Were repairs to the scrap-metal company's shredding and sorting equipment exempt?

Subject

Machinery and Equipment Repair Exemption

Plain-English summary

Repairs to the scrap-metal shredding and sorting machinery were not exempt. The company processed automobile bodies, appliances, and similar items into ferrous scrap for steel mills and nonferrous scrap for other processors or disposal.

Despite that manufacturing-like activity, the Department classified the integrated business under wholesale-trade SIC code 5093. That code was not eligible under section 212.08(7)(eee), and the company could not use miscellaneous manufacturing code 3999 because its activities were specifically classified elsewhere.

What this means for you

Under this historical exemption, using industrial machinery in processing was not enough. The business also had to fall within one of the statute's qualifying industry codes.

Common questions

Q: Did the Department agree the machinery performed processing? Yes.

Q: Why was the exemption denied? The business's SIC code was 5093, which did not qualify.

Q: Could the company use miscellaneous manufacturing code 3999? No. Its activities were already specifically classified under code 5093.

Citations and references

• Fla. Stat. § 212.08(7)(eee) — industrial machinery and equipment repair exemption
• SIC code 5093 — scrap and waste materials wholesale classification applied in the ruling
• SIC code 3999 — miscellaneous manufacturing classification rejected in the ruling
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-014

Original ruling text

SUMMARY

QUESTION: Do repairs of machinery and equipment used by a
scrap metal recovery business qualify for exemption?

ANSWER - Based on facts below: Repairs of machinery and
equipment used to shred automobile bodies, kitchen and
laundry appliances, and similar items and to sort the
recovered scrap into ferrous metals for sale to steel mills
and nonferrous metals for transfer to other processors or
disposal as waste are not exempt. The exemption is
available only for activities described in certain Standard
Industry Classification codes. A business engaged in
assembling, breaking up, sorting, and wholesale
distribution of scrap metal is classified under SIC code
number 5093, which is not a qualifying code number.

Mar 15, 2000

Re: Technical Assistance Advisement (00A-014)
Sales and Use Tax -- Machinery and Equipment Repair
Exemption
Statutes: 212.08(7)(eee), F.S.

Dear :

This is in response to your letter dated January 13, 2000, in
which XXX ("Taxpayer") seeks a technical assistance advisement
on application of Florida sales and use tax to repairs of
certain machinery and equipment used in Taxpayer's operations.

Facts

Taxpayer is in the scrap metal recovery business. You describe
one facility located in XX County as typical of Taxpayer's
operations. That facility consists of a 4,000 horsepower metal
shredder and related equipment and buildings. Automobile
bodies, major kitchen and laundry appliances, and similar items

are placed in the shredder and reduced to fist-sized pieces of
metal. The metal is then passed through a series of air, water,
and magnetic separation processes to sort the metal into
distinct grades of ferrous metal and nonferrous materials. The
former are sold as raw material to steel mills and foundries.
The latter are transferred to other processors or disposed of as
waste. The shredding and sorting converts unusable scrap metal
into a product that can be used by the mills and foundries.
Non-ferrous materials are eliminated, the density of the
material is increased, and the form and size is changed to be
suitable for steel-making furnaces.

Requested Advisement

You have asked whether repairs to Taxpayer's shredders and other
machinery and equipment used in the processes you describe
qualify for the machinery and equipment repair exemption in
section 212.08(7)(eee), F.S. In particular, you ask if
Taxpayer's activities will be considered as classified in
Standard Industrial Classification ("SIC") code 3999.

Applicable Law, Discussion, and Analysis

Section 212.08(7)(eee), F.S., reads as follows:

(eee) Certain repair and labor charges.--

1. Subject to the provisions of subparagraphs 2. and 3.,
   there is exempt from the tax imposed by this chapter all
   labor charges for the repair of, and parts and materials
   used in the repair of and incorporated into, industrial
   machinery and equipment which is used for the manufacture,
   processing, compounding, or production of items of tangible
   personal property at a fixed location within this state.

2. This exemption applies only to industries classified
   under SIC Industry Major Group Numbers 10, 12, 13, 14, 20,
   22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 36, 37,
   38, and 39 and Industry Group Number 212. As used in this
   subparagraph, "SIC" means those classifications contained
   in the Standard Industrial Classification Manual, 1987, as

published by the Office of Management and Budget, Executive
Office of the President.

Subparagraph 3. provides that the exemption is to be implemented
in 25% annual increments, beginning on July 1, 1999.

