Did qualifying equipment for a new printed-circuit-board plant remain exempt when acquired through direct purchases, leases, sale-leasebacks, and lease-purchase financing?

Plain-English summary

Utah Private Letter Ruling 90-015 addressed a new printed-circuit-board manufacturing plant financed through a mix of direct purchases and equipment leases.

The proposed arrangements included equipment owned directly by the manufacturer, equipment sold to a finance company and leased back before being placed in service, equipment purchased by a lessor and leased to the manufacturer, and a lease-purchase and sublease structure involving Salt Lake City Corporation.

The Commission said qualifying machinery and equipment were exempt under all the purchases and leases described in the request.

Represented equipment use

The company represented that all covered equipment was tangible personal property and would not become an improvement to real property.

It would be used predominantly in Utah manufacturing.

None would be used primarily for research and development, raw-material or finished-goods refrigeration or storage, or shipping finished products.

Every item would have a useful economic or accounting life of at least three years.

Purchase and lease structures

The plant used several financing methods.

Some equipment would be purchased and owned directly.

Other equipment would be acquired through a sale-and-leaseback, direct lessor purchase and lease, or lease-purchase and simultaneous sublease.

The Commission's response made the exemption available for both the purchases and leases referred to in the request, based on the represented equipment and uses.

Actual production requirement

The exemption did not cover equipment merely associated with the business.

The Commission specifically warned that computers and other equipment not used in the actual production process would not qualify.

Holding

Under the represented facts:

• Qualifying machinery and equipment for the new manufacturing facility were exempt.
• The exemption covered the described direct purchases and leases.
• The result extended to the presented sale-and-leaseback and lease-purchase structures.
• Covered equipment had to be used in actual production.
• Nonproduction computers and other equipment outside the production process did not qualify.
• The result depended on the request's representations about use, property status, and useful life.

What this means for you

Manufacturers building new facilities

Financing form did not eliminate the exemption for equipment that otherwise met the historical manufacturing requirements.

Equipment finance companies and lessors

Document the lessee's qualifying manufacturing use and the specific acquisition and lease structure.

Accountants and tax professionals

Test each asset's function, real-or-personal-property status, useful life, and excluded uses rather than treating the entire project as exempt.

Common questions

Q: Did directly purchased production equipment qualify?

A: Yes.

Q: Did leased production equipment qualify?

A: Yes, under the described arrangements.

Q: Did the sale-and-leaseback structure prevent exemption?

A: No, based on the represented facts and equipment use.

Q: Did all computers qualify?

A: No. Computers not used in the actual production process were excluded.

Key source language

• Governing exemption: section 59-12-104(16) and Rule R865-19-85S covered qualifying machinery and equipment used in a new or expanded manufacturing facility.
• Purchase and lease result: “the exemption cited above is available for both the purchases and leases referred to in the request.”
• Production limit: equipment “not used in the actual production process will not qualify for exemption.”

Citations and references

• Utah Code Ann. § 59-12-104(16)
• Utah Sales Tax Rule R865-19-85S
• Utah Industrial Facilities and Development Act, identified in the request without a numbered citation

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 90-015
• Scope note: the request described four direct-purchase, lease, sale-and-leaseback, and lease-purchase acquisition structures.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
December 14, 1990

December
14, 1990

XXXXX

Re:
Advisory Opinion - XXXXX

Dear
XXXXX:

This
letter is in response to your recent
request for a Tax Commission ruling on whether sales or use tax would be due on the purchase or lease of equipment used in a new manufacturing facility where printed circuit boards are produced. You have stated that all of the equipment will be used in the manufacturing process and than none will be used for research and development, refrigeration or storage of raw materials or finished goods, or used in shipping finished goods. All of the equipment will have a useful life of three or more years.

The
Tax Commission policy is to refer such requests to the division most qualified to analyze the request and make recommendations concerning it. As such, your request was referred to the Tax Commission's Auditing division for their analysis and recommendations. The division's recommendation is as follows:

1. Code section 59-12-104 (16) and Sales Tax
   Rules R865-19-85S provide tax exemption for the purchase or lease of qualifying machinery and equipment for use in a new or expanded manufacturing facility. Based upon your description of the equipment and its use the exemption cited above is available for both the purchases and leases referred to in the request.

2. It should be noted that equipment, such as
   computers, not used in the actual production process will not qualify for exemption.

For
the Commission

Joe
B. Pacheco

Commissioner

November
19, 1990

HAND-DELIVERED

Utah
State Tax Commission

Auditing
Division

Sales
and Use Tax Section

160
East 300 South

Salt
Lake City, Utah 84134

Attention:
XXXXX

RE: XXXXX -- Equipment Lease Transaction

Gentlemen:

The
purpose of this letter is to request an advisory opinion as to sales and use tax consequences of equipment purchase and leasing transactions.

We
represent XXXXX, a Utah corporation ("XXXXX"). XXXXX was formed in 1989 to construct a new manufacturing plant at the XXXXX in Salt Lake County, Utah, for the manufacture of printed circuit boards for computers. XXXXX is a wholly-owned subsidiary of XXXXX, a XXXXX corporation.

XXXXX
contracted with XXXXX of Salt Lake City to build the manufacturing plant. XXXXX expects the building to be completed before January 1, 1991. XXXXX has ordered numerous items of highly-technical, sophisticated equipment from various vendors and manufacturers around the world, and such equipment is beginning to arrive at the plant site for installation and testing. Equipment for the plant will be coming from Japan, Hong Kong, Taiwan, Germany, Israel, and various locations within the United States.

