How did Florida apply the new- and expanding-business machinery exemption to three beverage production lines?

Plain-English summary

The manufacturer's new beverage represented a distinct and separate economic activity even though the company already made other beverages. Line 1 therefore qualified tentatively as machinery for a new business once the taxpayer filed Form DR-1214. A refund required a claim within three years of tax payment and proof that production actually began.

Line 2 could qualify as an expanding business after a DR-1214 filing and proof that output of the new product increased by at least 10%. Directly relevant measures were gallons produced or containers filled at the taxpayer's facility; a subcontractor's output could be excluded because the taxpayer bought no machinery for that subcontractor.

Line 3 required a second DR-1214 for that line and the same documented 10% output increase. Its refund also had the three-year filing limit. Unpaid tax on Line 3 machinery was relieved only after the Department received the permit application.

What this means for you

The exemption follows each project and its paperwork. Product distinctness supports new-business status, while later equipment needs measurable facility-level output growth and separate timely applications.

Common questions

Was Line 1 a new business? Yes, because the new beverage was a distinct economic activity.

What did Lines 2 and 3 need? Separate applicable DR-1214 filings and proof of at least 10% higher productive output.

How long was the refund window? Three years from payment of the tax.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 11A-030

Original ruling text

SUMMARY
QUESTIONS:

1. Does Taxpayer’s production of new type of beverage product (“New Product”) on
   Line 1 constitutes a new business under s. 212.08(5)(b)1., F.S.? Taxpayer previously made
   beverage products.
2. If New Product does constitute a new business, will Taxpayer be entitled to seek a
   refund for sales tax paid on Line 1 equipment?
3. Does Taxpayer’s installation of Line 2 for a different type of container for New
   Product qualify as an expanding business under s. 212.08(5)(b)2., F.S.?
4. If Line 2 does qualify as an expanding business, will Taxpayer be entitled to seek a
   refund for sales tax paid on Line 2 equipment?
5. Does Taxpayer’s subsequent installation of Line 3, which replaced Line 1 and
   produces the same type of container as Line 2, qualify as an expanding business?
6. If Line 3 does qualify as an expanding business, will Taxpayer be entitled to seek a
   refund for sales tax that has been paid on Line 3 equipment and is Taxpayer is entitled to an
   exemption for purchases of equipment where tax has not yet been paid?
   ANSWERS:
   Issue 1. In consideration of the classification factors as provided by Rule 12A1.096(4)(b), F.A.C., Taxpayer’s production of New Product represents a distinct and separate
   economic activity. Accordingly, the production of New Product is considered to be a new
   business.
   Issue 2. Taxpayer will be entitled to a tentative exemption as a new business for Line 1
   when an Application for Temporary Tax Exemption Permit, form DR-1214, has been submitted.
   Taxpayer will be entitled to a refund for Line 1 when Taxpayer files an application for refund
   within three years of the date when such taxes were paid and provides documentation that
   production of New Product did commence.
   Issue 3. Taxpayer’s Line 2 will qualify for an exemption as an expanding business when:
   (1) form DR-1214 has been submitted, and (2) Taxpayer has documented that production of
   New Product increased by not less than 10 percent.
   Issue 4. Taxpayer will be entitled to a refund for Line 2 when Taxpayer files an
   application for refund within three years of the date when such taxes were paid.
   Issue 5. Taxpayer’s Line 3 will tentatively qualify for an exemption as an expanding
   business when a second DR-1214 has been submitted for that line.

Issue 6. Taxpayer will be entitled to a refund for Line 3 when Taxpayer files an
application for refund within three years of the date when such taxes were paid and provides
documentation that productive output did increase by not less than 10 percent. Taxpayer will not
be liable for any unpaid taxes on purchases of machinery and equipment for Line 3 only upon the
Department’s receipt of Taxpayer’s DR-1214.

