Which pieces of an automated material handling system -- racking, forklifts, conveyors, computer controls, dust collection -- qualify for Utah's manufacturing sales tax exemption, and where does the 'continuous production cycle' end?

Plain-English summary

A tax consultant helping a Utah company review its accounts payable for possible sales tax overpayments identified several purchases tied to a new automated material handling system that the consultant believed qualified for Utah's "new and expanding operation" manufacturing exemption. The Commission's first response (August 1, 1995) said the initial submission didn't include enough detail to determine which items qualified, and asked for a resubmission identifying the applicable SIC code and explaining each item's role in the manufacturing process -- while also flagging that some of the originally-listed items obviously wouldn't qualify (real property improvements, or clearly non-manufacturing activities) and should be dropped from the request.

The consultant then sent the Commission's Legal Division a detailed list of interpretive questions about Rule R865-19S-85's key phrases -- "integrated continuous production cycle," "de minimis," "new or expanding operation," "storage machinery," and others -- and separately (August 8, 1995) resubmitted a much more detailed request describing the client as a manufacturer that turns plant/tree-derived raw material into vitamin and herb capsules (SIC code 2833), laid out the full manufacturing process step by step, and asked for a ruling on eleven specific pieces of equipment in its new automated system: free-standing racking, two types of storage/transport machinery, a wire guidance system, computer hardware and software, a dust collection system, tote boxes, two conveyor systems, a filter process, and forklifts/pallet jacks.

The Commission's substantive determination turned on one central concept: the exemption covers machinery that is part of the integrated continuous production cycle -- the unbroken sequence of manufacturing steps -- but does NOT cover storage of raw materials or finished product, or shipment/distribution activities, even when those are automated and physically integrated with production equipment. Applying that line item by item:

• Free-standing racking (storing raw material and finished product): did not qualify -- storage is a non-qualifying activity regardless of automation.
• Storage/transport machinery moving raw material into the start of production, or moving output within the production sequence: qualified, as part of the continuous cycle.
• The same category of machinery, when used instead to pull already-bottled, already-packaged product from storage racks to fill orders: did not qualify -- the production cycle ends once the finished product is bottled and moved to storage, so anything after that point (storing, sorting, packaging for shipment) is non-qualifying distribution.
• Wire guidance system for the qualifying machinery: qualified, unless it had been converted into real property.
• Computer hardware and software: qualified only for the share of use controlling qualifying manufacturing equipment -- using the same system to track inventory or prepare/track invoices is non-qualifying, and the whole system loses the exemption unless that non-qualifying use is de minimis (inconsequential relative to total use). The Commission specifically warned that inventory control and invoicing "sound like substantial business activities" likely to disqualify the equipment.
• Dust collection system: qualified, if used to capture dust/particles that would otherwise contaminate the finished product.
• Tote boxes: needed to clear two separate hurdles -- a useful economic/accounting life of at least three years, AND use that isn't solely shipping/distribution (i.e., not used only after the product is already bottled and headed to storage/shipping).
• Conveyor system moving raw material between the mixing and milling stages: qualified. A different conveyor system moving already-bottled product through a post-production sorting/shrink-wrap area for shipping: did not qualify.
• Filter process removing foreign material before milling: qualified, as part of the manufacturing process.
• Forklifts/pallet jacks: qualified only to the extent used solely to move raw material into the production process or move finished product back for the same qualifying purpose -- since other storage machinery already handled that role, the forklifts likely served other, non-qualifying purposes (staging raw material for later processing, or moving shipment-ready pallets), which would not qualify.