When
the plant is completed and ready to begin operations (which is estimated to be in March/April, 1991) it is estimated that the cost of the plant and premises will be about U.S. $$$$$, and the cost of equipment and facilities in the plant will be between U.S. $$$$$ and U.S. $$$$$. It is anticipated that, at start-up, the plant will employ approximately 200 full-time employees, with potential for growth to approximately 400 full-time employees in two to three years.

To
finance the equipment needed for the plant, XXXXX has chosen to use a combination of financing as follows:

1.
Self-financing (purchase) Approx.
U.S. $$$$$

2.
Equipment lease financing Approx.
U.S. $$$$$

obtained
under authority of the

Utah
Industrial Facilities and

Development
Act through Salt Lake

City
Corporation and XXXXX ("XXXXX:)

3. Equipment lease financing Approx. U.S.$$$$$

through
XXXXX ("XXXXX")

Most
of the equipment will require expert installation and testing before it can be useful in the plant operations. It is expected that some of the equipment will be installed by the end of 1990, and the remainder will be installed in January or February, 1991.

Some
items of equipment will be purchased and owned by XXXXX and not be subject to any lease financing arrangement.

The
equipment to be subject to the XXXXX transaction will be purchased directly by XXXXX, and then leased to XXXXX. Actually, since the XXXXX transaction is under the authority of the Utah Industrial Facilities Development Act through Salt Lake City Corporation, the equipment will be leased from XXXXX to Salt Lake City Corporation pursuant to a Lease/Purchase Agreement and, simultaneously, subleased from Salt Lake City Corporation to XXXXX pursuant to a Sublease/Purchase Agreement.

The
equipment to be subject to the XXXXX equipment lease financing will consist of two packages--one package being equipment to which XXXXX has already taken title, which will be sold to XXXXX and then leased back by XXXXX, and the second package being equipment which will be purchased directly by XXXXX from manufacturers and then leased to XXXXX.

Under
the XXXXX equipment lease agreement, XXXXX will have the option to purchase the equipment at the end of the five-year lease term for an amount equal to 32.5% of the original equipment cost. If such option is not timely exercised at that time, then the lease will be extended for one additional year, at the end of which XXXXX would have an option to purchase the equipment at its then fair market value, determined by independent appraisal.

Under
the portion of the XXXXX financing arrangement which involves the sale/leaseback portion of the transaction, the following steps will be involved:

1. XXXXX would purchase and take title to the
   equipment from the manufacturers.

2. Within a short period of time after XXXXXX's
   purchase, and before the equipment is placed in service by XXXXX, XXXXX would sell the equipment to XXXXX and immediately lease the same equipment back from XXXXX, pursuant to an equipment lease agreement.

Documents
Furnished

We
are furnishing to you with this letter a copy of the following documents related to the advisory opinions requested herein:

A. XXXXX Lease documents:

1. Equipment Lease Agreement

2. First Amendment to the Equipment Lease
   Agreement

3. Lease Rider No. 1

4. Individual Equipment Record (IER) Form

5. Bill of Sale (XXXXX to XXXXX)

6. Bill of Sale (Vendor to XXXXX)

7. Listing of equipment to be subject to XXXXX
   lease arrangement (sale/leaseback portion only)

B. XXXXX documents:

1. Lease-Purchase Agreement and First
   Supplement to Lease-Purchase Agreement

2. Sublease-Purchase Agreement and First
   Supplement to Sublease-Purchase Agreement

Representations
Regarding Equipment

On
behalf of XXXXX, we make the following representations concerning all of the Equipment subject to this advisory opinion, whether such Equipment will be purchased and owned by XXXXX or made subject to the XXXXX lease arrangement or be made subject to the XXXXX lease arrangement:

1. All of the Equipment will be tangible
   personal property;

2. None of the Equipment will become an
   improvement to real property;

3. All of the Equipment will be used by XXXXX
   predominantly as part of its manufacturing processes in the State of Utah;

4. None of the Equipment will be used primarily
   for

-
research and development;

-
refrigeration or storage of raw materials, component parts or finished products; or

-
shipping finished products; and

5. All of the Equipment will have a useful
   economic and/or accounting life of three or more years.

Based
on the above, we hereby respectfully request an Advisory Opinion from you to the effect that neither XXXXX (nor XXXXX nor XXXXX, as lessors of equipment to XXXXX) will be liable for any Utah sales tax or Utah use tax with respect to:

1. The direct purchase and continued ownership
   and use by XXXXX of the Equipment;

2. The direct purchase by XXXXX of the
   Equipment followed by the sale of such Equipment to XXXXX and simultaneous leaseback of such Equipment from XXXXX to XXXXX pursuant to the XXXXX equipment lease agreement;

3. The purchase by XXXXX of the Equipment
   followed by the lease of such equipment to XXXXX pursuant to the XXXXX equipment lease agreement;

4. The purchase by XXXXX of Equipment followed
   by the lease of such Equipment to Salt Lake City Corporation pursuant to the Lease-Purchase Agreement, with simultaneous sublease of such Equipment to XXXXX pursuant to the XXXXX Sublease-Purchase Agreement.

If
you have any questions with regard to these matters, please let us know. We would be glad to furnish to you any additional information or documents which may be relevant to this matter.

Very
truly yours,

XXXXX