Does leased quality-control equipment qualify for Georgia's manufacturing exemption when it is also used for research and development?

Plain-English summary

The leased quality-control equipment qualified for the manufacturing exemption. It tested incoming raw materials, work in process, or finished goods at the manufacturing plant, and those tests were necessary to ensure material quality before further production.

The equipment also had research-and-development uses, but the substantial-purpose test favored manufacturing because the company represented that each item was used in manufacturing more than one-third of its total operating time.

Common questions

Q: Does mixed manufacturing and R&D use automatically defeat the exemption?

A: No. A qualifying manufacturing purpose prevailed when it exceeded one-third of the equipment's total use.

Q: Why was quality-control testing considered integral?

A: The manufacturer depended on testing incoming materials against its standards before using them in production.

Citations and references

• O.C.G.A. § 48-8-3(34) -- former manufacturing machinery exemption
• O.C.G.A. § 48-8-3.2(d)(2), (e)(4) -- substantial purpose and quality-control equipment
• Ga. Comp. R. & Regs. r. 560-12-2-.62(2)(k), (3), (4)(b)(4) -- manufacturing equipment tests

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2013-17

Original ruling text

State of Georgia
Douglas J. MacGinnitie
Commissioner

Department of Revenue

Frank M. O’Connell
Director

Administrative Division – Office of Tax Policy
Suite 15107
1800 Century Blvd.
Atlanta, Georgia 30345-3205
(404) 417-6649

February 25, 2013

Georgia Letter Ruling SUT No. 2013-02-25-01 Manufacturing
This letter is in response to your ruling request regarding the application of Georgia’s sales and
use tax exemption for manufacturing machinery and equipment to certain quality control
equipment used in the company’s manufacturing process.
Facts
The Company is an American manufacturer of certain products. In the manufacture of its
products, the Company leases various types of quality control equipment (“QC equipment”) for
use in its manufacturing process. The QC equipment was delivered to the Company in the state
of Georgia. The Company historically paid Georgia state and local sales taxes to vendors on
these lease agreements. The Company recently contacted the vendor to discuss the submission of
a refund claim to the State of Georgia for the sales tax paid on the aforementioned lease
payments. The basis of the claim by the vendor is that the equipment used is exempt from sales
tax because the “substantial purpose” of the equipment is to be used in the Company’s
manufacturing process.
The QC equipment is used by the Company’s manufacturing organization for quality control
testing of incoming raw materials during the manufacturing of the Company’s products. Below
are several key activities for which the QC equipment is used in the manufacturing process:
[REDACTED]
The chart below lists the QC equipment used by the Company in its manufacturing operations
and includes the percentage of time that each piece of equipment was used in manufacturing and
R&D activities respectively. The percentages were calculated based on time studies performed
by the Company that measured the amount of time in which a piece of equipment was used in
quality control testing during the manufacturing process and the amount of time the same piece
of equipment was used in R&D activities.
[CHART REDACTED]

An Equal Opportunity Employer

February 25, 2013
Page 2 of 3

Issue
Does the QC equipment used by the Company in its manufacturing process qualify for the state
of Georgia’s sales and use tax exemption with respect to leases of manufacturing machinery and
equipment as provided for under O.C.G.A. § 48-8-3(34)?
Analysis
O.C.G.A. 48-8-3(34) provides an exemption from state sales and use tax for certain types of
manufacturing machinery. To qualify for exemption, the machinery or equipment must:

1. Have the character of machinery or equipment at the time of sale or lease, or consist of
   components which, when assembled, will have the character of machinery or equipment;
2. Be used in a manufacturing plant; and
3. Be necessary and integral to the manufacture of tangible personal property for sale or
   further manufacturing.1
   For machinery or equipment that has multiple purposes, some purposes necessary and integral to
   the manufacture of tangible personal property, and some purposes not necessary and integral to
   the manufacture of tangible personal property, the substantial purpose of such machinery or
   equipment will prevail for purposes of determining the eligibility for the exemption.2
   “Substantial purpose” is that purpose for which an item of tangible personal property is used
   more than one-third of the total amount of time that the item is in use; alternatively, instead of
   time, the purpose may be measured in terms of other applicable criteria such as the number of
   items produced.3 Testing and quality control machinery or equipment located at a manufacturing
   plant used to test the quality of industrial materials, work in process, or finished goods will
   generally qualify as necessary and integral to the manufacture of tangible personal property.4
   O.C.G.A. § 48-8-3.2, which became effective January 1, 2013, specifically lists “testing and
   quality control machinery or equipment located at a manufacturing plant used to test the quality
   of industrial materials, work in process, or finished goods” as an example that qualifies as
   necessary and integral to the manufacture of tangible personal property. 5 This section also adopts
   the “substantial purpose” test described above.6
   Ruling
   The Company’s QC equipment is used in its manufacturing process to test the quality of
   industrial materials, work in process, or finished goods. The Company asserts that the equipment
   is used in manufacturing more than one-third of the total amount of time that the item is in use.
   The QC equipment is necessary and integral to the manufacture of tangible personal property for
   1

Ga. Comp. R. & Regs. r. 560-12-2-.62(3)(a).
Ga. Comp. R. & Regs. r. 560-12-2-.62(3)(c).
3
Ga. Comp. R. & Regs. r. 560-12-2-.62(2)(k).
4
Ga. Comp. R. & Regs. r. 560-12-2-.62(4)(b)(4).
5
O.C.G.A. § 48-8-3.2(e)(4).
6
O.C.G.A. § 48-8-3.2(d)(2)
2

An Equal Opportunity Employer

February 25, 2013
Page 3 of 3

sale or further processing since the Company’s ability to manufacture its products is highly
dependent on the quality of incoming materials, and it is critical these materials are tested to
ensure they meet the Company’s quality standards before they are further used in the
manufacturing process. For these reasons [i.e. the QC equipment is used in manufacturing more
than one-third of the total time that the equipment is in use, and the QC equipment is necessary
and integral to the manufacture of tangible personal property for sale or further processing], the
QC equipment qualifies as exempt manufacturing machinery and equipment as provided by
O.C.G.A. § 48-8-3(34) and § 48-8-3.2.
The opinions expressed in this ruling are based upon the information contained in your request
and limited to the specific transactions, facts, and taxpayer in question. Should the circumstances
regarding the transactions change, or differ materially from those represented, then this ruling
may become invalid. In addition, please be 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 tax treatment than that expressed in this
response.

An Equal Opportunity Employer