Does installing a new ice-cream/frozen-yogurt production machine that adds capacity -- while also requiring some existing equipment to be upgraded -- qualify for Utah's manufacturing sales tax exemption?

Plain-English summary

A frozen yogurt and sherbet manufacturer installed a new "glacier machine" (installation ran February-August 1998) that produces a new hockey-puck-shaped frozen dessert product, alongside its existing production line (which continued making frozen yogurt/sherbet in 3-gallon and half-gallon buckets, unchanged). No existing machine was retired to make room for the new one -- but some "old" equipment had to be upgraded/replaced to accommodate the new machine's addition. The manufacturer asked whether any or all of the installation costs qualified for Utah's sales tax manufacturing equipment exemption under § 59-12-104(14).

The Commission applied the two key defined terms in Rule R865-19S-85:

• "New or expanding operations" (100% exempt) includes an expansion of an existing Utah manufacturing operation that increases production capacity -- as long as the new equipment doesn't itself meet the definition of a "normal operating replacement."
• "Normal operating replacements" means new machinery/equipment or parts serving the same/similar purpose as machinery retired from service for any cause within 12 months before or after the new purchase -- these got only a partial, phased-in exemption at the time: 60% for purchases between July 1, 1997 and June 30, 1998, rising to 100% for purchases between July 1, 1998 and June 30, 1999.

Applying that split:

• The glacier machine itself: qualifies as new or expanding operations -- it increased production capacity (a new product) and didn't replace any retired machine. Result: 100% exemption.
• The "upgraded" preexisting equipment that had to be replaced just to make room for/accommodate the new glacier machine: this equipment was retired "due to" a cause (the new installation), so it fits the "normal operating replacement" definition even though it wasn't retired for wear-and-tear reasons. Result: only the phased partial exemption applied -- 60% if bought July 1, 1997-June 30, 1998, or 100% if bought July 1, 1998-June 30, 1999.

What this means for you

Manufacturers adding new production equipment

A genuinely new, capacity-increasing machine that doesn't replace anything gets the full manufacturing exemption. But don't assume ancillary equipment upgraded just to make room for the new machine gets the same treatment -- if that ancillary equipment itself replaces something retired (even indirectly, "due to" the new installation), it's analyzed separately as a normal operating replacement, potentially at a lower exemption percentage depending on the purchase date.

Accountants tracking manufacturing exemption claims on expansion projects

Split your documentation machine-by-machine, not by project. This ruling shows the Commission analyzing the primary new equipment and the incidental "upgraded" equipment under two entirely different Rule R865-19S-85 categories with different exemption percentages -- lump-sum project accounting risks over- or under-claiming the exemption.

Businesses timing capital equipment purchases around exemption-percentage changes

This ruling illustrates a phased-in exemption schedule for normal operating replacements (60% then 100% across two fiscal years) -- if your state exemption for replacement equipment is similarly phased, purchase timing can materially affect the tax cost.

Common questions

Q: Does adding a new production machine that doesn't replace anything qualify for the full manufacturing exemption?
A: Yes, per this ruling, if it increases production capacity and doesn't itself replace retired equipment -- that's "new or expanding operations" under Rule R865-19S-85, fully exempt.

Q: What if I have to upgrade other equipment just to fit the new machine in?
A: Per this ruling, that upgraded equipment is analyzed separately as a "normal operating replacement" (since it replaced equipment retired "due to" the new installation), and got only the phased partial exemption in effect at the time of purchase.

Q: Does "normal operating replacement" require the old equipment to have failed or worn out?
A: No -- per this ruling, the rule covers replacement "due to any cause," which the Commission read broadly enough to include equipment retired simply to accommodate a new installation.

Q: Can another manufacturer rely on this ruling for its own expansion project?
A: Not automatically -- it binds the Commission only for the taxpayer and the specific facts (no other machine retired for the new glacier machine; some equipment separately upgraded). It also applies an exemption-percentage schedule specific to 1997-99 purchases, so current percentages should be verified.