A final "General Clarification" letter answered the Legal Division questions more generally, establishing durable interpretive rules beyond this one taxpayer's equipment: (1) the continuous production cycle ends once the product reaches its finished, marketable form (illustrated with a cough-syrup example: bottling and boxing ends the cycle; packing individual boxes into shipping containers does not qualify, even if automated); (2) sorting raw material to remove unusable items before it enters the true continuous process is non-qualifying, even though it's essential to manufacturing, because it isn't part of the continuous cycle itself; (3) "devices necessary to control or operate" qualifying machinery can include electrical connections and computer equipment, but lose the exemption if converted to real property or used for a non-qualifying purpose beyond a de minimis amount; (4) "de minimis" has no fixed definition -- it's always a fact-specific comparison of non-qualifying use to total use; (5) a business only needs to meet one of the three "new or expanding operation" criteria (substantially different activity, new physical location, or increased production/capacity) -- not all three -- but new equipment must independently meet all of its own conditions (new/expanding operation use, qualifying manufacturing activity, 3+ year useful life, and not a replacement); and (9) "storage machinery" broadly means any equipment used to store raw material/finished product (racks, shelves) or move product within a storage or distribution area (forklifts).

What this means for you

Manufacturers installing automated material handling / warehouse automation systems

This ruling is the clearest available illustration of exactly where Utah draws the line inside a single integrated automated system: equipment feeding raw material INTO production, or moving semi-finished product BETWEEN production steps, tends to qualify; equipment that stores, sorts, or moves ALREADY-FINISHED, packaged product toward shipment tends not to. The same physical type of machine (the same model of automated storage/retrieval unit, for example) can be exempt in one role and taxable in another, purely based on which side of "finished and packaged" it operates on.

Businesses with shared computer systems controlling both production and back-office functions

If the same computer hardware/software both controls your manufacturing equipment and handles inventory tracking or invoicing, expect the Commission to scrutinize how much of its use is the non-qualifying back-office function. Keep the qualifying and non-qualifying uses well-documented and, ideally, minimize or isolate the non-manufacturing use if you want to preserve the exemption.

Accountants and tax professionals pursuing manufacturing-exemption refund claims

This ruling models a full three-round advisory-opinion process (initial vague request → Commission asks for SIC code and item-by-item detail → resubmission gets a genuine item-by-item ruling) that's a useful template for similar refund reviews. Also note the Commission's own caveat: parts of Rule R865-19S-85 were, as of 1995, being litigated before the Commission and the Utah Supreme Court -- confirm whether those cases changed the rule's application before relying on this analysis today.

Common questions

Q: Does storage equipment for raw materials or finished product qualify for Utah's manufacturing exemption?
A: No. Storage of raw materials or finished product is explicitly a non-qualifying activity under Rule R865-19S-85, even when the storage system is automated and integrated with production equipment.

Q: Where does the "continuous production cycle" end for exemption purposes?
A: When the product reaches its finished, marketable form -- for example, when it's bottled/boxed for sale. Activities after that point (further packaging for shipment, sorting, storage awaiting order fulfillment) are non-qualifying, even if automated.

Q: Can equipment used for both qualifying and non-qualifying purposes still be exempt?
A: Yes, if the non-qualifying use is de minimis -- inconsequential compared to the equipment's total qualifying use. There's no fixed test; it depends on the specific facts, and the Commission warned that activities like inventory control or invoicing are often substantial enough to disqualify shared equipment.

Q: Does a business have to meet all three "new or expanding operation" criteria to qualify?
A: No -- meeting any ONE of the three (substantially different activity, new physical location in Utah, or increased production/capacity) is enough, according to the Commission's general clarification letter.

Q: Does this ruling apply to my company's material handling or automation equipment?
A: Not automatically. It's a private letter ruling binding only on the Commission for the taxpayer and specific equipment described, and the Commission repeatedly stressed how fact-specific this exemption is. Consult a Utah tax professional, and check whether the litigation the Commission flagged as pending in 1995 changed the rule's interpretation.

