Sales and Use Taxes: The Machinery and Equipment Exemption (Portfolio 1330)

Bloomberg Tax Portfolio, Sales and Use Taxes: The Machinery and Equipment Exemption, No. 1330-3rd, discusses sales and use tax incentives for machinery and equipment used in manufacturing operations. To view this Portfolio, visit Bloomberg Tax for a free trial. 

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Description

Bloomberg Tax Portfolio, Sales and Use Taxes: The Machinery and Equipment Exemption, No. 1330-3rd, discusses sales and use tax incentives for machinery and equipment used in manufacturing operations. In general, most states offer some form of sales and use tax exemption for machinery and equipment that is used directly in manufacturing tangible personal property that is ultimately sold at retail. General rules aside, however, there are significant differences among the states in what operations qualify as “manufacturing,” “machinery and equipment” or whether machinery and equipment are “used directly” in a taxpayer's operations.

This Portfolio examines the general features of machinery and equipment exemptions and explores their contours in various states. In so doing, the Portfolio considers the following questions: (1) What kinds of operations qualify as “manufacturing”; (2) How do the various states define the phrase “machinery and equipment”; and (3) When is machinery and equipment “used directly” in manufacturing? It also considers special sales and use tax considerations for manufacturers.

For additional relevant Bloomberg Tax Portfolios consult the Multistate Tax Portfolio Classification Guide, in the Bloomberg Tax Portfolio Index binder.

Subscribers to the Internet version of the portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report - State.

This Portfolio may be cited as Marcus, Goodman and Wethekam, 1330-3rd T.M., Sales and Use Taxes: The Machinery and Equipment Exemption. Within the Multistate Tax Portfolio Series, however, references to the portfolios will include only the portfolio numbers and titles.

Authors

Fred O. Marcus, Esq.,

Mr. Marcus is a Principal at the Chicago office of Horwood Marcus & Berk, Chartered, where he co-chairs the firm's state and local tax practice group. His practice focuses on state and local tax planning and the resolution of state and local tax disputes on a nationwide basis for multistate and multinational corporations. He has appeared before the United States Supreme Court, the California Supreme Court and the California Appellate Court, has argued before the Illinois and Missouri Supreme Courts and the Illinois, Maryland and New Jersey Appellate Courts and has tried cases before the courts and administrative tribunals of numerous other states. He is a frequent lecturer before such groups as the Council on State Taxation, the Tax Executives' Institute, the Chicago Tax Club, New York University's Institute on State and Local Taxation, Vanderbilt University Law School's Paul J. Hartman State and Local Tax Forum and Georgetown University's State and Local Tax Institute. He is also an Adjunct Professor of Law at Northwestern University Pritzker School of Law's Graduate Tax Program where he teaches state and local taxation.

Mr. Marcus is a member of the American Bar Association's Section of Taxation's State and Local Tax Committee; a member of the Illinois Taxpayers' Federation Board of Trustees and Advisory Board; a member of Tax Management's State Tax Advisory Board; a member of New York University's School of Continuing Legal Education's State and Local Tax Advisory Board and a member of the Illinois Department of Revenue's Director's Practitioner Advisory Group. He is the author of a Bloomberg Tax Portfolio entitled Limitations on the States' Jurisdiction to Impose Net Income Based Taxes , and has co-authored three additional Portfolios entitled Sales and Use Taxes: The Machinery and Equipment Exemption , Illinois Net Income Taxes and Illinois Sales and Use Taxes . He is also the author of a chapter on Illinois Franchise Taxes for the Illinois Institute of Continuing Legal Education and numerous other articles on various aspects of state and local taxation. He holds a Juris Doctor from DePaul University College of Law and a Bachelor of Science in Accounting from the University of Illinois at Chicago. He is a member of the Illinois State Bar Association.

Mr. Marcus is the 2015 recipient of the Council on State Taxation's Paul H. Frankel Excellence in State Taxation Award and has been annually recognized as an Illinois Super Lawyer. He can be reached at 312.606.3210 or by e-mail at fmarcus@saltlawyers.com.

Jordan M. Goodman, Esq. and

Mr. Goodman is a partner in the Chicago law firm of Horwood Marcus & Berk, Chartered, where he concentrates his practice on state and local tax planning and the resolution of state and local tax disputes for multistate and multinational corporations. He advises businesses in various industries on the tax ramifications and benefits of organizational structures and has lectured on state and local taxation before business and professional associations. Mr. Goodman is co–author of the chapter entitled Illinois Income Tax Considerations for the Illinois Institute of Continuing Legal Education publication Organizing and Advising Illinois Businessesand the chapter entitled Illinois Sales and Use Tax in the American Bar Association's Sales and Use Tax Handbook. He received his B.S. in accounting with high honors from Indiana University and his J.D. from the University of Illinois. Mr. Goodman is also a Certified Public Accountant.