Subparagraph 1. describes the parameters of the exemption. It
applies to labor and parts for repairs. The repairs must be to
industrial machinery and equipment. The equipment must be used
in manufacturing, processing, compounding, or producing items of
tangible personal property. This must occur at a fixed location
in Florida. Based on Taxpayer's description of its equipment
and operations, it appears that Taxpayer does use industrial
machinery and equipment to manufacture or process tangible
personal property at a fixed location in Florida. Taxpayer
cites numerous judicial and regulatory sources in its letter to
support its contention that it is involved in manufacturing.
The Department agrees that Taxpayer's operations are within the
scope of manufacturing or processing as those terms are used in
the statute.

Subparagraph 2. imposes an additional requirement that must be
met. The machinery or equipment must be used in a manufacturing
or processing activity that is classified in specified SIC Major
Group numbers. The statute cites the Standard Industrial
Classification Manual of 1987 (the "Manual") as the source of
the SIC codes to be applied in determining if a manufacturing
process qualifies for the exemption. The introduction and
commentary in the Manual provide guidelines for applying the SIC
system. It was established for purposes of uniform economic
data collection and analysis. The system was designed to
classify "establishments" by their type of activity to insure
that all businesses with the same economic activity were grouped
together when gathering, compiling, and analyzing economic data.

Classification is applied at the level of an "establishment."
An establishment is an "economic unit, generally at a single
location, where business is conducted or where services or
industrial operations are performed." Examples include a
factory, store, hotel, farm, or bank. An establishment is
assigned an industry code based on its primary activity, as

determined by its principal product, group of products, or
services rendered. So long as all the activities at a location
are part of an integrated economic unit, only one SIC code will
be assigned.

In some cases there may be two distinct and separate economic
activities performed at a single physical location. If three
conditions are met, each activity should be treated as a
separate establishment with its own coding. First, there must
be no industry classification in the system that includes the
combined activities in a single code. Second, employment in
each of the activities must be significant. Third, it must be
possible to prepare separate reports for the activities as to
number of employees, wages, sales, and other establishment data.
An example of two activities that would be viewed as separate
establishments even though operated at a single location would
be a facility where a company operates a lumber yard and also
runs a construction business.

In the introductory remarks to Division D of the SIC system,
which covers industries classified under the general heading
"Manufacturing," the Manual notes that there are "numerous
borderline cases between manufacturing and other divisions of
the classification system." There are "manufacturing-type
activities" that are assigned to other divisions rather than
Division D. Examples include processing of raw materials on
farms, job site manufacturing by construction contractors, tire
retreading and rebuilding, and computer software production.
Manufacture of a product on the site where it is sold to the
general public is often subsumed under the retail trade code
assigned to that sales activity. Examples of this include
bakeries, ice cream parlors, and custom tailors. In other
cases, establishments may use heavy industrial equipment to
process products for wholesale marketing with both the
production activity and the selling activity described under a
single wholesale trade SIC code number. An example of this
would be a poultry wholesaler who purchases whole fresh poultry
carcasses, cuts them up, and sells them at wholesale.

This guidance from the commentary in the Manual must be kept in
mind in determining whether Taxpayer's industrial machinery and

equipment is used in a manufacturing activity that falls under
one of the qualifying Major Groups listed in section
212.08(7)(eee)2., F.S. Only three are possibly applicable to
Taxpayer's activities. These are "Primary Metal Industries"
(Major Group 33), "Fabricated Metal Products, Except Machinery
and Transportation Equipment" (Major Group 34), and
"Miscellaneous Manufacturing Industries" (Major Group 39). As
acknowledged by your letter, Taxpayer's activities do not fit
into any of the four digit codes that fall under those Major
Groups unless SIC code 3999 applies. SIC code 3999 is
"Manufacturing Industries, Not Elsewhere Classified." You urge
the Department to accept that classification because Taxpayer's
activities are manufacturing and they are not described under
any other manufacturing code.

