Did replacing an entire packaging line qualify for Florida's industrial-machinery repair exemption when it was part of one integrated production process?

Plain-English summary

Florida treated replacement of the packaging line as an exempt repair because that line was a component of a larger, existing, integrated production system. The plant's production flowed continuously from raw-material handling through packaging, and removing the packaging component temporarily idled other manufacturing equipment.

The aging equipment caused product loss and safety concerns. The project replaced labeling, weighing, conveying, electrical, metering, counting, monitoring, testing, control hardware and software, and related equipment. It included only minor site work and did not increase throughput; the new component would actually run slightly slower.

The exemption covered repair of a greater integrated whole

Section 212.08(7)(xx), as quoted in the ruling, exempted labor charges and incorporated parts and materials used to repair qualifying industrial machinery and equipment at a fixed Florida location in specified industries.

Florida said a new standalone machine ordinarily could not be called a repair part incorporated into an existing machine. But when physically connected machinery performed an uninterrupted sequence and failure of one component rendered the rest useless, replacing the defective component repaired the larger integrated line.

Integration was both physical and functional

The packaging equipment handled the final production step before storage and distribution. During replacement, the plant stopped producing that product because the packaging component was connected to and integrated with the upstream equipment.

Those facts allowed Florida to treat the new packaging line as a component incorporated into the existing overall production equipment line.

The ruling set limits

Replacing the entire integrated production line would not be an exempt repair because the new machinery would not be a component of a greater existing whole. Likewise, replacement of a standalone machine would not qualify on this reasoning.

Where production included a discrete process, only the machinery involved in that process would be considered together for the integration test.

What this means for you

Manufacturers

Document the exact production sequence, physical connections, functional dependencies, shutdown effects, and scope of the replacement. The word “line” alone does not establish integration.

Plant and capital-project teams

Separate component replacement from full-line replacement and capacity expansion. Here, throughput stayed the same, site work was minor, and the project replaced an aging component within an operating whole.

Accountants and tax professionals

Confirm the facility's industry classification and that labor, parts, and materials fit the statutory repair exemption. The ruling's integration analysis was highly fact-specific and did not create a general exemption for new manufacturing equipment.

Common questions

Q: Was an entire packaging line replaced?
A: Yes, but Florida viewed that packaging line as one component of a larger continuous production equipment line.

Q: Would replacing a standalone machine qualify?
A: Not under the reasoning stated in the TAA.

Q: Would replacing the entire integrated production line qualify?
A: No. Florida said the replacement then would not be a part incorporated into a greater existing whole.

Q: Did the project increase production capacity?
A: No. The facts said throughput would remain the same and the replacement would run slightly slower.

Citations and references

• Fla. Stat. § 212.08(7)(xx) — exemption for qualifying repair labor, parts, and materials incorporated into industrial machinery and equipment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-037

Original ruling text

SUMMARY

QUESTION: Does the replacement of the packaging line
qualify for the machinery and equipment repair exemption?

ANSWER - Based on Facts Below: The replacement of a
packaging line qualifies for the industrial machinery and
repair exemption, as long as it is a component of the overall
production equipment line the product.

Jun 23, 2004

Re: Technical Assistance Advisement 04A-037
Sales and Use Tax - Repairs to Machinery and Equipment
Section: 212.08, F.S.
Rules: None
Petitioner: XXX (herein "Taxpayer")
FEI: XX

Dear :

This letter is a response to your petition dated April 21, 2002,
for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

Your petition sets forth the following facts:

[Taxpayer] is in the process of replacing some
[manufacturing] XXX equipment.... [Taxpayer] is registered
with the Department for sales and use tax purposes pursuant
to Chapter 212, Florida Statutes[,] XXX.

The [product manufactured at plant] XXX is shipped to
[wholesalers] XXX throughout the State of Florida and, XXX
in neighboring Southeastern states. The business is part
of the industry classified in SIC Major Group Number XXX
This [plant] XXX produces [xxx quantity of product]
annually....

