Did a beverage manufacturer's new in-house container lines qualify for Florida's expanding-business machinery exemption?

Plain-English summary

The beverage manufacturer had bought containers from outside suppliers but planned to begin making new containers itself at two Florida plants. The containers would hold its own beverages and would not be sold to other manufacturers.

Florida treated each container project as an expansion of the existing beverage business, not a new business. Each facility would satisfy the productive-output condition when it produced its first new container, even though the equipment was not intended to increase beverage volume.

The equipment listed in the taxpayer's exhibit and the labor to install it qualified for the exemption after the taxpayer submitted a separate Application for Temporary Tax Exemption Permit, Form DR-1214, for each facility. The exemption was tentative until the taxpayer began producing the containers and established qualification to the Department's satisfaction.

What this means for you

Bringing production of a component in-house can qualify as an expansion when the component is incorporated into an existing product and is not sold to others. Separate fixed locations require separate applications, and approval is not automatic merely because equipment is purchased.

Common questions

When did each plant meet the output test? When it self-produced its first new container.

Did installation labor qualify? Yes, for the listed qualifying equipment.

Was one permit application enough for both plants? No. Each separate fixed location required its own Form DR-1214 application.

Citations and references

• Fla. Stat. § 212.08(5)(b) and Fla. Admin. Code r. 12A-1.096, as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 11A-010

Original ruling text

SUMMARY
QUESTIONS: 1. Whether Taxpayer will qualify for exemption as an expanding business when
the first new container for Taxpayer’s product is self-produced at the facility. Taxpayer does not
currently manufacture its own containers.

2. If the answer to Issue 1 is yes, whether Taxpayer is entitled to the exemption under s.
   212.08(5)(b)2., F.S., for the equipment identified in Exhibit B of the TAA request.
   ANSWERS: 1. Taxpayer’s facilities will satisfy the statutory criteria and qualify for
   exemption as an expanding business under s. 212.08(5)(b)2., F.S., when the first new container
   is self-produced by Taxpayer.
3. Taxpayer will be entitled to the exemption under s. 212.08(5)(b)2., F.S., for the
   equipment identified in Exhibit B of the TAA request when an Application for Temporary Tax
   Exemption Permit, form DR-1214, has been submitted for each facility. The exemption will also
   extend to the costs for labor to install such items.

April 19, 2011
XXX
XXX
XXX
Re: Technical Assistance Advisement 11A-010
Sales and Use Tax
Expanding business exemption
Section 212.08(5)(b), F.S.
Rule 12A-1.096, F.A.C.
Dear
This is in response to your request dated March 16, 2011, for a Technical Assistance
Advisement (TAA) pursuant to section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding
a tax exemption issue for XXX. (“Taxpayer”). An examination of your letter has established that
you have complied with the statutory and regulatory requirements for issuance of a TAA.
Therefore, the Department is hereby granting your request for a TAA.
Background
Taxpayer is a manufacturer of beverages. Taxpayer produces these beverages at two
locations (Facility #1 and Facility #2) in Florida. These beverages are filled in a container that is
produced to Taxpayer’s specifications by outside suppliers. Taxpayer does not currently
produce its own containers.

Taxpayer is in the process of converting to new containers, some of which will continue
to be produced by outside suppliers, while other containers will be produced by Taxpayer itself.
All of the containers will be used to hold Taxpayer’s beverages. None of the containers
produced by Taxpayer will be sold to other beverage manufacturers. The new containers will
have the same capacity as the old containers, but the material used to produce the new containers
will be completely different from the material used to produce the old containers.
The conversion to the new container will require substantial changes to packaging
operations. At Facility #1, the containers will be manufactured on an entirely new processing
line. At Facility #2, an existing processing line will be converted to accommodate the new
container and a second, entirely new processing line will be established. A flowchart illustrating
the production lines for the facilities has been submitted as Exhibit A to the TAA request.
The change in the containers will require different equipment in the filling operation and
certain replacement systems with greater capacity to accommodate the speed at which the new
containers will be filled. Other ancillary equipment that will be needed will include: in-line
container accumulators, equipment to prepare and package the containers for shipping,
conveyors to transport the containers and their components, electrical wiring, plumbing, and
other utility equipment for steam, compressed air, and refrigeration within the packaging
process. In addition to the equipment itself, significant labor costs for installation will also be
incurred. Specific machinery and equipment for the production lines is listed in Exhibit B to the
TAA request.
Issues

