Was a textile mill's new in-house dye operation a new business or an expansion for Florida's machinery exemption?

Subject

New or Expanding Business Exemption

Plain-English summary

The dye house was an expansion of the existing textile business, not a new business. Moving into adjoining space in the same building enlarged the same fixed location, even though the spaces previously had separate addresses, utilities, and walls.

The Department also found dyed cloth physically comparable to the existing greige cloth. Adding color was compared to changing a product variant, not creating a fundamentally different product.

What this means for you

Separate rooms, addresses, and equipment did not establish a new fixed-location business. The Department examined the broader plant site and the intrinsic nature of the product.

Common questions

Did the former tenant's separate space create a new facility? No.

Was dyed cloth a new, noncomparable product? No.

Did the equipment qualify for the requested new-business exemption? No.

Citations and references

• Fla. Stat. §§ 212.08(5)(b), 212.21, and 213.22
• Fla. Admin. Code r. 12A-1.096

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-027

Original ruling text

May 02, 1994

Re: TAA 94A-027
Sales and Use Tax - New or Expanding Business Exemption
Rule 12A-1.096, F.A.C.
Section 212.08(5)(b), F.S.
Taxpayer: XXX
FEI: XXX
STN: XXX

Dear :

This reply is to your letter dated October 7, 1993, written on
behalf of your client, XXX (hereinafter referred to as
"Taxpayer"). In your letter, you requested the issuance of a
Technical Assistance Advisement regarding an exemption from
sales tax on purchases of machinery and equipment, pursuant to
Section 212.08(5)(b), Florida Statutes. This response
constitutes a Technical Assistance Advisement under Chapter 1211, Florida Administrative Code, and is issued to you under the
authority of s. 213.22, Florida Statutes.

DISCUSSION OF FACTS

Your letter provides the following information in part:

"[Taxpayer] commenced business operations in 1985 as a
textile knitting mill. [Taxpayer] purchased yarn in spools
and knitted the yarn into greige goods. [Taxpayer] then
either sold the greige goods to customers or shipped the
greige goods to dye-houses outside Florida for dyeing and
sale to customers.

"In May, 1989, [Taxpayer] began purchasing dye equipment to
establish its own dye-house in XXX. [Taxpayer] began its
dye-house operations in October, 1990. [Taxpayer] did not
pay any sales or use tax on most of the purchased equipment
which was purchased from equipment vendors located outside
the United States. [Taxpayer] thereafter filed an

application for a Temporary Tax Exemption Permit as a new
business for the purchases of dyeing equipment made during
the period May 1, 1989 through September 30, 1991.

"Upon its inception of the knitting business in 1985,
[Taxpayer] conducted its operations at [Space A], XXX.
[Taxpayer] occupied approximately XXX square feet of a XXX
square foot building to conduct its knitting operation.

"The remainder of the building was bifurcated into two
separate parts: [Space B] and [Space C], both operated by
[Freight Company], a freight forwarding business. In order
to commence the dye-house operations, [Taxpayer] acquired
possession of the space at [Space B] and [Space C] from
[Freight Company].

"The space previously occupied by [Freight Company] was
distinct from the space utilized by [Taxpayer]. For
example, the [Freight Company] space had a separate post
office address and was physically divided from the
[Taxpayer] space by walls. There was no interior access
between the two spaces. [Taxpayer] had to demolish walls
and reconfigure the space in order to convert the [Freight
Company] space into a dye-house. During the time that
[Freight Company] occupied the space, separate telephone
and electric lines serviced the premises.

"[Taxpayer] did not close an existing manufacturing
facility of its own, and no third party entity closed a
manufacturing facility in Florida because [Taxpayer] opened
the new dye-house.

"After [Taxpayer] opened its new dye-house, the knitting
operation continued to sell greige goods to customers or
alternatively, send greige goods to the dye-house for
dyeing and finishing. [Taxpayer] also purchased greige
goods from third-party manufacturers for dyeing and sale to
customers.

"On April 5, 1993 the Department determined that
[Taxpayer's] purchase of the dye-house equipment did not

qualify for the `new business' exemption under Section
212.08(5)(b)....

"On May 26, 1993 [Taxpayer's] attorneys requested that the
Department reconsider its determination....

"On September 7, 1993 the Department reaffirmed its
position that purchases of equipment did not qualify for
the sales tax exemption under Section 212.08(5)(b)."

REQUESTED ADVISEMENT

In its determination of April 5, 1993 and reaffirmation of
September 7, 1993, the Department maintained that Taxpayer's
business was an "expanding business" for purposes of the
exemption from sales tax provided by Section 212.08(5)(b), F.S.
Taxpayer maintains that its facility for dyeing greige goods is
a "new business" and seeks a ruling that purchases of certain
industrial machinery and equipment during the period May 1,
1989, through September 30, 1991, qualify for the exemption
provided by Section 212.08(5)(b)1., F.S.

