Was mandrill wire used to shape catheters exempt as a manufacturing material in Florida?

Subject

Mandrill Wire Used to Manufacture Catheters

Plain-English summary

The catheter manufacturer's purchase of mandrill wire was subject to Florida tax. The wire was essential to the manufacturing process: catheter material was extruded over it, it maintained the tube's internal diameter, and it supported the tube during braiding. But the manufacturer removed and discarded the wire before the catheter was used, so it was not part of the finished product.

Florida's cited component-material rule excluded industrial materials from taxable retail sale only when they were intended to and actually did become a component or ingredient of the finished product for resale. Materials used and consumed in fabrication without remaining in the finished product did not qualify.

The ruling therefore treated the wire as a taxable manufacturing input even though it directly affected the catheter's dimensions and performance.

What this means for you

A manufacturing material is not exempt merely because production cannot occur without it or because it determines the finished product's characteristics. Under this ruling, the decisive point was physical incorporation: the material had to be intended to and actually remain as a component or ingredient of the product sold.

Manufacturers should distinguish component materials from tools, supports, forms, and other inputs that are removed, discarded, dissipated, or consumed during production.

Common questions

Q: Why was the mandrill wire important in production? It established the catheter's internal diameter and supported the tube during braiding so it would not collapse.

Q: Did that importance make the wire tax-exempt? No. The wire was removed and discarded, so it did not become a component or ingredient of the finished catheter.

Q: What materials qualified for the cited component exemption? Materials intended to and actually becoming a component or ingredient of the finished product for sale.

Q: Did the ruling decide whether the catheter itself was taxable? No. It addressed the manufacturer's purchase of mandrill wire, not the tax treatment of the finished catheter sale.

Q: Can another manufacturer rely on this ruling? No. The advisement binds the Department only for the requester and the specific production facts described.

Citations and references

• Fla. Stat. § 212.05(1)(a)1.a, (b) — sales and use tax on tangible personal property
• Fla. Stat. § 212.02(4), (14)(a), (14)(c), (20) — cost price, retail sale, component materials, and use
• Fla. Admin. Code r. 12A-1.043(1)(a), (b)1, (d) — direct materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-012

Original ruling text

SUMMARY

Rule 12A-1.043(1)(a)(b)1., and (d), F.A.C., states that direct materials are those that are consumed in producing the property, or that become a component or ingredient of the finished product. Section 212.02(14)(c), F.S., provides an exemption from tax for materials which are intended to and do become a component or ingredient of the finished product for sale. However, the statute does not provide an exemption for materials which are used in the fabrication, converting, or processing of tangible personal property for sale which do not become a component or ingredient of the finished product for sale. The purchase of wire, which is used in the manufacture of catheters, is subject to tax.

Mar 13, 1998

Re: TAA 98(A)-012
Purchase of Wire Used in Manufacturing Catheters Sections 212.02(4), (14), and (20), 212.05(1)(a)1.a., and (b), F.S.

Dear :

This is in response to your letter of December 2, 1997, in which you requested the issuance of a technical assistance advisement on behalf of your client XXX [hereinafter "Taxpayer"], regarding the taxability of its purchase of mandrill wire used in the manufacture of catheters.

You explained that a catheter is a medical device which is used in the diagnosis or treatment of patients. Your letter provides in part:

A catheter is a flexible tube, or small hose, that is formed when the base material, after being mixed and cooked in an oven, is coated, or extruded, over a mandrill wire to

create the first layer of a catheter tube. In terms of quality control, the catheters manufactured by [Taxpayer] allow virtually no margin for error in the size, smoothness or flexibility of each and every catheter made. This control is aided by the use of high quality mandrill wire in the manufacturing process.

Mandrill wire comes on a spool, hundreds of feet long, which is used uncut in each manufacturing run for whatever catheter size is being made. With the mandrill wire still inside, the catheter is run through another machine wherein very thin braiding wire is woven around the tube. Over this, yet another layer of materials is extruded to complete the body of the catheter. The entire process is completed for one long catheter from the same original spool of wire. After various quality inspections, the catheter is then cut into its specific product links and the mandrill wire removed. The mandrill wire is an integral component in the manufacture of these catheters, but is discarded before the catheter's use. The mandrill wire is not a part of the final product. The manufacturing process described here is the same for each type or model of catheter made by [Taxpayer].

