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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