Citations and references

Statutes:

• Utah Code Ann. § 59-12-104(14) (sales tax exemption for manufacturing equipment)

Rules:

• Utah Admin. Code R865-19S-85 (defines "new or expanding operations" as an expansion increasing production capacity, and "normal operating replacements" as equipment replacing retired equipment for any cause within 12 months)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/98-076.pdf

Original ruling text

98-076

Response January 20, 1999

REQUEST LETTER

Dear Ms. Reese:

In February, 1998, we began installing a glacier
machine in our CITY ice cream plant. This machine will be used to make frozen
yogurt and sherbet"pucks@ which will be
sold to COMPANY A stores and COMPANY B stores .Currently, we are selling these
products to these customers in either 2
gallon or 3 gallon containers.

In your opinion would any or all of the costs
associated with installing this machine qualify for the sales tax manufacturing
exemption?

If you need further information, please call me at

.

Thanking you in advance.

Sincerely,

RESPONSE
LETTER

January 20, 1999

RE: Advisory
Opinion - Applying the Manufacturing Exemption to a Glacier Machine

Dear NAME,

We have received your advisory opinion request
concerning your company=s purchase of a glacier machine. You have specifically asked if any or all of
the costs associated with installing the machine qualify for the sales tax
exemption for manufacturing equipment.

We understand from your letter and a telephone
conversation with you the following facts concerning the glacier machine. It is these facts upon which this opinion
rests. Should the facts actually be otherwise, a different opinion might
result. In February, 1998, you began
the installation of the glacier machine, with completion occurring in August,
1998. The new glacier machine produces
frozen yogurt and sherbet and is a new addition on your production line. The production line previously included
other machines that made frozen yogurt and sherbet, and these machines are
still in place and still produce frozen yogurt in either three gallon or
half-gallon bucket sizes. The new
machine increases production capacity by producing an additional product in the
shape and approximate size of a hockey puck.
No other machines were retired or replaced by the new glacier machine;
however, some Aold@ equipment was
upgraded (replaced) by new equipment to accommodate the addition of the new
glacier machine.

Your company is a manufacturer subject to the
provisions of the manufacturing equipment exemption for sales tax found in Utah
Code Ann. '59-12-104(14).
Critical to what exemptions may apply to your recent installation is a
determination of whether it is a Anew
or expanding operation@ or a Anormal
operating replacement.@ A 100%
exemption is available for equipment that is deemed Anew or expanding operations.@ While the
100% exemption also applies to Anormal
operating replacements@ purchased between July, 1, 1998, and June 30, 1999,
only a 60% exemption applies for Anormal
operating replacements@ purchased between July 1, 1997, and June 30, 1998.

Utah Admin.
Code R865-19S-85 (copy enclosed) provides definitions of these two critical
terms. Section A.5.(a)(ii) of the
rule provides that Anew or expanding operations@ includes an expansion of an existing Utah
manufacturing operation if the expanded operation increases production
capacity. Your facility is an existing one that has expanded with the addition
of a new glacier machine without the retirement or replacement of other
machines. Resulting is an increased
production capacity. Your new glacier
machine meets the criteria of Subsection (a)(ii), but Section A.5.(b) must also
be met.

Subsection
A.5.(b) provides that the new machine be one that does not meet the definition
of Anormal operating replacements.@ ANormal operating replacements,@ as defined in Subsection A.6.(a), includes new
machinery and equipment or parts that have the same or similar purpose as
machinery or equipment retired from service due to any cause within 12 months
before or after the purchase date of the new machinery and equipment or
parts. The new glacier machine itself
does not replace any retired machine, so it does not qualify as a Anormal operating replacement.@ Accordingly,
it does qualify as Anew or expanding operations@ and would qualify for a 100% sales tax exemption.

However, any other preexisting equipment that had to
be Aupgraded@ in
the installation process replaces equipment retired because of Aany cause,@
the cause here being the installation of the new glacier machine. This equipment meets the definition of Anormal operating replacements@ and consequently does not qualify as Anew and expanding operations.@ Accordingly,
any of this equipment purchased between July 1, 1997, and June 30, 1998, would
receive a 60% sales tax exemption. Any
of this equipment bought between July 1, 1998, and June 30, 1999, would receive
a 100% sales tax exemption.

Please contact us if you have any other questions.

For the Commission,

Joe B. Pacheco, CPA

Commissioner

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