While not physically present in the final catheter, the mandrill wire establishes the critical I. D. of the catheter. It alone supports the stress associated with the braiding operation, for without it, the extruded tube would collapse, destroying the catheter. Subsequent layers that are built around the mandrill wire establish a foundation for unique characteristics such as torque control, uniform radial support, felt "pushability" and monitored laminar flow of the diagnostic media. All these critical issues are affected by the mandrill wire in the manufacture of the catheter.

You offered Rule 12A-1.043(1)(b)1., and (d), F.A.C., as authority to exempt your client's purchase of mandrill wire used in the manufacture of catheters.

APPLICABLE AUTHORITY

Section 212.05(1)(a)1.a., and (b), F.S., provides in part:

212.05 Sales, storage, use tax.--It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property in this state.... (1) For the exercise of such privilege, a tax is levied on each taxable transaction or incident, which tax is due and payable as follows: (a).1.a. At the rate of 6 percent of the sales price of each item or article of tangible personal property when sold at retail in this state, computed on each taxable sale for the purpose of remitting the amount of tax due the state, and including each and every retail sale.... (b) At the rate of 6 percent of the cost price of each item or article of tangible personal property when the same is not sold but is used, consumed, distributed, or stored for use or consumption in this state.

Section 212.02(20), F.S., provides:

(20) "Use" means and includes the exercise of any right or power over tangible personal property incident to the ownership thereof, or interest therein, except that it does not include the sale at retail of that property in the regular course of business.

Section 212.02(4), F.A.C., provides:

(4) "Cost price" means the actual cost of articles of tangible personal property without any deductions there from on account of the cost of materials used, labor or service costs, transportation charges, or any expenses whatsoever.

Section 212.02 (14)(a), and (c), F.S. provides:

(14)(a) "Retail sale" or a "sale at retail" means a sale to a consumer or to any person for any purpose other than for resale in the form of tangible personal property or

services taxable under this chapter, and includes all such transactions that may be made in lieu of retail sales or sales at retail. (c) "Retail sales," "sale at retail," "use," "storage," and "consumption" do not include materials, containers, labels, sacks, or bags intended to be used one time only for packaging tangible personal property for sale or for packaging in the process of providing a service taxable under this chapter and do not include the sale, use, storage, or consumption of industrial materials, including chemicals and fuels except as provided herein, for future processing, manufacture, or conversion into articles of tangible personal property for resale when such industrial materials, including chemicals and fuels except as provided herein, become a component or ingredient of the finished product. However, said terms include the sale, use, storage, or consumption of tangible personal property, including machinery and equipment or parts thereof, purchased electricity, and fuels used to power machinery, when said items are used and dissipated in fabricating, converting, or processing tangible personal property for sale, even though they may become ingredients or components of the tangible personal property for sale through accident, wear, tear, erosion, corrosion, or similar means. (Emphasis Supplied)

DEPARTMENT RESPONSE

Rule 12A-1.043(1)(a)(b)1., and (d), F.A.C., cited in your request, addresses direct materials and states that such materials are those that are consumed in producing the property, or that become a component or ingredient of the finished product. For authority on this issue, we look to section 212.02(14)(c), F.S., which provides an exemption from tax for materials which are intended to and do become a component or ingredient of the finished product for sale. However, the statute does not provide an exemption for materials which are used in the fabrication, converting, or processing of tangible personal property for sale which do not become a component or ingredient of the finished product for sale as outlined in your letter quoted above. Therefore, your client's purchase of

mandrill wire, which is used in the manufacture of catheters, is subject to tax.

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 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 the response.

Sincerely,

Richard S. Harrod
Senior Tax Specialist
Technical Assistance & Dispute
Resolution

RSH/h
Control No.32094