Was an existing Florida manufacturer's new ignition-module line a new business or an expansion for the machinery exemption?

Subject

New-Business Classification for Ignition-Module Production

Plain-English summary

The Department reversed its earlier classification and concluded that the manufacturer's ignition-module production was a new business for the machinery exemption, not merely an expansion of its existing rectifier business. The additional product was not physically comparable to the electrical rectifiers already made at the same facility.

The first review had found similarities: both products shared one four-digit SIC code, used conductive metals and plastic, were counted by pieces, and were viewed as serving the same broad market segment. After the manufacturer supplied more facts and product samples, the Department found more significant differences.

Ignition modules contained electronic circuitry on ceramic substrates and required calibration, printing and firing conductive and resistive materials, laser calibration, surface-mount assembly, wire bonding, sophisticated testing, specialized equipment, and specially trained employees. Rectifiers used heatsinks and diodes, heavy soldering, simpler testing, and no calibration. The products also performed different functions and were sold to different customer segments.

What this means for you

Adding a product at an existing plant did not automatically make the activity an expansion. The Department used a fact-specific physical-comparability test that considered product classification, raw materials, function, equipment, production units, markets, and other relevant characteristics.

No one factor controlled. Detailed evidence about components, production technology, workforce skills, and actual customers changed the Department's decision in this case.

Common questions

Q: What was the Department's original decision? It initially treated ignition-module production as an expansion because the modules appeared physically comparable to the existing rectifiers.

Q: Why did the Department reverse that decision? Product samples and added facts showed substantially different circuitry, manufacturing processes, machinery, calibration, worker training, functions, and markets.

Q: Did sharing the same SIC code make the products comparable? No. SIC code was only one factor, and no single factor was determinative.

Q: Were ordinary model or style differences enough to create a new business? The ruling said products differing merely in size, color, flavor, style, packaging, or model line were generally physically comparable.

Q: Did the ruling establish a general precedent? No. The Department expressly said it should not be treated as precedent because the implementing rule's comparability process and factors were being amended.

Citations and references

• Fla. Stat. § 212.08(5)(b) — new and expanding business machinery exemption
• Fla. Admin. Code r. 12A-1.096 — implementing rule under amendment when the ruling was issued
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-010

Original ruling text

SUMMARY

A manufacturer produced electrical rectifiers for
automotive applications. The manufacturer later purchased
machinery and equipment to begin the production of ignition
modules at the same facility. The manufacturer applied for
an exemption from sales and use tax as a new business for
the ignition module machinery and equipment. However, in
the Department's opinion, based on then available
information, ignition modules were physically comparable to
electrical rectifiers. Accordingly, the Department approved
the application for exemption as an expanding business.
The manufacturer then requested that the Department
reconsider its prior determination. The manufacturer
submitted additional facts and product samples. After
consideration of the product components, manufacturing
techniques, and the product markets, the Department has now
determined that the electrical rectifiers and ignition
modules are not physically comparable and that the
application exemption should be approved as a new business.

Mar 09, 1998

Re: Technical Assistance Advisement 98A-010
Sales and Use Tax
New/Expanding Business Exemption
Section 212.08(5)(b), F.S.

Dear :

This is in response to your request for a Technical
Assistance Advisement regarding XXX (hereinafter "Manufacturer")
classification as an expanding business under the provisions of
s. 212.08(5)(b), F.S., for the production of ignition modules.

BACKGROUND

Manufacturer operates a facility which produced electrical

rectifiers for automotive applications. In 1996, Manufacturer
purchased machinery and equipment to begin the production of
ignition modules at the same facility. Manufacturer applied for
an exemption from sales and use tax as a new business for the
ignition module machinery and equipment. However, in the
Department's opinion, ignition modules were physically
comparable to electrical rectifiers. Accordingly, the
Department approved Manufacturer's application for exemption for
the production of ignition modules as an expanding business.
Manufacturer now requests that the Department reconsider its
prior determination and approve the application for exemption as
a new business.

DISCUSSION

Business Classification

When an additional product is made at an existing fixed
location, the determination as to whether that business is
classified as new or expanding is made on a case-by-case basis
and will depend upon whether the additional product is
physically comparable to an existing product that is already
being made at that fixed location. Generally, products which
merely differ in size, color, flavor, style, packaging, or model
line, are considered to be physically comparable.