Citations and references

Rules and classification codes (1995-era; the Commission itself flagged pending litigation that could affect this rule's future application, and Utah Code/rules have been renumbered/amended many times since):

• Utah Admin. Rule R865-19-85S / R865-19S-85 (machinery and equipment manufacturing exemption -- both formats used interchangeably in the source letters)
• 1987 Standard Industrial Classification (SIC) Manual, code 2833 (as cited for the vitamin/herb manufacturer)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/95-043.htm

Original ruling text

95-043

Responses
August 1, 1995, August 15, 1995 and August 29, 1995

Request

Utah
State Tax Commission

Audit
Division

210
N. 1950 West

Salt
Lake City, UT 84134

Re:
Manufacturing Exemption

To whom it may concern:

My name is XXXXX, and I'm helping a company in the
local area perform a review of their accounts payable records for possible
overpayments. In the process of
performing the review, we have come cross several items that we believe qualify
under the state�s �new and expanding operation� manufacturing exemption. Most of the items are part of an automated
material handling system that has been, and is continuing to be installed at
their manufacturing facility. And a few
of the items in question are purchases that we would classified as real
property labor, performed by the provider of the material handling system.

Please find attached an item-by-item breakdown of
each of the purchases in question along with a client provided description of
their function and use.

It's our position that each of the items outlined
would qualify under the exemption because they are an integrated part of the
continuous production cycle, and because they are not replacement items that
have wore out or are no longer in use.

Following the applicable regulation, we are
seeking a declaratory judgment or
opinion on the attached items in question.

Because the tax has already been paid to the vendor,
we would like to receive direction prior to providing exemption certificates to
the applicable vendors and requesting refunds from them. We desire to have this issue resolved as
soon as possible. Thanks.

Best Regards,

XXXXX

XXXXX

XXXXX

RE: Advisory
Opinion - Manufacturing Exemption

Dear XXXXX,

You requested an advisory opinion regarding
application of the manufacturing equipment exemption to equipment used in
conjunction with an XXXXX system. From
the documentation that you provided, we are unable to determine whether the
equipment described qualifies for the exemption. We suggest that you resubmit the request for an advisory opinion,
including enough detail to help us determine the applicable SIC code, and to
help us understand what part each piece of equipment plays in the manufacturing
process. Please tell us why you think
the equipment qualifies under the �new or expanding operations� provision in
the law.

In telephone conversations with our staff, you
stated that your original inquiry included items that obviously do not qualify
for exemption, either because they are improvements to real property or because
they are used in non-qualifying activities.
Please focus your request on the items about which you have legitimate
questions. If you have questions about
what to include in your request, please contact our Tax Policy Analyst, XXXXX,
at XXXXX.

If you feel that you can make a determination about
application of this exemption to this equipment without an advisory opinion,
you may request a refund for items that you believe qualify for the
exemption. Because the manufacturing
exemption is complicated, we suggest that you submit your written request for
refund to:

XXXXX

We understand that you are reluctant to request a
refund directly from the Tax Commission because you believe that will trigger
an audit. However, XXXXX can be a
valuable resource to help you identify exempt transactions. With his help, your client can avoid
problems regarding this exemption in future audits.

For the Commission,

Alice Shearer

Commissioner

XXXXX

Utah Tax Commission

Legal Division

210 N. 1950 West

Salt Lake, UT 8134

RE: Rule
R865-19-85S Machinery and Equipment Exemption

Dear XXXXX:

I�m having a difficult time fully understanding this
regulation, and determining what items qualify, under this exemption, and which
ones would not. Please address each of
the items below and provide as much detail as possible, as well as examples.

1) �including
final processing, finishing or packaging articles sold as tangible personal
property�

Does this include electronically or mechanically
sorting and shrink wrapping the products in preparation for loading on pallets
? Does the fact that the items are temporarily stored on racks that are an
integrated component of an automated material handling system, prior to sorting
and shrink wrapping disqualify the activity as part of the production cycle ?

2)
�integrated continuous production cycle�

Please explain in detail what this means and what is
included and what s not included.