RELEVANT AUTHORITY

The following statutory and regulatory provisions are pertinent
to your request:

Section 212.08(5)(b), F.S., provides in part:

"(b) Machinery and equipment used to increase productive
output.
"1. Industrial machinery and equipment purchased for use in
new businesses which manufacture, process, compound, or
produce for sale, or for exclusive use in spaceport
activities as defined in s. 212.02, 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 of that date.
"2. Industrial machinery and equipment purchased for use in
expanding manufacturing facilities or plant units which
manufacture, process, compound, or produce for sale, or for
exclusive use in spaceport activities as defined in s.
212.02, items of tangible personal property at fixed
locations in this state are exempt from any amount of tax
imposed by this chapter in excess of $100,000 per calendar
year 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 business by
not less than 10 percent.
...
"4. The department shall promulgate rules governing
application for, issuance of, and the form of temporary tax
exemption permits; provisions for recapture of taxes; and
the manner and form of refund applications and may
establish guidelines as to the requisites for an
affirmative showing of increased productive output,
commencement of production, and qualification for
exemption." (Emphasis supplied)

Rule 12A-1.096, F.A.C., provides in part:

"Industrial Machinery and Equipment for Use in a New or
Expanding Business.
"(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 being permanently affixed to one location or plant site, or any portable plant which 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 thefixed location' for purposes of
this rule are limited to the immediate permanent location
or plant site.
...
"(c) `Physically comparable' means the similarity or

equivalency of the characteristics of the items of tangible
personal property being manufactured, processed, compounded
or produced... The taxpayer shall have the burden of
demonstrating that items of tangible personal property are
not physically comparable to other items which have been or
are being produced at that particular fixed location."
...
"(e) `Production process' means production activities
beginning when raw materials are delivered at the fixed
location of the new or expanding facility 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.... One production process may
encompass more than one fixed location if the qualifying
business transfers work-in-process from the first fixed
location to the second fixed location for further
manufacturing, processing, compounding or producing of the
items of tangible personal property for sale or for
exclusive use in spaceport activities as defined in s.
212.02, F.S."

Rule 12A-1.096(2)(e), F.A.C., further provides in pertinent
parts:

"(e) The Executive Director or the Executive Director's
designee shall determine if a business qualifies for a new
business status based on the facts in each particular case
using the following guidelines, provided the requirements
of paragraphs (2)(a), (b), (c), and (d) are complied with:
"1. A new business means a new facility or plant which
manufactures, processes, compounds or produces for sale, or
for exclusive use in spaceport activities as defined in s.
212.02, F.S., an item of tangible personal property at a
fixed location in the state.
"2. A new business means an addition to or an enlargement
of an existing facility or plant or the installation of
additional machinery and equipment for the purpose of
manufacturing, processing, compounding or producing for
sale, or for exclusive use in spaceport activities as
defined in s. 212.02, F.S., items of tangible personal
property which are not physically comparable to other items

which have been or are being produced at that particular
fixed location. The taxpayer shall have the burden of
demonstrating that items of tangible personal property are
not physically comparable to other items which have been or
are being produced at that particular fixed location...."
"3. A new business means opening a new facility or plant,
at a fixed location in this state, which manufactures,
processes, compounds or produces for sale, or for exclusive
use in spaceport activities as defined in s. 212.02, F.S.,
an item of tangible personal property provided no other
facility or plant which manufactured, processed, compounded
or produced for sale, or for exclusive use in spaceport
activities as defined in s. 212.02, F.S., a physically
comparable item of tangible personal property, at a fixed
location in this state, was closed to open the new facility
or plant." (Emphasis Supplied)

Rule 12A-1.096(3)(c), F.A.C., provides in part:

"(c) The Executive Director or the Executive Director's
designee shall determine if a business qualifies for an
expanding business status based upon the facts of each case
using the following guidelines, provided the requirements
of paragraphs (3)(a) and (e) are complied with:
"1. An expanding business means an addition to, the
modernization or enlargement of an existing facility or the
installation of additional machinery or equipment which
manufactures, processes, compounds or produces for sale, or
for exclusive use in spaceport activities as defined in s.
212.02, F.S., an item of tangible personal property which
is already being produced at the fixed location in this
state or which is physically comparable to the item of
tangible personal property which is already being produced
at the fixed location in this state." (Emphasis Supplied)

TAXPAYER'S ARGUMENT

Your letter, on page 3, provides in part:

"Rule 12A-1.096 [,F.A.C.] defines the term `new business'
in three alternative definitions. The taxpayer must

satisfy only one of the definitional requirements to be
considered a new business'. It is the taxpayer's position that it qualifies as anew business' under all three
definitions, however."