In the Department's prior determination, the Department
considered and balanced the following factors:

1. The principal product or group of products made by, or
   the four-digit Standard Industrial Classification (SIC)
   Code of, the business;
2. The similarity of the raw materials or components used
   to make the existing and additional products;
3. Whether the additional product performs the same
   function as, or represents an improved version of, the
   existing product;
4. Whether production of the existing and additional
   products can be performed on similar machinery and

equipment;

5. The similarity of units used to measure production of
   the existing and additional products; and
6. Any other characteristics which are relevant to the
   physical comparability determination for the specific case.

All of the above factors were considered before the
determination was made. Depending on the particular industry,
one factor may have greater significance than another. No
single factor is determinative. When these factors were applied
to the prior product (rectifiers) and the additional product
(ignition modules) produced at the facility, the following
conclusions or observations were derived:

1. The SIC Code for both automotive rectifiers and ignition
   modules is 3694 (electrical equipment for internal
   combustion engines).
2. The component parts for both rectifiers and ignition
   modules are essentially the same (conductive metals and
   plastic), except that the ignition modules also contain
   circuitry components.
3. The additional product (ignition modules) does not
   perform the same function as the existing product
   (rectifiers).
4. The production of the additional product apparently
   cannot be performed on existing machinery and equipment.
5. The units used to measure production of rectifiers and
   ignition modules are both piece counts.
6. The prior products and the additional products are both
   sold to the same market segment.

Factors 1, 2, 5, and 6 represented similarities in the
products, while factors 3 and 4 represented differences. In
consideration of those observations, it was the position of the
Department that the production of ignition modules represented

an expansion of Manufacturer's business of electrical automotive
devices.

Additional Product Information

Manufacturer has provided additional information about the
composition and manufacturing of the electrical rectifiers and
ignition modules, as well as samples of those products. The
following information has been provided by Manufacturer.

... [T]he basic component of the ignition module contains
electronic circuitry on ceramic substrates whereas the
rectifier contains no electronic circuitry, only heatsinks
and diodes. Ignition modules require precise calibration
in order for the product to transmit correct voltage.
Rectifiers require no calibration of the diodes[;] without
any adjustments, the diodes automatically convert AC
current to DC current.

Also, the rectifiers are made in a dedicated area, using
heavy soldering techniques, and relatively simple testing
and, as discussed, do not require any calibration.
Conversely, ignition modules use exclusive assembly
technologies which include: print and fire of conductive
and resistive materials on ceramic substrates; laser
calibration of resistors; micro electronics substrate
assembly using surface mount technology, wire bonding
interconnect; and, sophisticated automatic testing. In
addition, the labor skills necessary to manufacture the
products are not similar. The new employees hired to
produce the ignition modules had extensive, highly
specialized training. Employees on the rectifier line did
not have the technical knowledge to operate the ignition
module manufacturing equipment.

Lastly, the products are sold to two entirely different
market segments. Rectifiers are marketed to alternator
rebuilders. This segment of customers generally falls under
SIC code 7620, Electrical Repair Shops. Ignition modules
are sold to Gasoline Service Stations (SIC 5540) and
General Automotive Repair Shops (SIC 7538). Rectifiers can

be rebuilt by reusing the heatsinks and attaching new
diodes. However, ignition modules are almost never rebuilt
due to the small circuitry. In marketing these products,
[Manufacturer] uses a special catalog for the ignition
modules to better serve the two market segments.

RECONSIDERATION OF PRIOR DETERMINATION

In consideration of the above additional facts and after an
examination of samples of the subject products, the Department
finds that there is a significant difference in the components
of the products requiring different machinery and equipment to
produce. Further, the products are sold to two different market
segments.

Therefore, the Department now finds that sufficient
differences exist between the rectifiers and ignition modules,
and the products are not physically comparable when considering
the factors as used by the Department in its prior determination
for the purposes of administering the exemption. Accordingly,
Manufacturer's production of ignition modules should have been
classified as a new business for the purposes of the exemption
provided under s. 212.08(5)(b), F.S.

LIMITATION ON DETERMINATION

As stated previously, the determination as to whether a
business is classified as new or expanding depends upon whether
the additional product is physically comparable to an existing
product. The Department is currently in the process of amending
Rule 12A-1.096, F.A.C., which implements the new and expanding
business exemption under s. 212.08(5)(b), F.S. The amendments,
in part, will be clarifying the process and factors for making
determinations about physical comparability. The rule
provisions concerning that process and factors may change from
those used in this advisement as the rule promulgation process
progresses. Accordingly, the above determination for
Manufacturer should not in any way be considered as setting a
precedent for future determinations.

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
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