Marilyn A. Wethekam, Esq.

Ms. Wethekam is a partner in the Chicago law firm of Horwood Marcus & Berk, Chartered, where she concentrates her practice in state tax planning and the resolution of state and local tax disputes on a nationwide basis for multistate and multinational corporations. Prior to joining the firm, she was Tax Counsel for the Mobil Oil Corporation, specializing in state and local tax matters, and Supervisory Tax Counsel for Montgomery Ward & Co. Inc., where her responsibilities included both state and federal tax matters. Ms. Wethekam is a frequent lecturer before groups such as New York University's Institute on State and Local Taxation, Georgetown University's State and Local Tax Institute, the Council On State Taxation and the Tax Executives' Institute. She has also authored several articles on state taxation. Ms. Wethekam is a member of the Advisory Board of Georgetown University's State and Local Tax Institute and past Chair of the Council On State Taxation. She received her B.A. degree from Loyola University of Chicago, her J.D. degree from Illinois Institute of Technology, Chicago–Kent College of Law and an LL.M. in taxation from John Marshall Law School. Ms. Wethekam is admitted to practice in Illinois and Texas.

Table of Contents

Detailed Analysis
1330.01. INTRODUCTION
1330.02. WHO IS A MANUFACTURER?
A. General Requirements
B. Preferred Industries
C. NAICS Classification
D. Sub-manufacturers
E. Contractors
F. Retailers
G. Restaurants
1330.03. WHAT IS MANUFACTURING?
A. General Discussion
B. The Basic Approach
C. Other Approaches
D. Reprocessing
E. Services
F. Concrete/Cement Mixing Trucks
G. Recycling and Materials Recovery
1. As Manufacturing
2. Non-manufacturing Exemptions
H. Water Purification
1. As Manufacturing
2. Non-manufacturing Exemptions
I. Electricity Production
1. As Manufacturing
2. Non-manufacturing Exemptions
J. Telecommunications and Broadcasting
1. As Manufacturing
2. Non-manufacturing Exemptions
K. Oil and Gas
1. As Manufacturing
2. Non-manufacturing Exemptions
L. Mining
1. As Manufacturing
2. Non-manufacturing Exemptions
M. Print Media
1. As Manufacturing
2. Non-manufacturing Exemptions
1330.04. NEW AND EXPANDED PLANTS
1330.05. SERVICES TO MANUFACTURING MACHINERY AND EQUIPMENT
A. Repair
B. Installation
C. Maintenance
1330.06. WHAT PROPERTY QUALIFIES AS MACHINERY AND EQUIPMENT?
A. General Discussion
B. Repair and Replacement Parts
C. Hand Tools
D. Control Equipment and Software
E. Safety Apparel
1330.07. INGREDIENTS, COMPONENTS, CONSUMABLES, ENERGY
A. General Discussion
B. The Primary Purpose Test
C. Ingredients and Component Parts
D. Containers and Packaging
E. Useful Life Requirement
F. Chemicals and Catalysts
G. Consumables
H. Power, Fuel, Electricity, Steam for Consumption
1. General Discussion
2. Primary Use
3. Exclusive Use
4. Utility Studies
I. Jigs, Dies, Patterns and Molds
1330.08. EQUIPMENT IN SELECT INDUSTRIES
A. General Discussion
B. Semiconductor Manufacturers
C. Aircraft and Aerospace
D. Biotechnology
E. Alternative Fuel
1330.09. PRIMARY OR EXCLUSIVE USE
1330.10. WHEN IS AN ITEM “USED DIRECTLY” IN MANUFACTURING?
A. General Discussion
B. Integrated Plant Theory
C. Ohio Rule or Physical Transformation Theory
D. Research, Planning, and Development
E. Lab Testing, Quality Assurance
F. Machinery Shop Equipment
G. Monitoring Equipment
H. Packaging Equipment
I. Storage Equipment
1. Overview
2. Raw Materials and Components
3. Unfinished Products
4. Finished Products
J. Distribution Equipment
K. Refrigeration
L. Safety and Protective Equipment
1. Overview
2. Not Required by Law
3. Required by Law
M. Intra-plant Transport Equipment
N. Environmental Control
O. Pollution Control
1. Overview
2. Not Required by Law
3. Required by Law
P. Machinery and Equipment to Power the Plant
Q. Cleaning Supplies
1330.11. CONVERSION OF PROPERTY TO A DIFFERENT USE
A. Exempt Use to Non-exempt Use
B. Non-exempt Use to Exempt Use
C. Withdrawal of Self-produced Goods From Inventory
1330.12. DOCUMENTING THE EXEMPTION

Working Papers

Item Description Sheet
Worksheet 1 Integrated Plant Theory — Sample Regulation: Virginia Regulation § 10–210–920
Worksheet 2 Ohio Rule/Physical Change Theory — Sample Regulation: Ohio Regulation Section 5703–9–21