Does Utah's manufacturing sales tax exemption cover new equipment for a contractor's growing panel-manufacturing and insulation-lamination business, including equipment that also gets used in its construction activities?

Plain-English summary

A company that had been one of Utah's major drywall and plastering contractors for more than 40 years had also developed two manufacturing sidelines: making prefabricated panels attached to building exteriors, and (since 1992, as a metal-building insulation distributor) laminating vinyl sheeting to insulation. As demand for both products grew, the company decided to build a new, larger facility, buy new panel-shop equipment, and add a second insulation laminating machine (plus possibly a third, custom-built machine for a new hardboard-insulation product). It asked the Utah State Tax Commission whether this equipment could be purchased exempt from sales tax as manufacturing machinery.

The Commission said yes, with conditions. Under Utah's exemption for machinery and equipment used in a new or expanding manufacturing operation, a "manufacturing facility" is one described by SIC codes 2000-3999 in the 1987 Standard Industrial Classification Manual. The Commission found both of the company's manufacturing lines qualified -- panel manufacturing under SIC 3275, insulation lamination under SIC 3296 -- and that moving to a new facility while substantially increasing manufacturing activity made this a genuine "expanding operation." So the panel-shop equipment and laminating machines were exempt, but only within three limits: (1) the exemption covers tangible personal property only, not real property or property that becomes a building improvement; (2) the equipment must have a useful economic or accounting life of at least three years; and (3) equipment used for something outside the manufacturing process itself, like shipping or transporting the finished product, doesn't qualify.

Two further wrinkles mattered for this taxpayer specifically. First, ordinary replacement equipment -- new equipment serving the same purpose as existing equipment retired within 12 months before or after the purchase -- was fully taxable under the law as it stood, though the Commission flagged that the legislature had just enacted a phase-in exemption for replacement equipment: 30% exempt for tax years starting July 1, 1996, 60% starting July 1, 1997, and 100% starting July 1, 1998 (replacements bought before July 1, 1996 stayed fully taxable). Second, because the company also continued running its original drywall/plastering construction business (SIC 1742) at the same site, Rule R865-19-85S's separate-establishment principle applied: distinct economic activities at one location are treated as separate establishments for this exemption, so equipment used only for the construction business didn't qualify, and equipment shared between manufacturing and construction only qualified if the construction use was de minimis.

What this means for you

Manufacturers expanding into a new facility or product line

This ruling is a clear example of what "new or expanding operation" means in practice: a genuine facility move plus a substantial increase in manufacturing activity qualifies, even for a company (like this one) whose core historical business was something else entirely (construction). Look at your own activity through the SIC-code lens the Commission used -- multiple distinct manufacturing product lines can each independently qualify.

Businesses replacing worn-out manufacturing equipment

Don't assume all manufacturing-equipment purchases are treated the same. Equipment that's genuinely new capacity is different from equipment that's just replacing an existing machine doing the same job -- the latter category had its own separate (and at the time, much less generous) exemption phase-in schedule. If you're planning a purchase near one of the phase-in dates referenced here, the exact purchase date could matter a great deal to the tax result -- though you'd need to confirm whether Utah's replacement-equipment exemption has since reached 100% or changed further.

Businesses that run manufacturing and a different (e.g., construction) line at the same site

If your company operates more than one distinct type of business at a single location, expect the Commission to treat each as a separate "establishment" for this exemption. Equipment dedicated to the non-manufacturing side won't qualify, and shared equipment only survives if the non-manufacturing use is truly minor (de minimis) -- so document how equipment is actually used across your business lines.

Accountants and tax professionals

Three practical hooks from this ruling: the SIC-code-based definition of "manufacturing facility," the three-year useful-life floor for exempt equipment, and the separate-establishment rule under Rule R865-19-85S for mixed-activity locations. Also flag the phase-in dates for the replacement-equipment exemption if advising on a purchase timed around 1996-1998 -- and verify whether that phase-in schedule or the SIC-code approach has since been superseded.

Common questions

Q: Does new manufacturing equipment qualify for Utah's sales tax exemption if my company's core business is something else, like construction?
A: It can -- the Commission looked at whether the specific manufacturing activity (here, panel manufacturing and insulation lamination) independently qualified under the applicable SIC codes, regardless of the company's broader business history.

Q: Is replacement equipment (like-for-like) exempt the same way as new-capacity equipment?
A: Not under the law described in this ruling. Ordinary replacement equipment was fully taxable, though a phase-in exemption was just enacted (30% for tax years starting July 1, 1996, rising to 100% by July 1, 1998).

Q: What if equipment is used for both manufacturing and a different business activity at the same site?
A: Under Rule R865-19-85S's separate-establishment rule, equipment used only for the non-manufacturing activity doesn't qualify, and equipment shared between the two only qualifies if the non-manufacturing use is de minimis (minor).

Q: Does this ruling apply to my equipment purchase?
A: Not automatically. It's a private letter ruling binding only on the Commission for the taxpayer and facts described, and it reflects mid-1990s SIC-code definitions and a since-superseded replacement-equipment phase-in schedule. Consult a Utah tax professional and verify current law.

