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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