November 1, 2011

XXX
XXX
XXX

Re: Technical Assistance Advisement 11A-030
Sales and Use Tax
New and 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 September 22, 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”) at its manufacturing facility in XXX (“Facility”).
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. On or about February 2, 2009, Taxpayer began
the production of a new beverage product (“New Product”), on a new production line (“Line 1”)
at Facility. On or about July 9, 2010, Taxpayer converted to the use of a new type of container
for New Product. This new type of container is utilized on a second production line (“Line 2”)
for New Product. New Product was then packaged on two lines in two different types of
containers. However, Taxpayer was producing more New Product than it had the capacity to
package. As a result, Taxpayer contracted with another company to package the excess New
Product that could not be packaged at Facility. In the week that began September 19, 2011,
Taxpayer retired Line 1 and replaced it with a third production line (“Line 3”). The production
capacity of Line 3 was such that it was no longer necessary to have an outside company package
the excess production of New Product. All of New Product is now being packaged in the new

type of container.
Issues

1. Whether Taxpayer’s production of New Product constitutes a new business pursuant
   to s. 212.08(5)(b)1., F.S.
2. If New Product does constitute a new business, will Taxpayer be entitled to seek a
   refund for sales tax paid on Line 1 equipment, as long as an application for refund is made within
   three years of the date when such taxes were paid.
3. Whether Taxpayer’s installation of Line 2 qualified as an expanding business under
   the provisions of s. 212.08(5)(b)2., F.S., if productive output increases by more than 10 percent
   when measured by the productive output from July 9, 2010, through July 8, 2011.
4. If the installation of Line 2 does qualify as an expanding business, will Taxpayer be
   entitled to seek a refund for sales tax paid on Line 2 equipment, as long as an application for
   refund is made within three years of the date when such taxes were paid.
5. Whether Taxpayer’s installation of Line 3 qualified as an expanding business under
   the provisions of s. 212.08(5)(b)2., F.S., if the productive output of New Product increases by
   more than 10 percent as measured by the 12-month period following the completion of the
   installation of the additional equipment over the 12-month period immediately preceding the
   installation of such equipment.
6. If the installation of Line 3 does qualify as an expanding business, will Taxpayer be
   entitled to seek a refund for sales tax paid on Line 3 equipment as long as an application for
   refund is made within three years of the date when such taxes were paid, and whether Taxpayer
   is entitled to an exemption under the provisions of s. 212.08(5)(b)2., F.S., for purchases of
   equipment where tax has not yet been paid.
   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. (2010), provides in part:
7. Industrial machinery and equipment purchased for exclusive use . . . in new
   businesses that manufacture, process, compound, or produce for sale items of tangible
   personal property at fixed locations are exempt from the tax imposed by this chapter
   upon an affirmative showing by the taxpayer to the satisfaction of the department that
   such items are used in a new business in this state. Such purchases must be made prior to
   the date the business first begins its productive operations, and delivery of the purchased
   item must be made within 12 months after that date.
8. Industrial machinery and equipment purchased for exclusive 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. . . .
d. If a qualifying business entity fails to apply for a temporary exemption permit
or if the tentative determination by the department required to obtain a temporary
exemption permit is negative, a qualifying business entity shall receive the exemption
provided in subparagraph 1. or subparagraph 2. through a refund of previously paid taxes.
No refund may be made for such taxes unless the criteria mandated by subparagraph 1. or
subparagraph 2. have been met and commencement of production has occurred. . . .

6. For the purposes of the exemptions provided in subparagraphs 1. and 2., these
   terms have the following meanings: . . .
   b. “Productive output” means the number of units actually produced by a single
   plant, operation, or product line in a single continuous 12-month period, irrespective of
   sales. Increases in productive output shall be measured by the output for 12 continuous
   months selected by the expanding business following the completion of installation of
   such machinery or equipment over the output for the 12 continuous months immediately
   preceding such installation. However, in no case may such time period begin later than 2
   years following the completion of installation of the new machinery and equipment. The
   units used to measure productive output shall be physically comparable between the two
   periods, irrespective of sales.
   Rule 12A-1.096, F.A.C. (2011), provides in part:
   (1)(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. . . .
   (2) New Business. . . .
   (e) The Executive Director or the Executive Director’s designee will determine if
   a business qualifies for exemption as a new business, based on the facts in each particular
   case. . . .
7. A new business means an addition to, or the enlargement of, an existing facility
   or plant, or the installation of additional machinery and equipment, for the purpose of
   manufacturing, processing, compounding, or producing items of tangible personal
   property for sale that represent a distinct and separate economic activity from other items
   that have been or are being produced at that same fixed location . . . .

