Did a sheet-metal job shop's $319,000 laser qualify for Florida's industrial-machinery exemption as equipment used in a new business?

Subject

Laser Cut Metal Work

Plain-English summary

The Department concluded that the manufacturer's $319,000 laser qualified for the industrial-machinery exemption as equipment used in a new business. The job shop already used a turret or punch press to make thin sheet-metal components for electronic devices. It bought the laser to cut much thicker steel-plate parts for grinding and shredding machines.

The Department had initially classified the project as an expanding business because it believed the laser-cut parts were physically comparable to the existing products. The taxpayer then submitted samples showing that the old product was a small, thin electronics component, while the new product was a quarter-inch steel plate cut into four sickle-shaped blades with a central shaft hole.

After reviewing the samples and seven comparison factors, the Department found a preponderance of differences. The products had different industrial classifications, material categories, intended uses, machinery, and production techniques. Although both were custom-fabricated metal parts measured by piece count, those similarities did not outweigh the differences.

Because the new laser products were not physically comparable to products already made at the fixed location, the laser acquisition fit the statutory new-business exemption. No sales or use tax was due on the purchase.

What this means for you

For this exemption, a "new business" could include new machinery installed at an existing plant to make a product not physically comparable to the plant's existing products. It did not require an entirely new company or facility.

The taxpayer carried the burden of proof. Product samples and detailed evidence about materials, industrial classifications, uses, machinery, and manufacturing methods changed the Department's original decision.

Common questions

Q: Why did the Department first deny the exemption? Based on the information initially available, it thought the laser-cut and turret-press products were physically comparable and classified the project as an expanding business.

Q: What was different about the new product? It was a thick steel-plate mechanical part for grinding and shredding equipment, rather than a thin sheet-metal component for an electronic device.

Q: Did one comparison factor control the result? No. The ruling said no single factor was decisive; the Department weighed the overall similarities and differences.

Q: Are products different merely because of size or model? Not under the ruling's test. Differences only in size, color, flavor, style, packaging, or model line were treated as physically comparable.

Citations and references

• Fla. Stat. § 212.08(5)(b)1. — industrial machinery and equipment exemption for qualifying new businesses
• Fla. Admin. Code R. 12A-1.096(2)(e)2. — new-business definition and physical-comparability burden
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-033

Original ruling text

SUMMARY

A job shop sheet metal manufacturer produces parts from thin metal on a turret press (punch press) for the electronics industry. The manufacturer has applied for an exemption from sales tax on the purchase of a laser which has the capability to cut thick metal parts for use in grinding and shredding machines. After consideration of all relevant facts and an examination of sample products, the Department has determined that the thick metal parts cut by a laser are not physically comparable to the thin metal parts produced on a turret press. Accordingly, the purchase of the laser qualifies for exemption from sales tax as a new business.

May 05, 1997

Re: Technical Assistance Advisement 97A-033 Sales and Use Tax; Laser Cut Metal Work Section 212.08(5)(b), F.S. Rule 12A-1.096, F.A.C.

Dear:

This is in response to your letter of March 6, 1997, requesting a technical assistance advisement (TAA) concerning the Department's prior determination that your company (hereinafter "Taxpayer") should be classified as an expanding business for the purposes of the exemption from sales and use tax on purchases of machinery and equipment pursuant to s. 212.08(5)(b), F.S.

REVIEW

Taxpayer is a job shop sheet metal manufacturer and supplier to the electronics industry. The parts which are produced and sold are made on a turret press (commonly called a punch press). The sheet metal used is less than .119 inches in

thickness. In September 1996 Taxpayer purchased a laser for the purpose of cutting metal parts of .250 to .500 inches in thickness. Metal pieces of those thicknesses could not be produced on Taxpayer's existing equipment. Although Taxpayer could process metal with a maximum thickness of .188 inches on a turret press, the wear on the press is excessive and the part produced is of lesser quality. Taxpayer applied for an exemption from sales tax on the purchase of the laser as a new business pursuant to subparagraph 1. of the exemption statute.

