Were tangible property, utilities, machinery, equipment, replacement parts, and related items used by a subsidiary to manufacture asphalt for resale exempt from Rhode Island sales and use tax?

Plain-English summary

The subsidiary's qualifying tangible property, utilities, machinery, equipment, replacement parts, and related items used to manufacture asphalt for resale were exempt from Rhode Island sales and use tax. The Division had already determined that creating the asphalt product for resale was manufacturing, and the subsidiary continued that same production process beginning January 1, 2012.

The subsidiary used its own machinery and equipment to make the asphalt. It sold asphalt directly to customers that installed it and also made bona fide arm's-length sales to its parent, which used the product in its contracts. The subsidiary charged sales tax on those sales unless the purchaser qualified for a separate exemption, such as the exemption for a state or political subdivision.

The manufacturing-input exemption covered qualifying property and utilities that became an ingredient, component, or integral part of the finished product or were consumed in manufacturing for resale. "Consumed" included property destroyed, used up, worn out beyond repair or reuse, or made obsolete.

The machinery-and-equipment exemption covered qualifying tools, dies, molds, machinery, equipment, replacement parts, and related items used in an industrial plant in the actual manufacture, conversion, or processing of property for sale. It could cover the qualifying portion of interchangeable portable or mobile machinery.

The statutes excluded general office, accounting, collection, sales-promotion, and other administration work, along with post-production handling, storage, selling, and transportation. The ruling's exemption therefore followed how each item was used in the manufacturing process.

What this means for you

Manufacturers

Separate production use from administrative and distribution use. The exemption covered qualifying items connected with actual manufacturing for resale, not everything purchased by a manufacturing business.

Parent-subsidiary operations

Moving production from the parent to a subsidiary did not defeat the manufacturing exemption on these facts. The subsidiary itself manufactured the asphalt for resale and made bona fide sales at arm's length.

Accountants and purchasing teams

Track whether inputs become part of the product, are consumed in production, or support qualifying machinery and equipment. Also keep downstream sales-tax treatment separate from the manufacturer's purchase exemptions.

Common questions

Did the subsidiary qualify even though the parent previously performed the manufacturing? Yes. The subsidiary carried out the asphalt-manufacturing process for resale using its machinery and equipment.

Were utilities and consumable property exempt? Yes, to the extent they qualified under the manufacturing-input provision by becoming part of the product or being consumed in production for resale.

Were machinery and replacement parts exempt? Yes, to the extent used in the industrial plant in connection with the actual manufacturing process.

Were office and distribution assets covered? No. The cited provisions excluded administration and post-production distribution operations.

Were the subsidiary's asphalt sales automatically exempt? No. The subsidiary charged sales tax unless the particular purchaser qualified for another exemption.

Citations and references

• R.I. Gen. Laws § 44-18-30(7) — qualifying property and utilities incorporated into or consumed in manufacturing for resale.
• R.I. Gen. Laws § 44-18-30(22) — qualifying manufacturing machinery, equipment, replacement parts, and related items.
• R.I. Gen. Laws § 44-18-30(8) — separate exemption referenced for sales to state or political-subdivision purchasers.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2012-01

Original ruling text

Ruling Request No. 2012-01

Ruling Request No. 2012-01

Request for Ruling Regarding the Exemption of Certain Tangible Personal Property, Utilities, and Machinery and Equipment used in the Process of Manufacturing as Provided byR.I.G.L. § 44-18-30(7)(i) and§ 44-18-30(22)

On behalf of your client, Company A, ("Taxpayer") and its subsidiary, Company B, ("Subsidiary"), you request a declaratory ruling pursuant to R.I. Gen. Laws § 42-35-8 and Division of Taxation Reg. DR 03-01 regarding the application of the exemptions to the sales and use tax set forth in R.I. Gen. Laws § 44-18-30(7) and § 44-18-30(22) to certain activities of Taxpayer and Subsidiary.

Facts

The facts set forth in your request for ruling dated August 7, 2012 form the basis for this ruling.

The Division of Taxation ("Division") has previously determined with regard to Taxpayer that the process of creating asphalt for resale ("Manufactured Product") is "manufacturing" as that term is used in R.I. Gen. Laws § 44-18-30(7)(iv). Consequently, the tangible personal property and utilities used to manufacture the Manufactured Product is exempt from sales and use taxes pursuant to R.I. Gen. Laws § 44-18-30(7), and the machinery and equipment and related items used to manufacture the Manufactured Product is exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(22).