3)
�devices necessary to the control or operation of machinery and
equipment�

Give some examples of such devices. Please define control as it relates to the
intent of this regulation.

4) �de
minims�

Please define.
Give some examples.

5) �New�

Would new items that are not replacing existing
items, but used in addition to existing items, that increase plant production
or capacity, qualify?

6) �other
storage of raw material, component parts, or finish products�; �shipment of the
product�

These activities have been identified as
non-qualifying activities, please define l) other storage, and 2) shipment of the product. If storage racks, which are an integrated
part of an automated material handling system, housing semi-finished products
on a temporary basis, qualify as exempt machinery or equipment, if they are
part of the continuous production cycle, regardless of their storage function ?

7) �Material
Handling System�

Would there be any component of a material handling
system that wouldn't qualify under the exemption, that is an integrated part of
the continuous production cycle? If necessary, further explain the term
continuous production cycle�. Provide situations where identical items would
both qualify and not qualify.

8) �new
or expanding operation�

To qualify as �new or expanding� do all three of the
written requirements

l.
substantially different in nature, character, or purpose from activities;

2. begun in
   a new physical plant location in Utah; or

3. increase
   production or capacity

need to be met, or item 1 & 2 or 3, or any one
of the three requirements listed? Please clarify.

9) �storage
machinery�

What is storage machinery? Provide some examples.

Thanks,

XXXXX

August 8, 1995

XXXXX

210 North 1950 West

Salt Lake City, UT 84134

Dear XXXXX:

As indicated in my previous advisory opinion
request, I�m assisting a Utah company in a review of their purchases for
possible overpayment of sales tax.

My client is a manufacturer of vitamins and
herbs. The products they manufacture
originate from plants and trees, and other components, and are manufactured
into capsules which can be utilized for human consumption.

Manufacturing Process

The raw material is transported by storage machinery
to the production area where the raw material is dump and filtered prior to the
milling process to remove foreign objects and other undesirable particles. After the material has been filtered it is
transported to the milling area for milling.
After milling, the material is further processed, treated, sorted and
put into capsule form. The capsules
flow through quality control and are prepared for bottling or other forms of
packaging. The product is then labeled and shrink wrapped. Following the shrink wrapping process the
product is transported by storage machinery and placed on racks for temporary
storage. When orders come in, the
product is removed from the racks and transported along a conveyor system in
tote boxes where the computer system reads the bar codes on the containers, and
assigns and sorts the product to the correct distribution bid. From there the product is further shrink wrapped
and placed on pallets where they are prepared for shipment.

Expansion

My client has undergone tremendous expansion over
the last few years due to the increase demand.
The need to increase production has generated the need to purchase new
machinery and equipment. All the items
in question are new, and where not purchased to replace existing items but to
accommodate the expansion and the increase in production. In fact, the expansion is so wide spread
that a new building is under construction that will house additional
manufacturing sectors.

Because the rule relating to the Manufacturing
Exemption is not very clear, we are not sure what items qualify and which items
would not. Based on our best judgment
the integrated continuous production cycle, begins when the raw material is moved
from the racks to the production area, and would end when the product undergoes
its final shrink wrapping and is placed on the pallets.

There are several items of machinery and equipment
that have been purchased for use during the process that we would believe would
qualify under the manufacturing exemption.
Please review and provide an opinion on each of the items listed below.

1 ) ** Free-standing
racking **- These racks are a component part of a new Automated Material
Handling System purchased. These racks are used to store raw material, as well
as finished product prior to sorting and final shrink wrapping. This new racking was purchased to
accommodate the XXXXX System. It
expands the company�s ability to store as well as to organize the tremendous
increase flow of products by storing higher and adding many more idles.

