) the taxable price of each piece of equipment is at
least $2,000; and (2) the retail food vendor operates a
substantial grocery or market business.” MD Code
11-
210(c)(2). A substantial grocery or market business is “a
business at which at least 10% of all sales of food are
sales of grocery or market items, not including food
normally consumed on the premises even though it is
packaged to carry out.” MD Code
11-206(a)(6).
55
Bakeries
• Pennsylvania: The definition of “processing” includes
“cooking or baking of bread, pastries, cakes, cookies,
muffins and donuts”…but only when the baker sells the
items at bakeries and donut shops rather than at an
“establishment from which ready-to-eat food and
beverages are sold. For purposes of this clause, a
bakery, a pastry shop and a donut shop shall not be
considered an establishment from which ready-to-eat
food and beverages are sold.” 72 P.S.
7201(d)(13).
56
Mining & Refining Industry
• Kansas: Manufacturing exemption statute exempts “all sales of
tangible personal property which is consumed in the
production, manufacture, processing, mining, drilling, refining or
compounding of tangible personal property, the treating of by-
products or wastes derived from any such production process,
the providing of services or the irrigation of crops for ultimate
sale at retail within or without the state of Kansas.” K.S.A.
79-
3606(n).
• Pennsylvania: Definition of “manufacturing” includes “refining,
blasting, exploring, mining and quarrying for, or otherwise
extracting from the earth or from waste or stock piles or from
pits or banks any natural resources, minerals and mineral
aggregates including blast furnace slag.” 72 P.S.
7201(c)(3).
57
Video and Movie Production
• New York: “Tangible personal property for use or
consumption directly and predominantly in the production,
including editing, dubbing and mixing, of a film for sale
regardless of the medium by means of which the film is
conveyed to a purchaser. For purposes of this paragraph,
the term ‘film’ means feature films, documentary films,
shorts, television films, television commercials and similar
productions.” N.Y. Tax. Laws
1115(a)(39).
• Texas: Texas has a statutory exemption for “tangible
personal property that is necessary or essential to and used
or consumed in or during: (A) the production of a motion
picture or video or audio recording…; or (B) the production
of a broadcast by or for a cable program producer or by or
for a radio or television station…” Tex. Tax Code
151.3185(2).
58
Video and Movie Production; Cable Providers
• South Carolina: South Carolina has an exemption for “all
supplies, technical equipment, machinery, and electricity
sold to radio and television stations, and cable television
systems, for use in producing, broadcasting, or distributing
programs. For the purpose of this exemption, radio stations,
television stations, and cable television systems are
deemed to be manufacturers.” S.C. Code
12-36-2120(26).
59
Agricultural Industry
• California: California exempts “the sale of, and the storage and use of, or
other consumption in this state of, farm equipment and machinery, and the
parts thereof, purchased for use by a qualified person to be used primarily
in producing and harvesting agricultural products.” Cal. Tax Code
6356.5.
• Texas: Machinery and equipment used as follows are exempt from sales
and use tax:
• “exclusively used or employed on a farm or ranch in the building or
maintaining of roads or water facilities or in the production of: (A) food
for human consumption; (B) grass; (C) feed for animal life; or (D) other
agricultural products to be sold in the regular course of business.” Tex.
Tax Code
151.316(7).
• “exclusively used in, and pollution control equipment required as a
result of, the processing, packing, or marketing of agricultural products
by an original producer at a location operated by the original producer
for processing, packing, or marketing the producer’s own products.”
Tex. Tax Code
151.316(8).
60
Data Center Operators
• New York: New York exempts “machinery, equipment and
other tangible personal property…sold to a person operating
an internet data center located in this state for use in such a
center, where such property: (A) will be located or installed in
a facility or structure which is an internet data center and (B) is
required for and directly related to the provision of internet
website services for sale by the operator of the center.” N.Y.
Tax. Laws
1115(a)(37)(i). Certain services are also exempt.
N.Y. Tax. Laws
1115(y).
• Texas: Effective September 1, 2013, tangible personal
property purchased for use at a qualifying data center is
exempt from the sales/use tax by a qualifying owner, qualifying
operator, or qualifying occupant (owner, operator, and
occupant may be the same or different entities). Significant
requirements must be met to qualify for this exemption
61
Data Center Operators (cont’d)
• Virginia: Virginia exempts “computer equipment or
enabling software purchased or leased for the
processing, storage, retrieval, or communication of data,
including but not limited to servers, routers, connections,
and other enabling hardware.” The data center must be
(i) located in a Virginia facility, (ii) result in a new capital
investment of at least $150 million, and (iii) result in the
creation of at least 50 new jobs (or 25 new jobs if the
data center is located in certain high unemployment
areas) by the data center operator and its tenants,
collectively, associated with the operation or
maintenance of the data center. Va. Tax Code 58.1-
609.3(18).
62
Contacts
Stephanie Gilfeather
Senior Tax Consultant, Seattle
206.716.6401,
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68
Direct Production Exemptions
• Resale exemption
• Applies to property transferred to the purchaser – raw materials, packaging, etc.
• Processing exemption
• Covers equipment and/or consumables that cause a chemical or physical change to the product
69
Indirect Exemptions
• Intraplant transportation equipment
• Pollution control
• Quality control
• Research and development
• Utilities
71
States of Interest
• Texas
• New York
• Illinois
• Michigan
• Pennsylvania
• Ohio
• North Carolina
• Virginia
72
Texas Indirect Exemptions
• Pollution control – if directly related to the manufacturing process
• Quality control – does not apply to raw materials
• Safety equipment – apparel worn by manufacturing employees
• Utilities – electricity and gas predominantly used in the manufacturing process
73
Texas Indirect Exemptions
• R&D credit
• Signed into law 6/14/13
• Effective 1/1/14 – 12/31/26
• Choice of franchise tax credit for R&D expenditures or sales tax exemption for equipment and software used in R&D
• Applies to “Qualified research expenses” as defined in IRC Section 41
74
Texas Indirect Exemptions
• R&D credit (cont.)
• Franchise tax credit equals 2.5% of QRE (assuming consistent expenditures)
• Bonus credit for working with institutions of higher learning
• Labor-intensive R&D lends itself towards the franchise tax credit
• Capital-intensive R&D means the sales tax credit may offer more benefit
75
New York Indirect Exemptions
• Pollution control – exempt if used directly and predominantly for waste from a manufacturing or industrial facility
• Utilities – electricity and gas used directly and EXCLUSIVELY in the production process
76
Illinois Indirect Exemptions
• Pollution control – specific exemption for low sulfur dioxide emission coal fueled devices
• Pollution control – additional exemption for TPP exclusively used in a pollution control facility in an Illinois Enterprise Zone
77
Michigan Indirect Exemptions
• Engineering – if related to industrial processing
• Pollution control – processing or recycling of scrap, waste and used materials for disposal or sale
• Quality control – covers all steps prior to the completion of the manufacturing process
• R&D – applies to the development, discovery or modification of a product or a product-related process
78
Pennsylvania Indirect Exemptions
• Intraplant transportation equipment
• Pollution control – for waste generated in the manufacturing process
• Quality control – applies to testing and inspection throughout the production operation
• R&D – if related to producing a new or improved product or manufacturing process
79
Ohio Indirect Exemptions
• Intraplant transportation equipment
• Quality control – applies to raw materials, in-process materials and finished goods
• R&D - if related to producing a new or improved product or manufacturing process
80
North Carolina Indirect Exemptions
• Pollution control – if related to the manufacturing process
• Utilities – electricity and gas used in the manufacturing process