Since January 1, 2012, Subsidiary, not Taxpayer, has manufactured the Manufactured Product using its machinery and equipment and related items. Subsidiary sells the Manufactured Product directly to customers who install the Manufactured Product, and Subsidiary charges sales tax on those sales. In addition, Subsidiary sells the Manufactured Product to the Taxpayer which uses the Manufactured Product in contracts that it performs. These transactions are bona fide sales at arms length for value. Subsidiary charges sales tax for those sales unless the purchaser, including Taxpayer, qualifies for another exemption, such as the exemption for state or political subdivisions set forth in R.I. Gen. Laws § 44-18-30(8).

Taxpayer represents that to the best of its knowledge or that of its representative, the identical issue is not being considered by the Division of Taxation in connection with an active examination or audit of a tax return already filed.

Taxpayer has not filed and is not filing a ruling request on the same or similar issue to the Internal Revenue Service or the taxing jurisdiction of another state.

Ruling requested

Notwithstanding any ruling in any pending case to which the Division is a party, whether all of the tangible personal property, utilities, and machinery and equipment and related items used in the process of manufacturing the Manufactured Product since January 1, 2012, are exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(7) and § 44-18-30(22).

Discussion

R.I. Gen. Laws § 44-18-30(7) establishes the following exemption from the sales and use taxes for personal property used in a "manufacturing":

(i) From the sale and from the storage, use, or other consumption in this state of computer software, tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, and water, when the property of service is purchased for the purpose of being manufactured into a finished product for resale, and becomes an ingredient, component, or integral part of the manufactured, compounded, processed, assembled, or prepared product, or if the property or service is consumed in the process of manufacturing for resale computer software, tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, or water.

(ii) "Consumed" means destroyed, used up, or worn out to the degree or extent that the property cannot be repaired, reconditioned, or rendered fit for further manufacturing use.

(iii) "Consumed" includes mere obsolescence.

(iv) "Manufacturing" means and includes manufacturing, compounding, processing, assembling, preparing, or producing.

(v) "Process of manufacturing" means and includes all production operations performed in the producing or processing room, shop, or plant, insofar as the operations are a part of and connected with the manufacturing for resale of tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, or water and all production operations performed insofar as the operations are a part of and connected with the manufacturing for resale of computer software.

(vi) "Process of manufacturing" does not mean or include administration operations such as general office operations, accounting, collection, sales promotion, nor does it mean or include distribution operations which occur subsequent to production operations, such as handling, storing, selling, and transporting the manufactured products, even though the administration and distribution operations are performed by or in connection with a manufacturing business.

R.I. Gen. Laws § 44-18-30(22) establishes the following exemption from the sales and use tax for certain machinery and equipment used in "manufacturing":

(22) Manufacturing machinery and equipment.

(i) From the sale and from the storage, use, or other consumption in this state of tools, dies, and molds, and machinery and equipment (including replacement parts), and related items to the extent used in an industrial plant in connection with the actual manufacture, conversion, or processing of tangible personal property, or to the extent used in connection with the actual manufacture, conversion or processing of computer software as that term is utilized in industry numbers 7371, 7372, and 7373 in the standard industrial classification manual prepared by the technical committee on industrial classification, office of statistical standards, executive office of the president, United States bureau of the budget, as revised from time to time, to be sold, or that machinery and equipment used in the furnishing of power to an industrial manufacturing plant. For the purpose of this subdivision, "industrial plant" means a factory at a fixed location primarily engaged in the manufacture, conversion, or processing of tangible personal property to be sold in the regular course of business;

(ii) Machinery and equipment and related items are not deemed to be used in connection with the actual manufacture, conversion, or processing of tangible personal property, or in connection with the actual manufacture, conversion or processing of computer software as that term is utilized in industry numbers 7371, 7372, and 7373 in the standard industrial classification manual prepared by the technical committee on industrial classification, office of statistical standards, executive office of the president, United States bureau of the budget, as revised from time to time, to be sold to the extent the property is used in administration or distribution operations;

(iii) Machinery and equipment and related items used in connection with the actual manufacture, conversion, or processing of any computer software or any tangible personal property which is not to be sold and which would be exempt under subdivision (7) or this subdivision if purchased from a vendor or machinery and equipment and related items used during any manufacturing, converting or processing function is exempt under this subdivision even if that operation, function, or purpose is not an integral or essential part of a continuous production flow or manufacturing process;

(iv) Where a portion of a group of portable or mobile machinery is used in connection with the actual manufacture, conversion, or processing of computer software or tangible personal property to be sold, as previously defined, that portion, if otherwise qualifying, is exempt under this subdivision even though the machinery in that group is used interchangeably and not otherwise identifiable as to use.

Ruling

The tangible personal property, utilities, and machinery and equipment and related items used in the processing of manufacturing the Manufactured Product since January 1, 2012 by Subsidiary is exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(7)(i) and § 44-18-30(22).

This ruling may be relied upon by Taxpayer and Subsidiary and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

**David M. Sullivan

Tax Administrator

September 21, 2012**