ARGUMENT 1

You argue, on page 4, that Taxpayer qualifies as a new business
as described in Rule 12A-1.096(2)(e)1., F.A.C.

"[Taxpayer] (1) opened a new facility of [sic] plant (2)
which manufactures for sale an item of personal tangible
property in the state (3) at a fixed location.

"The business premises previously occupied by [Freight
Company] at [Space B] and [Space C] constitutes a new
facility or plant.

"[Taxpayer] manufactures or processes for sales (sic) items
of tangible personal property at the new facility.
[Taxpayer] dyes greige goods either manufactured by
[Taxpayer] at its original plant or purchased from third
parties and sells the dyed fabric to customers in the
ordinary course of business.

"The space at [Space B] and [Space C] constitutes a `fixed
location' as that term is defined."

In support of this conclusion, you rely upon the definition of
"fixed location" as described in Rule 12A-1.096(1)(a), F.A.C.,
and maintain, on page 5, that Rule 12A-1.096(2)(e)1., F.A.C.,
"...does not provide that the new business cannot be vertically
integrated into an existing business." You further state:

"To determine that the opening of the new facility to dye
greige goods is not a `new business' is to frustrate the
legislative intent in enacting Section 212.08(5)(b)[,F.S].
The purpose of enacting Section 212.08(5)(b) was to
encourage businesses to open new manufacturing facilities
in Florida. Prior to the opening of the dye-house,
[Taxpayer] sent its greige goods to dye-houses located in

the XXX. After it opened the dye-house, [Taxpayer]
transferred the greige goods for dyeing at the new facility
in XXX...."

ARGUMENT 2

You next argue, on page 6, that the business also satisfies the
requirements of Rule 12A-1.096(2)(e)2., F.A.C.

"The elements which must be satisfied are that (1) there
has been an addition to or enlargement of an existing
facility (2) for the purpose of manufacturing for sale (3)
items of tangible personal property which are not
physically comparable to other items which have been or are
being produced at that particular fixed location.

"For purposes of this analysis only, we will assume that
there has been an enlargement of an existing facility
rather than the opening of a new one. It is without
dispute that the first two elements have been satisfied.
The issue therefore arises whether items of tangible
personal property which are not physically comparable to
other items which have been or are being produced at that
particular fixed location are, in fact, being produced at
the new location."

You further state that "If `fixed location' is interpreted
broadly to include the entire structure rather than the separate
parts, then it is our contention that the tangible personal
property produced by the dye-house operation is not physically
comparable to the tangible personal property produced by the
knitting operation."

"[Rule 12A-1.096(1)(c), F.A.C.,] defines `physically
comparable' as similarity or equivalency of characteristics
of the items of tangible personal property being
manufactured, processed, compounded or produced. It is our
contention that the tangible personal property resulting
from the dye-house is not similar or equivalent to the
property produced by the knitting plant. [Rule 12A1.096(3)(d), F.A.C.,] contains examples of items of

tangible personal property which are similar or comparable
to each other. Those examples include tennis shoes as
being comparable to track shoes and domestic sausage being
comparable to smoked sausage. It should be noted that
track shoes and tennis shoes are each finished products as
are domestic sausages and smoked sausages. However, [Rule
12A-1.096(2)(f), F.A.C.,] contains examples of activities
presumed to be new businesses. Included in the examples is
a company that manufactures automobile engine manifolds
enlarges its existing facility to manufacture automobile
engines. Producing an engine manifold is merely part of
the process of producing an automobile and producing an
entire engine is also only part of the process of producing
an automobile. Yet, a manifold and engine are not
physically similar. By comparison, there are many stages
in producing a garment beginning with the planting of the
cotton plant and ending with sewing the garment. Knitting
the yarn to produce greige goods is one step in the process
and dyeing the greige goods is another step. There is as
much a distinction between greige fabrics and dyed fabric
as there is between a manifold and an engine."

ARGUMENT 3

Your final argument, on page 7, is that Taxpayer's business also
qualifies as a new business under Rule 12A-1.096(2)(e)3., F.A.C.

"[Taxpayer] (1) opened a new facility (2) at a fixed
location in this state, (3) which manufactures, processes
or produces for sale, (4) an item of tangible personal
property and (5) no other facility or plant which
manufactured or processed a physically comparable item of
tangible property at a fixed location in this state was
closed.

"...It is clear that [Taxpayer] manufactures or processes
an item of tangible personal property by engaging in the
dyeing business at the new facility. Rule 12A1.096(1)(d)[, F.A.C.] defines the term `process' to mean a
series of operations conducing to an end which is an item
of tangible personal property for sale.

"Finally, no manufacturing plant was closed by [Taxpayer]
or any other entity."