The [equipment produces] XXX... [produces] XXX roughly
[quantity of product]XXX per year. The machinery and
equipment being replaced is used in the packaging [product]
XXX, the final step in production before XXX storage
pending distribution. The project in question is described
as a XXX at the... [plant] XXX, a fixed location at which
tangible personal property, XXX, is manufactured, prepared
for shipment and from which distribution begins. The
[equipment] XXX is the portion of the manufacturing
facility in which XXX [product is put in various
containers] and stored XXX pending shipment. The machinery
and equipment in question [is] being replaced because the
aging of the existing XXX equipment has resulted in some
product loss and for the purpose of enhancing plant
employee safety. The machinery and equipment being
replaced includes XXX labeling equipment, weighing
equipment, XXX conveyors, XXX, electrical equipment,
product metering and counting equipment, monitoring,
testing and control equipment including hardware and
software, XXX and other associated machinery and equipment.
The XXX replacement, a [XXX] dollar project, will entail
some minor site work, namely replacement of some concrete
flooring, minor underground plumbing in areas outside the
[equipment] XXX footprint, and installation of a new OSHArequired XXX area, but no other upgrade of existing
structures or improvements.

The [equipment] XXX being replaced is more than XXX years
old. The old equipment used to package [product] XXX has
caused some loss of product due to failures in XXX
integrity and the replacement will not only solve those
problems but yield enhanced employee safety as well.
Throughput capacity (XXX) will remain the same; the new XXX

[equipment] will actually run slightly slower, improving
asset utilization by running more shifts for more
consistent operation. The new XXX equipment generally has
a depreciable life of 3 years or more.

While the XXX replacement project is underway, no [product
of this type] will be produced at the... [plant]. Because
the XXX [equipment] is connected with and an integrated
part of the manufacturing and packaging of [product] XXX,
the project will temporarily idle other plant equipment,
including the [equipment used to produce and deliver
product to storage] XXX, among other facilities....

During the replacement project, the [product] that would have
been [packaged]is being [packaged in other ways] instead.
Pursuant to a conversation on or about May 12, 2004, Taxpayer's
representative provided that the cost of the [packaging
equipment] equals X [a small] percent of the total plant
investment of [plant].

REQUESTED ADVISEMENT

Advice is requested whether the [packaging equipment]
replacement qualifies for the machinery and equipment repair
exemption found in section 212.08(7)(xx), Florida Statutes.

LAW AND DISCUSSION

Section 212.08(7)(xx), Florida Statutes, provides in pertinent
part as follows:

(xx) 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, production, or preparation for
   shipping 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, 35, 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....

The exemption under section 212.08(7)(xx), Florida Statutes, is
limited to "labor charges for the repair of, and parts and
materials used in the repair of and incorporated into,
industrial machinery and equipment." The type of transaction
covered by that exemption must be determined by considering the
language of the statute itself. It applies to any parts or
materials incorporated into existing industrial machinery and
equipment. If a stand alone machine is scrapped and replaced
with a new one, that new machine cannot be classified as a part
or material that has been incorporated into an existing machine
or piece of equipment. If, however, a series of operations on
the product are performed sequentially without interruption by
machinery and equipment that is integrated by virtue of physical
connection, loss of function of any part of the line would
render the remainder of the line useless as well. Replacement of
the defective element would in that case be an incorporation of
parts and materials to repair the integrated line. Replacement
of the entire line, however, would not be an exempt repair,
because the added machinery and equipment could not be
characterized as a part of a greater whole. In addition, where
there is a discrete process, only machinery and equipment
involved in that process will be considered integrated for the
repair exemption.

In the XXX process, there is a continuous stream of production
from the [handling of raw materials] to the packaging lines,
including the XXX packaging line [being replaced].

CONCLUSION

The replacement of the XXX packaging line qualifies for the

industrial machinery and repair exemption, because the [it] is a
component of the overall production equipment line of [product].

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 upon those facts and the specific
situation 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 from that which is expressed in this response.

You are further advised that this response, your request and XXX
are public records under Chapter 119, F.S., and are subject to
disclosure to the public under the conditions of s. 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, XXX, deleting names,
addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department XXX.

Sincerely,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution

Control #XX