Citations and references

Rules and classification codes (1995-era; verify current Utah Code/rule text, especially whether the replacement-equipment exemption phase-in has since changed):

• Utah Admin. Rule R865-19-85S (separate-establishment rule for distinct economic activities at a single location)
• 1987 Standard Industrial Classification (SIC) Manual: codes 2000-3999 (manufacturing facility definition), 3275 (prefabricated panels), 3296 (insulation lamination), 1742 (construction, as cited in the ruling)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/95-024.htm

Original ruling text

Response July 26, 1995

Request

May 9, 1995

State Tax Commission

Attn: Commissioners

210 North 1950 West

Salt Lake City, UT 84134

RE: Potential Sales Tax
Exemption on Equipment Used in Manufacturing

Dear Commissioners:

For the last 40+ years, we have been one of the major drywall and
plastering contractors in the State of Utah.
About the time the XXXXX was built, we started manufacturing panels
which are attached to the exterior of a building. At the time, the XXXXX was the largest job for which we had
manufactured panels. Many times we
install the manufactured panels (as we did at the XXXXX), other times we simply
sell the panel (as we did for the XXXXX Airport).

In the past, these manufactured panels have been a small portion of the
work we have done. We are now finding
an ever increasing demand for this product and have now decided to go after
this market. In order to increase our
capacity, we have put our current office and warehouse up for sale and are
building a new facility in XXXXX.

In 1992, we became the XXXXX distributor for Metal Building and Piping
insulation. Unlike our other divisions,
our insulation division strictly sells insulation. The Metal Building portion of those sales required a
manufacturing process where we laminate vinyl sheeting to the insulation.

Demand for metal building insulation has also increased and we are
looking at purchasing another laminating machine in order to double our
manufacturing capacity.

We are also interested in moving into the area of hardboard insulation
lamination. We are currently supplying
foil-backed hardboard insulation for clean-room manufacturers and have been
disappointed in the quality of product we have been purchasing. In order for us to manufacture our own
laminated product, we will need to purchase a laminating machine built to our
specifications.

We respectfully request a written determination as to whether or not we
can purchase the panel shop equipment and the two insulation laminating
machines exempt from sales tax.

In order to help you with your determination, I offer the following
information as to how we project our sales to be impacted by our investment in
this manufacturing equipment.

**see file for graph illustrating totals for different products
manufactured by XXXXX, **

Your consideration of this matter will be greatly appreciated. Please feel free to contact me if you have
any questions.

Very truly yours,

XXXXX

XXXXX

RE: Advisory Opinion - Application of the Sales Tax
Exemption for Manufacturing Equipment to Panel Shop Equipment

Dear
XXXXX,

You
requested an opinion as to whether the purchase of panel shop equipment and
insulation laminating machines qualifies for a sales tax exemption as
manufacturing equipment. Our research
indicates as follows:

Machinery
Purchased for New or Expanding Operations

Sales
or leases of machinery and equipment by a manufacturer for use in a new or
expanding operations related to the manufacturing process in a Utah
manufacturing facility are exempt from sales tax. A manufacturing facility is defined as an establishment descried
SIC codes 2000-3999 of the 1987 Standard Industrial Classification Manual.

You
have described two types of new activities.
One is the manufacture of prefabricated plaster panels, which fits
within qualifying code 3275. The other
activity involves manufacturing a new insulation product by laminating plastic
sheeting to insulation, which appears to fit within qualifying code 3296. XXXXX Qualifies as a new or expanding
manufacturing operation because it is moving to a new facility and
substantially increasing its manufacturing activities.

Purchases
of panel shop equipment and insulation laminating machines for these
manufacturing operations are exempt from sales tax with the following
qualifications.

1. The exemption applies only to tangible
   personal property, not real property or tangible property that is purchased and
   becomes an improvement to real property.

2. Machinery or equipment with a useful economic
   or accounting life of less than three years is not eligible for the exemption.

3. Machinery or equipment used for an activity
   that is not part of the manufacturing process, such as equipment used to
   transport or ship the final product, does not qualify for the exemption.

Replacement
Equipment

Manufacturing
machinery or equipment which is purchased as a normal operating replacement is
currently subject to sales tax.
Replacement equipment is defined as equipment which serves the same purpose
as existing equipment. If the existing
equipment is retired from service within 12 months before or after the purchase
of new equipment, the new equipment is considered replacement equipment.

The
state legislature recently passed a bill which phases in an exemption for
manufacturing replacement equipment over the next few years. The exemption rates which will apply to
replacement equipment are set out below.

1. For tax years beginning July 1, 1996, 30% of
   the exemption is allowed.

2. For tax years beginning July 1, 1997, 60% of
   the exemption is allowed.

3. For tax years beginning July 1, 1998, 100%
   of the exemption is allowed.

Normal
operating replacements purchased before July 1, 1996 are fully taxable.

Construction
Activities

In
addition to the expanding manufacturing activities described here, XXXXX will
apparently continue its construction activities (SIC code 1742) in the same
facility. Under Utah State Tax
Commission Administrative Rule R865-19-85S, � where distinct and separate economic
activities are performed a t a single physical location, each activity should
be treated as a separate establishment.�
Each of XXXXX�s business lines, then, is treated as a separate
establishment for purposes of the manufacturing equipment exemption. Since the construction activities constitute
a separate establishment which does not qualify as manufacturing facility,
purchases of machinery and equipment related solely to XXXXX�s construction
activities do not qualify for exemption.
Machinery or equipment purchased or lease for use in the manufacturing
activities and construction activities qualify for exemption only if the
use in construction activities is determined to be de minimis.

This
opinion is based only the facts presented in your letter. If additional facts arise which present new
questions, please feel free to request another advisory opinion.

For
the Commission,

Alice
Shearer

Commissioner