(3) Expanding Business. . . .
(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.a. An expanding business means . . . the installation of additional machinery and
equipment to manufacture, process, compound, or produce an item of tangible personal
property that is already being produced at that fixed location . . . .
(c)2. The physical productive output measurement must be based on physical
production data, which is directly relevant to the business and/or the product(s) being
produced. . . .
(4) Manufacturing Business Classification Factors.
(a) When an additional product is made at an existing fixed location, the
determination whether that business is classified for the exemption as a new business or
as an expanding business will depend upon whether the additional product represents an
economic activity that is distinct and separate from a product, or a group of products, that
is already being manufactured, processed, compounded, or produced at that fixed
location.
(b) The Executive Director or the Executive Director’s designee will make a
determination regarding the classification of a business’ application for exemption on a
case-by-case basis. The Department will be guided by the following factors when making
a determination:

1. The general nature of the applicant’s predominant existing business;
2. The Standard Industrial Classification (SIC) or North American Industry
   Classification System (NAICS) industry number of the existing product(s) versus the
   additional product;
3. The raw materials or components used to make the existing product(s) versus
   the additional product;
4. Whether the additional product is an alternative to, or represents a replacement
   for, the existing product(s);
5. The differences in machinery and equipment needed to make the existing
   product(s) versus the additional product; and
6. The units used to measure production of the existing product(s) versus the
   additional product.
   (c) No single factor within paragraph (b) will decide whether the additional
   product represents a distinct and separate economic activity.
   (d) Additional products that merely differ in size, color, flavor, style, packaging,
   or model line, or existing products that merely incorporate newer technology, are not
   considered to be a distinct and separate economic activity. For example, the
   manufacturing of electronic products based on digital technology is not a distinct and
   separate economic activity from the manufacturing of electronic products based on
   analog technology.

(e) The business claiming an exemption as a new business has the burden of
demonstrating that the additional product represents a distinct and separate economic
activity from a product, or group of products, that is already being manufactured,
processed, compounded, or produced at the fixed location. . . .
Discussion
When an additional product is made at a facility, the determination whether that business
should be classified as a new business or as an expanding business will depend upon whether the
additional product represents an economic activity that is distinct and separate from a product, or
a group of products, that is already being made at that facility. This determination must be made
on a case-by-case basis, based on the factors as provided by Rule 12A-1.096(4)(b), F.A.C.
With respect to Taxpayer, the New Product and prior products are all beverages. This
represents a similar business activity. However, it has been reported, and has been verified, that
New Product is properly classified under a different North American Industry Classification
System (“NAICS”) number from the NAICS number that is applicable to the prior products that
have been produced at Facility. It has also been reported that New Product contains significant
ingredients that are not present in the prior products. Notwithstanding personal preferences of
consumers, it was not Taxpayer’s intention to offer an alternative product to, or to have New
Product replace, any existing product that was made at Facility. From a general standpoint, the
machinery and equipment necessary to make New Product and the existing products are the
same. The units used to measure production are also the same (i.e., gallons or containers).
Although no single factor would decide whether New Product represents a distinct and
separate economic activity, the fact that New Product and the existing group of products have
different NAICS classifications is significant. NAICS is a statistical system that groups
businesses into a broad range of industries based on the activities that are conducted by those
businesses. From the broadest to the most specific groupings, businesses are classified into
sectors, subsectors, industry groups, and industries. With respect to the determination as to
whether a new product made by any business represents a distinct and separate economic
activity, the further apart the new versus prior products can be classified under NAICS, the more
likely it is that the new product does represent a distinct and separate economic activity. Here,
Taxpayer’s New Product and the prior products are classified in different subsectors, which
represents a significant difference.
Pursuant to sub-subparagraph (3)(b)1.a. of Rule 12A-1.096, F.A.C., an expanding
business means the installation of additional machinery and equipment to make more of an item
of tangible personal property that is already being produced at the fixed location. Further, the
definition provided by paragraph (1)(f) of that rule states that the production process generally
ends when the tangible personal property has been packaged for sale. Accordingly, the
installation of additional or different packaging lines is a part of the production process for an
expanding business project. It is not necessary for an expanding business to purchase additional
machinery and equipment to make more of a product.