2) ** XXXXX **- Storage machinery used to
pull raw material from the racks and transport to the production area for
processing. Also used to transport the
product from the processing area to the racks.
The machinery can run along a guidance tracking line or can operate on
its own like a forklift. The machinery
is specifically designed to accommodate the new racking. The XXXXXs can lift to the top of the new
racking and swing around the new narrow idles, where the old lifts cannot fit
through the new racking configuration.
This machinery was also purchased to accommodate the expansion in
production.

3) ** XXXXX
**- Storage machinery used to move both raw material to the production area and
to transport product to the racking, and to a conveyor system. The conveyor system transports product to a
sorting and shrink wrap area. Needed to accommodate the new racking. Needed to accommodate the expansion in
production.

4) ** Wire
Guidance System **- Tracking line for the XXXXX machinery that moves up
down the isles of the racking, and to and from the production area. Needed to accommodate the expansion in
production.

5) ** Computer
System **- The hardware that controls the XXXXX System. This would include the wire guidance system
and the conveyer system that transport the product to the sorting and final
shrink wrap area. Needed to control the
XXXXX System which was incorporated to accommodate the expansion in production.

6) ** Computer
Software **- The Software used to operate the XXXXX System.

7) ** Dust
Collection System **- Equipment used to collect flying dust in the
production area. It was needed to
accommodate the increase dust generated by additional manufacturing machinery
put into production.

8) ** Tote
Boxes **- Container boxes used to house product as it moves along the
conveyor system. Component part of the
new XXXXX System.

9) ** Conveyor
System **- A conveyor that runs from the mixing area to the milling
area. This is a new piece of equipment
incorporated into the process to eliminate manual loading of material in the
milling area, which speeds up the process as well as allowing for much more
volume, which facilitates expansion in production.

10) ** XXXXX Process** - A filter process
that extracts foreign objects and undesirable objects from raw material to
milling. New equipment purchased to
eliminated manual labor and to accommodate the expansion in production.

11) ** Storage
Machinery **(XXXXX) - Forklift and pallet jack machinery used to move raw
material to the production area.
Purchased to meet the needs of increase production.

If you have any additional questions, please contact
me at your convenience. Thanks.

Best Regards,

XXXXX

XXXXX

See file for hand-drawn blow chart (faxed) and, of
course, the preceding cover sheet, dated August 8, 1995

XXXXX

XXXXX

RE: Advisory
Opinion - Manufacturing Exemption

Dear XXXXX,

We have received your revised request for an
advisory opinion regarding application of the sales tax exemption for
manufacturing equipment to a materials handling system purchased by your
client. We appreciate your supplying us
with additional information so we can make a reasonable determination of the
status of the equipment involved. On
the basis of the facts provided in your request, we find as follows:

To qualify for the manufacturing exemption, the
machinery or equipment must be purchased or leased by a manufacturer for use in
new or expanding operations. A
qualifying manufacturing activity is one which falls within codes 2000 - 3999
of the Standard Industrial Classification Manual (1987). You client's manufacturing process appears
to fit within qualifying code 2833.

To qualify as a new or expanding operation, the
manufacturing, processing or assembling activities must be:

1.
substantially different in nature, character or purpose from prior
activities;

2. begun in
   a new physical location in Utah; or

3. increase
   production or capacity.

Normal operating replacement equipment does not
qualify for the exemption, even if it increases capacity. New equipment or
machinery will be considered normal operating replacement if:

1. it has
   the same or similar purpose as equipment or machinery which is retired from
   service within 12 months before or after the purchase date, or

2. if
   existing machinery or equipment which serves the same or similar purpose is
   kept for back-up or infrequent use.

The new equipment improves the manufacturing process
and increases capacity. If it results
in an actual increase in production, it qualifies as a �new or expanding
operation.�

Machinery or equipment does not qualify for the
exemption if it has a useful economic or accounting life of three or less, or
if it is used for an activity which is not part of the manufacturing process.

With regard to the equipment described in your
letter and diagram, we draw the following conclusions:

1. The XXXXX
   are used to store raw material and finished product. Storage of raw materials or finished products are non-qualifying
   activities. Therefore, the rack system
   does not qualify for the exemption.