1. Whether Taxpayer will qualify for exemption as an expanding business when the first
   new container is self-produced.
2. If the answer to Issue 1 is yes, whether Taxpayer is entitled to the exemption under s.
   212.08(5)(b)2., F.S., for the equipment identified in Exhibit B of the TAA request.
   Applicable Authority
   The following passages from the Florida Statutes (F.S.) and the Florida Administrative
   Code (F.A.C.) are pertinent to the issues under consideration.
   Section 212.08(5)(b), F.S., provides in part:
3. Industrial machinery and equipment purchased for exclusive use by an
   expanding facility which is engaged in spaceport activities as defined by s. 212.02 or for
   use in expanding manufacturing facilities or plant units which manufacture, process,
   compound, or produce for sale items of tangible personal property at fixed locations in
   this state are exempt from any amount of tax imposed by this chapter upon an affirmative
   showing by the taxpayer to the satisfaction of the department that such items are used to
   increase the productive output of such expanded facility or business by not less than 10
   percent.

3.a. To receive an exemption provided by subparagraph 1. or subparagraph 2., a
qualifying business entity shall apply to the department for a temporary tax exemption
permit. The application shall state that a new business exemption or expanded business
exemption is being sought. Upon a tentative affirmative determination by the department
pursuant to subparagraph 1. or subparagraph 2., the department shall issue such permit.
b. The applicant shall maintain all necessary books and records to support the
exemption. Upon completion of purchases of qualified machinery and equipment
pursuant to subparagraph 1. or subparagraph 2., the temporary tax permit shall be
delivered to the department or returned to the department by certified or registered mail.
c. If, in a subsequent audit conducted by the department, it is determined that the
machinery and equipment purchased as exempt under subparagraph 1. or subparagraph 2.
did not meet the criteria mandated by this paragraph or if commencement of production
did not occur, the amount of taxes exempted at the time of purchase shall immediately be
due and payable to the department by the business entity, together with the appropriate
interest and penalty, computed from the date of purchase, in the manner prescribed by
this chapter. . . .
Rule 12A-1.096, F.A.C., provides in part:
(1) Definitions - The following terms and phrases when used in this rule shall
have the meaning ascribed to them except where the context clearly indicates a different
meaning:
(a) “Fixed location” means a location or plant site that is used, or intended to be
used, for an extended or indefinite period of time for spaceport activities or for
manufacturing, processing, compounding, or producing items of tangible personal
property for sale. The term also includes a location where a portable plant is set up for a
period of not less than six months in a stationary manner so as to perform the same
industrial manufacturing, processing, compounding, or production process that could be
performed at a permanent location or plant site. The geographical limits of the fixed
location for purposes of this rule are limited to the immediate permanent location or plant
site. Facilities or plant units that are within the same building, or that are on the same
parcel of land if not contained in a building, are considered to be one fixed location.
...
(f) “Production process” or “production line” means those industrial activities
beginning when raw materials are delivered to the new or expanding business’ fixed
location and generally ending when the items of tangible personal property have been
packaged for sale, or are in saleable form if packaging is not done. However, the
production process may include quality control activities after the items have been
packaged (or are in salable form if packaging is normally not done), such as good
manufacturing practices as mandated by the Federal Food and Drug Administration to
detect adulterated food or food that has been prepared, packaged, or held under insanitary
conditions.

1. The production process may encompass more than one fixed location if the
   business transfers work-in-process from one fixed location to a second fixed location for
   further manufacturing, processing, compounding, or production. For example, a
   company purchases machinery and equipment to produce raw orange juice at one fixed

location, and this raw orange juice is transferred as work-in-process to a second fixed
location where the company will use the raw orange juice to make five different products.
...
(3) Expanding Business.
(a) The purchase of industrial machinery and equipment, parts and accessories,
and the installation thereof, is exempt from tax when purchased by an expanding business
that uses such machinery and equipment at a fixed location in this state to increase the
productive output of tangible personal property that is manufactured, processed,
compounded, or produced for sale by not less than 10 percent, or for exclusive use in
spaceport activities.
(b) The Executive Director or the Executive Director’s designee will determine
whether a business qualifies for exemption as an expanding business, based upon the
facts of each case using the following guidelines:
...
1.b. An expanding business means an addition to, or the modernization or
enlargement of, an existing facility or the installation of additional machinery and
equipment to begin manufacturing, processing, compounding, or producing a component
item of tangible personal property that will be incorporated into a finished item of
tangible personal property for sale that is already being produced at that fixed location.
When the component item of tangible personal property is manufactured, processed,
compounded, or produced, the completion of the first component item meets the required
productive output increase. When the business manufactures, processes, compounds, or
produces that component for sale to others and incorporates that component in other
items of tangible personal property for sale, the business would be classified as a new
business.
c. For example, a washing machine manufacturer that previously purchased water
pumps from an outside supplier as component parts for the washing machines would be
considered an expanding business, rather than a new business, when it purchases
machinery and equipment to begin manufacturing its own component water pumps and
does not offer the water pumps for sale to others. When the first component water pump
is produced, the manufacturer, as an expanding business, meets the required productive
output increase.
...
(c)1. To qualify for exemption as an expanding business, the taxpayer is required
to provide information to the satisfaction of the Executive Director or the Executive
Director’s designee that the items purchased will be or have been used to increase the
productive output of the existing facility or specific product line(s) by not less than 10
percent. An expanding business is allowed to specify whether the 10 percent increase in
productive output is for the entire plant or for specific product line(s). However, where
the increase in productive output applies to a product or component that becomes part of
different product lines, the increase in productive output will be determined by measuring
the increase in the combined output of the different product lines. Similarly, if the
additional machinery and equipment affects the productive output of more than one
product line, the increase in productive output must be measured by all of the product
lines that have been affected.