In order for an expanding business to ultimately qualify for the exemption under s.
212.08(5)(b)2., F.S., that business must affirmatively show to the satisfaction of the Department
that productive output has increased by not less than 10 percent. The increase in productive
output must be measured by the output for 12 continuous months following the completion of
installation of such machinery or equipment over the output for the 12 continuous months
immediately preceding such installation. As of July 1, 2010, an expanding business has the
option to select when the post-installation measurement period begins, as long as that time
period begins no later than two years following such installation. Expanding businesses do not
have the option to change the pre-installation measurement period.
It should be noted that these measurements are based on months, not on days. Therefore,
for example, when Taxpayer completed the installation of Line 2 on July 9, 2010, the 12
continuous month measurement period following the completion of installation of the machinery
and equipment would typically be August 2010 through July 2011. At Taxpayer’s option, that
measurement period could be as late as August 2012 through July 2013. However, it should also
be noted that pursuant to s. 212.08(5)(b)3.d., F.S., no refund may be made until such time as the
new or expanding business has satisfied the criteria for exemption. Accordingly, the later the
post-installation measurement is that the expanding business selects, the longer the time it will
be before that expanding business may receive any refund of previously paid taxes.
Pursuant to Rule 12A-1.096(3)(c)2., F.A.C., the increase in productive output must be
measured by data that is directly relevant. Here, the relevant data is how many gallons of New
Product were produced or the number of containers that were filled. It is understood that the
purpose of the expanding business projects (Line 2 and Line 3) was to increase Taxpayer’s
ability to fill containers of New Product at Facility. No machinery and equipment was purchased
for use by the subcontracted company for its use in packaging New Product. Accordingly, any
number of containers or gallons of New Product filled by the subcontracted company may be
excluded from the productive output statistics, since the relevant data is how much New Product
could be directly filled by Taxpayer at Facility.
At this time it is important to understand that an exemption as a new or 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. 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 production has commenced by a new business, or that the productive
output for an expanding business has increased by not less than 10 percent. Accordingly, no
refund may be granted to an otherwise qualifying business until such time as form DR-1214 has
been filed.
Conclusions
Issue 1. In consideration of the classification factors as provided by Rule 12A1.096(4)(b), F.A.C., Taxpayer’s production of New Product represents a distinct and separate

economic activity. Accordingly, the production of New Product is considered to be a new
business for the purposes of the exemption under s. 212.08(5)(b), F.S.
Issue 2. Taxpayer will be entitled to a tentative exemption under s. 212.08(5)(b)1., F.S.,
for Line 1 when an Application for Temporary Tax Exemption Permit, form DR-1214, has been
submitted as a new business. Taxpayer will be entitled to a refund for Line 1 when Taxpayer
files an application for refund within three years of the date when such taxes were paid and
provides documentation that production of New Product did commence. The refund application
should include a copy of the determination letter issued by the Department in response to the
DR-1214 and documentation of production.
Issue 3. Taxpayer’s installation of Line 2 will qualify for an exemption as an expanding
business under the provisions of s. 212.08(5)(b)2., F.S., when: (1) an Application for Temporary
Tax Exemption Permit, form DR-1214, has been submitted as an expanding business; and (2)
Taxpayer has documented that production of New Product increased by not less than 10 percent
as measured by the 12 continuous month periods as described above.
Issue 4. Taxpayer will be entitled to a refund for Line 2 when Taxpayer files an
application for refund within three years of the date when such taxes were paid. The refund
application should include a copy of the determination letter issued by the Department in
response to the DR-1214 and documentation of the increase in productive output.
Issue 5. Taxpayer’s installation of Line 3 will tentatively qualify for an exemption as an
expanding business under the provisions of s. 212.08(5)(b)2., F.S., when a second Application
for Temporary Tax Exemption Permit, form DR-1214, has been submitted as an expanding
business for that line.
Issue 6. Taxpayer will be entitled to a refund for Line 3 when Taxpayer files an
application for refund within three years of the date when such taxes were paid. The refund
application should include a copy of the determination letter issued by the Department in
response to the DR-1214 and documentation that productive output did increase by not less than
10 percent. Taxpayer will not be liable for any unpaid taxes on purchases of machinery and
equipment for Line 3 only upon the Department’s receipt of Taxpayer’s DR-1214.
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

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