After consideration of the then available information, it was the Department's determination that metal parts cut by a laser were "physically comparable" to parts cut by a turret press and, therefore, the business should be classified as an expanding business pursuant to subparagraph 2. of the exemption statute. Since the purchase price of the laser was $319,000, the statutorily mandated $50,000 tax threshold for expanding businesses could not be exceeded. As a result, Taxpayer's application for exemption was denied.

CURRENT REQUEST

Taxpayer disputes the Department's determination and maintains that the metal parts cut by a laser are not "physically comparable" to parts cut by a turret press. As support for this position, Taxpayer has submitted samples of the "old" and "new" products made at the facility.

The sample "old" or prior product is a component part of an electronic device. It is a small, thin piece of sheet metal (approx. 1 3/8" X 5 9/16") with one side bent at a 90 degree angle and with 15 holes either punched or drilled into the piece. The sample "new" or additional product is a component part of a shredding machine. It is a 1/4" thick piece of steel plate (approx. 6" in diameter) cut to form four sickle-shaped blades and a central hexagonal shaft hole. (It should be noted that it was not clearly communicated or understood when Taxpayer's application for exemption was filed, that the laser cut parts were not just thicker metal components for electronic products.)

RELEVANT AUTHORITY

The following provisions of the 1996 Florida Statutes (F.S.) and the Florida Administrative Code (F.A.C.) are pertinent to the issues in this advisement.

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

1. Industrial machinery and equipment purchased for use in
   new businesses which 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....

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

2. A new business means an addition to or 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, ... 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. Such demonstration may require the submission of an independent engineer's report by the taxpayer if Department personnel are unable to determine if items are, or are not, physically comparable.

DETERMINATION

When additional products are 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(s) is physically comparable to an existing product that is already being manufactured, processed, compounded, or produced at that fixed

location. The Department must make a determination regarding the physical comparability of an additional product to an existing product on a case-by-case basis by considering the following criteria:

1. The basic product line or Standard Industrial
   Classification (SIC) Code of the business;

2. The basic raw materials or components used to make the
   products;

3. The essential nature of the products themselves;

4. Whether the additional product is an alternative to, or
   represents a replacement technology over, the existing product;

5. The intended ultimate use or purpose of the products;

6. The units used to measure production of the existing
   product and the additional product; and

7. Any other characteristics which are relevant to the
   physical comparability determination for the specific case.

No single criterion stated above will decide whether products are physically comparable. The determination will depend upon a preponderance of similarities or equivalencies of the existing and additional products. Products which merely differ in size, color, flavor, style, packaging, or model line, are considered to be physically comparable.

When the above criteria are applied to the recently provided facts, and upon an examination of the sample products, the following conclusions or observations are derived:

1. The SIC Code for sheet metal work is 3444. The SIC Code
   for fabricated plate work is 3443. This represents a difference in products.

2. The basic raw materials are sheet metal and steel plate.

Based on industry guidelines, once sheet metal exceeds .119 inches in thickness, it is classified as steel plate. This represents a difference in products.

3. The essential nature of the products is that they are
   both custom fabricated metal parts. This represents a similarity in products.

4. The additional product (the steel plate part) is not an
   alternative to the existing product (the sheet metal part). This represents a difference in products.

5. The prior products are components of electrical devices.
   The additional products are mechanical parts of grinding and shredding machines. This represents a difference in products.

6. The units used to measure production of the prior
   products and the additional products are a piece count. This represents a similarity in products.

7. The prior products and the additional products require
   different machinery and manufacturing techniques. This represents a difference in products.

Considering the above criteria, it has been affirmatively shown to the satisfaction of the Department that a preponderance of differences exists between the laser cut metal parts and the sheet metal parts that are cut by a turret press, and that the products are not physically comparable. Therefore, the acquisition of the laser by Taxpayer is eligible for the exemption provisions of s. 212.08(5)(b)1., F.S., as a new business. Accordingly, no sales or use tax is due on the purchaser of the laser.

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 advise 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 advise 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 Section 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 the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or response.

Sincerely,

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

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