a. Example: If a company purchases machinery and equipment that increases its
production of raw orange juice by 25 percent, and this raw orange juice is used by the
company to make five different products, the increase in productive output would be
determined by measuring the volume increase in the combined output of all five different
products.
b. Example: A beverage manufacturer that currently produces a variety of soft
drinks in 12-ounce cans purchases machinery and equipment to begin making plastic
bottles and also purchases additional mixing machinery and equipment to make more
syrup for overall beverage production. Effectively, there are two separate expansion
projects for this manufacturer. The plastic bottle expansion project will meet the required
productive output increase requirement upon production of the first bottle. However, the
productive output increase requirement for the additional mixing machinery and
equipment must be measured by the amount of beverages produced at the plant. . . .
Discussion
Exhibits A and B to the TAA request have been carefully reviewed. That review shows
that all of the additional or replacement equipment is for the purpose of accommodating the
change in containers. There is no equipment that is being acquired for the purpose of making
more of Taxpayer’s beverages.
Generally, the exemption under s. 212.08(5)(b)2., F.S., is only applicable to additional or
replacement industrial machinery and equipment that is used to increase the productive output of
the facility by not less than 10 percent. However, the provisions of Rule 12A-1.096, F.A.C., do
recognize the acquisition of additional machinery and equipment for the purpose of making
component parts of a business’ products as projects qualifying for exemption.
Taxpayer will be purchasing additional equipment to begin producing its own containers
for the first time. That scenario has already been considered as a project eligible for exemption
in the examples provided by the administrative rule under sub-subparagraphs (3)(b)1.c. and
(3)(c)1.b. Since none of the new containers will be sold to others, the container lines will not be
considered as new business projects. Instead, the new container lines would be eligible for
exemption as expanding business projects.
At this time it is important to understand that an exemption as an expanding business is
not automatic. Pursuant to s. 212.08(5)(b)3.a., F.S., no exemption exists until such time as a
business has applied for the exemption by filing an Application for Temporary Tax Exemption
Permit, form DR-1214. Since Facility #1 and Facility #2 are both separate fixed locations,
meaning work-in-process is not transferred from one facility to the other, a separate application
must be filed for each facility. Further, pursuant to s. 212.08(5)(b)2., F.S., the exemption is only
tentative until such time as the expanding business affirmatively shows, to the satisfaction of the
Department, that the productive output of the business has increased by not less than 10 percent;
or in this case, the production of the new containers by Taxpayer has begun.
Conclusions

Issue 1. Taxpayer’s facilities will satisfy the statutory criteria and qualify for exemption
as an expanding business under s. 212.08(5)(b)2., F.S., when the first new container is selfproduced by Taxpayer at each of those facilities.
Issue 2. Taxpayer will be entitled to the exemption under s. 212.08(5)(b)2., F.S., for the
equipment identified in Exhibit B of the TAA request when an Application for Temporary Tax
Exemption Permit, form DR-1214, has been submitted for each facility. The exemption will also
extend to the costs for labor to install such items.
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 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 documents are public
records under Chapter 119, F.S., which are subject to disclosure to the public under the
conditions of Section 213.22, F.S. Your name, address, and any other details, which might lead
to identification of the taxpayer, must be deleted before disclosure. In an effort to protect the
confidentiality of such information, we request you provide the undersigned with an edited copy
of your request for Technical Assistance Advisement, backup material and response within
fifteen days of the date of this advisement.
Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and
Dispute Resolution

ctrl# 100054