Does air-control machinery in a manufacturer's clean room qualify for Connecticut's manufacturing-machinery sales and use tax exemption?

Plain-English summary

A company that makes hypodermic needles had to meet a customer's exacting specifications — an extremely fine, sterile needle. To hit those specs, the temperature, pressure, humidity and cleanliness of the air where the needles are made had to be tightly controlled, so the company was building a "clean room" (an enclosed, environmentally controlled area) and installing machinery to regulate that air. The question: does the clean-room air-control machinery qualify for Connecticut's manufacturing-machinery exemption under Conn. Gen. Stat. § 12-412(34)?

Yes. Section 12-412(34) exempts from sales and use tax machinery "used directly in a manufacturing production process." One of the regulatory tests for "used directly," in Conn. Agencies Regs. § 12-412(34)-1(f), is whether the machinery "directly transforms, or has a direct effect upon, the form, composition or character" of the raw materials being manufactured into a new product.

DRS found the clean-room machinery met that test. By controlling the atmosphere the needles are made in, the machinery directly affects the needles' form, composition and character — it governs the level of contaminants on the needle surface and the company's ability to produce a needle with an especially fine internal diameter. Because the regulated air has a direct effect on the product itself, the machinery that regulates it is exempt.

DRS drew a sharp contrast for a common look-alike situation: air-purification or air-conditioning machinery used outside a clean room to control the environment for employee health, safety or comfort does not qualify. That machinery has no direct effect on the materials being manufactured — its absence would not stop a particular product from being produced — so it is not exempt under § 12-412(34).

What this means for you

Manufacturers building clean rooms or controlled environments

If your controlled-environment machinery is genuinely part of making the product — the atmosphere it maintains directly affects the product's form, composition or character (contamination level, precision, sterility) — it can qualify for the § 12-412(34) exemption. The clean room's purpose here was production specifications, not people.

The dividing line is "effect on the product," not "effect on the room"

The exemption turns on whether the machinery directly affects the raw materials/product. Environmental machinery that only makes the workplace comfortable, safe or healthy for employees fails that test, even if it's sophisticated. Ask: if this machine were removed, could the product still be made? If not (because the product itself depends on the controlled conditions), it points toward exemption.

Document the production link

Because the exemption depends on the machinery's direct effect on the product, keep records — customer specifications, process descriptions, engineering rationale — showing the controlled atmosphere is essential to the product's characteristics, not merely to employee working conditions.

Common questions

Q: Is clean-room air-handling machinery exempt from Connecticut sales tax?
A: It can be. In this ruling, machinery regulating a clean room's temperature, pressure, humidity and contamination was exempt under § 12-412(34) because the controlled air had a direct effect on the needles being manufactured.

Q: What makes machinery "used directly" in manufacturing?
A: Under Conn. Agencies Regs. § 12-412(34)-1(f), one test is whether it directly transforms, or has a direct effect upon, the form, composition or character of the raw materials being turned into the finished product.

Q: Is ordinary factory air conditioning exempt too?
A: No. DRS specifically said air-purification or air-conditioning machinery used outside a clean room to protect employees' health, safety or comfort is not exempt, because it has no direct effect on the product being made.

Q: Why did the clean-room machinery qualify when comfort HVAC doesn't?
A: Because the product itself depended on the controlled atmosphere — surface contamination and needle-bore precision were affected by the air quality — so the machinery had a direct effect on the goods, not just the workers.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-412(34) (exemption for machinery used directly in a manufacturing production process)
• Conn. Agencies Regs. § 12-412(34)-1(f) ("used directly" — machinery that directly transforms, or has a direct effect upon, the form, composition or character of raw materials)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-20

Original ruling text

Ruling 93-20, Sales and Use Taxes / Manufacturing Machinery

FACTS:

The Company produces hypodermic needles and related medical products. The hypodermic needles must be made according to specifications set forth by the Company's customer, which require that the end product be an extremely fine, sterile needle. The temperature, pressure, humidity and contamination of the air in the area in which the needles are made must be regulated in order to meet the customer's specifications, and so the Company is expanding its operation to include a "clean room," an enclosed, environmentally controlled area.

ISSUE:

Whether the machinery used to regulate the temperature, pressure, humidity and contamination of the air inside the Company's clean room qualifies for exemption from sales and use taxes as machinery used directly in a manufacturing production process under Conn. Gen. Stat. §12-412(34).

DISCUSSION:

Conn. Gen. Stat. §12-412(34) provides an exemption from sales and use taxes for sales, and the storage, use or consumption, of machinery used directly in a manufacturing production process. One of the guidelines included in Conn. Agencies Regs. §12-412(34)-1(f) for determining whether machinery is "used directly" is whether "machinery ... directly transforms, or has a direct effect upon, the form, composition or character of raw materials being manufactured into a product possessing a new name, nature and use which is intended for sale ..."

Under the facts and circumstances of this ruling, the Company's clean room machinery "directly transforms, or has a direct effect upon, the form, composition or character of raw materials" within the meaning of Conn. Agencies Regs. §12-412(34)-1(f) by regulating the atmospheric conditions within the clean room. The temperature, pressure, humidity and purity of the air in which the needles are produced directly affects their form, composition or character by having an impact on the level of contaminants found on the surface of the needles and the ability to create a needle with an especially fine internal diameter. Thus, the qualities of the air in the clean room has a direct effect on the production of the needles and the machinery used to regulate the atmospheric conditions of the clean room qualifies for exemption under Conn. Gen. Stat. §12-412(34).

The availability of the exemption provided under Conn. Gen. Stat. §12-412(34) for air purification or air conditioning machinery used in a clean room in the production of hypodermic needles may be contrasted with similar machinery used outside a clean room to control the environment to protect the health or safety or to promote the comfort of employees. In such case, the air purification or air conditioning machinery does not have a direct effect upon the materials being manufactured within the meaning of Conn. Agencies Regs. §12-412(34)-1(f), in that its absence from the facility would not prevent the production of a particular product from continuing. Therefore, such machinery would not be exempt under Conn. Gen. Stat. §12-412(34).

RULING:

The machinery used by the Company to regulate the temperature, humidity, pressure and contamination of the air in a clean room required for the production of hypodermic needles is exempt under Conn. Gen. Stat. §12-412(34) as machinery used directly in a manufacturing production process.

LEGAL DIVISION

Issued: October 25, 1993