2. Although
   described as storage machinery, the XXXXX appears to be a mechanical device
   which is used solely to move the raw material from storage to the beginning
   point of the manufacturing process or to move the finished product back to a
   storage area after final packaging. If
   it operates as described it is part of the integrated and continuous production
   cycle, and it qualifies for the exemption.

3. From the
   description provided, the XXXXX seems to operate in a similar fashion as the
   XXXXX. However, it appears that the
   XXXXX is used in nonqualifying activities.
   Activities associated with shipping or distribution do not qualify as
   manufacturing activities. From the
   diagram provided and from conversations with our staff, we understand that the
   finished product is packaged in a bottle at the end of the production line. The bottled product is moved to storage
   racks where it is stored until the XXXXX selects individual bottles to fill
   orders and to make up pallets for shipping.
   Under these circumstances, the �continuous production cycle� ends when
   the finished product is bottled and moved from the production line to storage. The XXXXX and other equipment which is used
   to store, sort and package the product for shipping is ineligible for the
   exemption.

4. The wire
   guidance system which moves the XXXXX qualifies for exemption unless it is has
   been converted to real property.

5 and 6. The Computer hardware and software appears
to serve both qualifying and non-qualifying activities. Controlling the XXXXX
or other manufacturing equipment is a qualifying activity. Tracking inventory and preparing or tracking
invoices are non-qualifying activities.
Equipment or machinery used in both qualifying and non-qualifying
activities will not lose the exemption if the use in non-qualifying activities
is determined to be de minimis.

�De minimis� is not a term that lends itself to easy definition,
and whether a use is de minimis depends on the particular facts in a
case. Basically, a use is de minimis
if it is

inconsequential in relation to the equipment's total use for
qualified manufacturing activities. We
cannot tell from the information provided whether your client's computer
hardware and software pass the de minimis test, but we caution you that
inventory control and invoicing

processes sound like substantial business
activities, and they probably disqualify the equipment.

7. The dust
   collection system qualifies for exemption if it is used to capture dust or
   particles that would otherwise contaminate the finished product.

8. The tote
   boxes may be disqualified on two counts.
   First, to the boxes must have at least a three year useful economic or
   accounting life to qualify for exemption.
   A discussion with your client's accountant may be useful to determining
   how the company is depreciating the boxes.
   Also, experience over time will show whether the boxes are typically
   replaced within three years.

Second, if the tote boxes are used solely in a
shipping or distribution activity, they are disqualified. Referring to the discussion on the XXXXX in
3 above, if the finished product is bottled and moved to storage before it
moves to the tote boxes, the tote boxes are not part of the qualified
manufacturing activities.

9. The
   conveyor system which delivers material from the mixing area to the milling
   area appears to qualify as equipment used in the manufacturing process. The conveyor system which delivers bottles
   of finished product through a sorting process to be packaged for shipping does
   not qualify for reasons discussed in 3 above.

10. The
    stainless steel XXXXX process appears to qualify as equipment used in the
    manufacturing process.

11. The
    forklift and pallet jacks may qualify for exemption if they are used solely for
    the purpose of moving raw material to the stainless steel XXXXX process and
    moving finished product back to storage.
    However, since the XXXXX serves this purpose, the forklift probably
    serves some other purpose, such as delivering raw material to the storage area
    where it will await processing or moving pallets of product which have been
    prepared for shipping. Such activities
    are non-qualifying activities.

This opinion represents the best guidance that we
can offer based on the facts presented.
As you and your client discuss the application of these guidelines to
your client's property, additional questions may arise. Please feel free to contact us if you need
further clarification.