While the Department agrees that Taxpayer is involved in
manufacturing and is using industrial machinery and equipment at
a fixed location, the Department cannot agree that those facts
alone require classification in a miscellaneous manufacturing
code. As noted, there are many manufacturing activities that
are classified under other divisions in the SIC system. SIC
code 3999 is for "Miscellaneous Manufacturing Industries, Not
Elsewhere Classified." As pointed out in your letter, Taxpayer's
activities are elsewhere classified. They fall under SIC code
5093. This is in the Wholesale Trade Division, Miscellaneous
Durable Goods Major Group. The remarks for the Wholesale Trade
Division indicate that it includes establishments selling goods
only to industrial users and not to the general public for
personal consumption. Taxpayer sells only to industrial users.
Within the Whole Trade Division, SIC code 5093 is described as
"Scrap and Waste Materials." The description for that code
reads as follows:

Establishments primarily engaged in assembling, breaking
up, sorting, and wholesale distribution of scrap and waste
materials. This industry includes auto wreckers engaged in
dismantling automobiles for scrap. However, those engaged
in dismantling cars for the purpose of selling secondhand
parts are classified in Industry 5015.

Specifically included as examples falling in this category are

"automotive wrecking for scrap," "iron and steel scrap," "metal
waste and scrap," and "nonferrous metal scrap." Taxpayer's
activity is clearly classified under the SIC system in code
5093. It cannot be viewed as "Not Elsewhere Classified," which
is a prerequisite for inclusion under SIC code 3999.

Review of other comments in the Manual confirm the Department's
conclusion. For example, the description under SIC code 3341
(secondary smelting and refining of nonferrous metals) is very
instructive. It states, "Establishments primarily engaged in
assembling, sorting, and breaking up scrap metal, without
smelting and refining, are classified in Wholesale Trade,
Industry 5093." This comment indicates that in order for scrap
metal activities to be classified under SIC codes for
manufacturers of metal products, the processes must include
smelting or refining, not just breaking up large items to
smaller pieces and sorting those pieces by type and grade.
There is no indication in Taxpayer's letter that it engages in
any smelting or refining of the scrap metal it processes.

The Department has considered whether it could view the
shredding and sorting processes as a separate activity that
could be assigned to SIC code 3999. Under the guidance in the
Manual, this is not permitted. The processing is not a separate
economic unit from the selling in the way that a lumber yard is
independent of a construction business run at the same site. In
addition, separation of one activity from another at a site for
purposes of SIC code assignment is permitted only if there is no
single industrial classification that includes both. In this
case, SIC code 5093 does include the full range of Taxpayer's
activities from assembling the automobile bodies and discarded
appliances through breaking them up, sorting the scrap, and
selling it to steel manufacturers or foundries.

Consideration of the basic purpose of the SIC system also
requires the conclusion that Taxpayer's activities must be
viewed as classified under SIC code 5093 and not under SIC code
3999. The SIC system was designed to be certain that similar
economic enterprises were classified together for purposes of
data collection and analysis. In analyzing the costs,
employment statistics, growth, decline, or other economic data

of industrial segments, Taxpayer's data should be combined with
that of the other businesses in SIC code 5093, not with the data
of those manufacturing beach umbrellas, cigarette lighter
flints, wind chimes, and the other assorted products in SIC code
3999.

The Department understands and appreciates that application of
the SIC requirement in this case results in denying the
exemption to industrial machinery and equipment that is used in
a manufacturing activity. If the Legislature had intended to
extend the exemption to all manufacturing activities, however,
there would have been no need to include the additional SIC
coding requirement in the statute at all. The Department does
not have the authority to expand the scope of this exemption by
stretching the miscellaneous manufacturing SIC code 3999 to take
in industries that are clearly described in other SIC codes that
do not qualify for exemption under section 212.08(7)(eee), F.S.

Advisement

Taxpayer does use industrial machinery and equipment in
manufacturing or processing scrap metal. Taxpayer does not,
however, qualify for the exemption for machinery and equipment
repair under section 212.08(7)(eee), F.S. Taxpayer's activities
are clearly classified in SIC code 5093, a classification that
does not qualify under the statute. Because Taxpayer's
activities are classified elsewhere in the SIC system, they
cannot be viewed as falling within SIC code 3999, a
miscellaneous category for activities that are not elsewhere
classified.

Closing Statement

This response constitutes a Technical Assistance Advisement
under section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice, as specified in section 213.22, F.S. Our
response is predicated on those facts and the specific situation
and assumptions summarized above. You are advised that
subsequent statutory or administrative rule changes, or judicial
interpretations of the statutes or rules upon which this advice

is based, may subject similar future transactions to a different
treatment than expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Linda W. Bridges, Senior Attorney
Technical Assistance and Dispute Resolution
850-922-9412

Enclosure
Control #40138