DEPARTMENT'S RESPONSE

RESPONSE TO ARGUMENT 1

The definition of "fixed location" (or new facility) is a
geographical concept limited to an immediate permanent location
or plant site. Accordingly, a fixed location may be broadly
construed to involve a single building or an industrial complex
covering many acres. The concept is not directly related to
finite mailing addresses. Since Taxpayer and Freight Company
occupied the same building (a fixed location), it is the
position of the Department that when Taxpayer in Space A moved
into and occupied Freight Company's former Spaces B and C, this
event was in the nature of an addition to or an enlargement of
an existing facility and not the opening of a new facility.
Therefore, Taxpayer has not opened a new facility within the
guideline as presented in Rule 12A-1.096(2)(e)1., F.A.C.

RESPONSE TO ARGUMENT 2

The Department, when making the determination as to what is
physically comparable, looks to the intrinsic nature of the
tangible personal property. Paragraph (2)(f) of Rule 12A-1.096,
F.A.C., provides examples of activities where a new product is
being produced. Your letter mentioned the example where a
company, which previously manufactured automobile engine
manifolds enlarged its facility to produce automobile engines
and was classified as a new business.

The Department agrees with you in that a manifold is a part of
an engine which in turn is a part of an automobile. The
production process from manifold to automobile may be comparable
to the production process from cloth to garments. However, it
is the Department's position that the production process from
manifold to engine is not comparable to the process from greige
cloth to dyed cloth.

The appropriate comparison to Taxpayer's situation would be the
example found in subparagraph (3)(d)4. of Rule 12A-1.096, F.A.C.
In that example, the maker of a domestic sausage who added a
production line to make smoked sausage was classified as an
expanding business. The intrinsic nature of that product is
sausage. The intrinsic nature of Taxpayer's product is cloth.
The process of changing or adding a meat flavor is very
comparable to the changing or addition of a color to cloth. It
is the Department's position that dyed cloth is physically
comparable to greige cloth. Accordingly, Taxpayer is not
producing a new product for the purposes of the exemption.

RESPONSE TO ARGUMENT 3

The guidelines presented in paragraph (2)(e) of Rule 12A-1.096,
F.A.C., are various factors to be considered and are not the
only criteria with which to make the determination as to whether
a business is a new business for the purposes of the exemption.
The Department accepts the fact that no manufacturing plant was
closed down by Taxpayer or anyone else in order to open the
cloth dyeing operation. However, this fact alone is not
sufficient in order to classify Taxpayer as a new business.

SUMMARY

Subparagraph 212.08(5)(b)4., F.S., provides that the Department
shall promulgate rules governing applications for, issuance of,
and the form of temporary tax exemption permits, and may
establish guidelines as to the qualifications for the exemption
provided by s. 212.08(5)(b), F.S.

Section 212.21, F.S., makes it clear that it is the legislative
intent that exceptions or exemptions from sales and use tax are
to be strictly construed and not expanded beyond their express
terms. Furthermore, the courts have consistently held that
exemptions contained in taxing statutes are special favors
granted by the Legislature and should be strictly construed
against the taxpayer.

Department of Revenue v. Anderson, 403 So.2d 397 (Fla.
1981); Housing by Vogue, Inc. v. Department of Revenue, 403

So.2d 478 (Fla. 1 DCA 1981); Pioneer Oil Co. v. Department
of Revenue, 401 So.2d 1319 (Fla. 1981); State ex rel. Szabo
Food Services, Inc. v. Dickinson, 286 So.2d 529 (Fla. 1973)

In May, 1992, the Department promulgated Administrative Rule
12A-1.096, F.A.C. The purpose of the rule was to standardize
policies and procedures used by the Department, provide
definitions, and to establish and implement requirements and
conditions relating to the exemptions provided by Section
212.08(5)(b), F.S.

In making its determination as to whether a business is to be
considered new or an expansion, the Department relies on the
language contained in Section 212.08(5)(b)1., F.S., which
provides that the taxpayer must make an affirmative showing, to
the satisfaction of the Department, that such items are used in
a new business in this state.

The Department has historically held that even though products
may vary in size, shapes or even in uses, if a so-called new
product is similar to the company's existing manufactured
products, the Department will consider this to be an expansion
of the business, unless the product is so unique that it would
be considered a new business.

The tangible personal property manufactured for sale by Taxpayer
is fabrics. While we agree that there are additional steps in
producing the dyed fabrics, the Department maintains that the
"new product", dyed fabrics, is similar in nature to greige
fabrics. Therefore, the new product is "physically comparable"
as described in Rule 12A-1.096(1)(c), F.A.C., and would qualify
as an expansion of a business, as described in Rule 12A1.096(3)(c)1., F.A.C.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 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 and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Delores Overcash
Technical Assistant

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