For the Commission,

Alice Shearer

Commissioner

RE: General
Clarification of the Manufacturing Equipment Exemption

Dear XXXXX,

We have received your request for clarification of the
language pertaining to the sales tax exemption for manufacturing
equipment. We agree that the language
can be confusing, and we generally consider questions regarding the
manufacturing exemption to be very fact specific. That is, it is impossible to make blanket statements that cover
all of the fact patterns that arise regarding this exemption. We offer the following general guidance, but
we hope when specific questions arise you will let us help you determine
whether the exemption applies. Additionally,
parts of this rule are at issue in cases pending before the Commission and the
Supreme Court. The outcome of those
cases may impact application of rule R 865-19S-85 in the future.

Response to questions 1 and 2.

Rule R865-19S-85 states that automated material
handling and storage machine qualify for exemption �when that machinery is part
of the integrated continuous production cycle.� The rule also states that storage of raw materials or finished
product and shipment of the finished product are non-qualifying
activities. We frequently face the
determination of when the �continuous production cycle� stops and the
non-qualifying storage and shipment activities begin. That determination depends on the particular manufacturing setup
in question.

For purpose of illustration, assume that a
manufacturer makes cough syrup. The
ingredients move through some continuous process from raw materials to finished
product. The automated machinery
immediately measures the finished product into bottles and slips each bottle
into a box. (The product will be
marketed in the bottle and the box.) That is the end of the production
cycle. Activities involved in packaging
individual boxes into shipping containers are non-qualifying activities, even
though the packaging and shipping processes may be automated.

Using a different example, assume a manufacturer
uses recyclable light plastic as the raw material for some end product. Assume also that the manufacturer receives
its materials from a source which does not pre-sort the materials. That is, the raw material that is delivered
to the manufacturer includes other materials as well as light plastics. The
manufacturer may put the materials on a conveyor system so workers can discard
non-usable items. The light plastic products
are then stored for later use as raw material used in the manufacturing
process. Although the sorting activity
is essential to the manufacture of the end product, it is not part of a
continuous production activity. The
automated equipment used in this sorting process does not qualify for
exemption.

Response to question 3.

The term �devices necessary to the control or
operation� of qualifying machinery refers to devices that are essential to the
operation of qualified equipment.
Electrical connections and computer equipment may fit within this
definition. However, such equipment is
disqualified if it is converted to real property or if it serves some other
non-qualifying purpose. For instance,
if a company uses a computer system to control the qualifying manufacturing
equipment, and also uses it to track inventory and accounts payable, the
equipment will lose its exempt status

Response to question 4.

Qualifying equipment will not lose its exempt status
if its use for non-qualifying equipment is de minimis. De minimis is not
a term that lends itself to one definition that applies in all cases. In fact, a determination of whether the use
of manufacturing equipment in a non-qualifying activity is de minimis requires
that the non-qualifying use be compared to the total use. Therefore, the decision is very
fact-specific.

Response to question 5.

With regard to your question as to whether new
equipment qualifies for exemption, the equipment must meet all of the
conditions set out in the rule and the statute. That is, it must be used in a new or expanding operation, it must
be used in qualified manufacturing activities, it must have at least a three
year economic or accounting life, and it must not replace old equipment. A business is a new or expanding operation
if it meets any of the criteria set out in the rule. It need not meet all three
conditions. New equipment purchased to
supplement, rather than replace, existing machinery may be evidence of �expanding
operations.�

Response to question 6.

Refer to our response to questions 1 and 2
above. In determining whether equipment
qualifies for exemption, we look for evidence of a continuous process. If the product leaves the production line
and it is stored for later additional processing or for packaging and shipping,
the storage racks probably do not qualify for exemption.

Response to question 7.

As stated above, automated equipment used for
non-qualifying activities is not eligible for exemption.

Response to question 8.

See response to question 5 above.

Response to question 9.

Storage equipment and machinery is any equipment,
machinery or item used to store raw materials or finished product (such as
racks or shelves) or used to move the product around in the storage or distribution
area (such as forklifts).

For the Commission,

Alice Shearer

Commissioner