Sales and Use Taxes
Materials Used in Fabrication
Repair or Maintenance of Tangible Personal Property
A manufacturing company (hereinafter "the Company") is engaged in the manufacture of metal parts which it grinds to specifications by means of metal grinding wheels. The cutting surfaces of the wheels are coated with a fine, gritty substance called cubic boron nitride (hereinafter "CBN"), which is very costly.
At frequent intervals during the manufacturing process, the CBN wears off of the cutting surfaces of the grinding wheels, and the Company sends the wheels to any of several vendors (hereinafter "Replating Companies") to be replated. The cost of replating a worn grinding wheel varies from 50% to 90% of the cost of a new grinding wheel, depending on the size of the wheel. Most of the cost of replating is the cost of CBN. The actual labor involved in replating is relatively minor--the wheel must be placed in a strip tank for several hours to remove the worn CBN, then the wheel is removed, masked and placed in a plating tank, where a new CBN coating is applied to the cutting edge of the wheel. One of the Replating Companies has broken down the cost of its replating process as follows: 77% for materials (CBN), 17% for plating labor and 6% for stripping labor.
Whether the replating process constitutes the manufacture of a tool for purposes of Conn. Gen. Stat. §§ 12-412(18) and (34);
Whether the CBN used to coat the grinding wheels is a material used by the Company in the production of a finished product to be sold for purposes of Conn. Gen. Stat. § 12-412(18);
Whether all or a portion of the purchase price of the replating is subject to tax as the repair or maintenance of tangible personal property under Conn. Gen. Stat. § 12-407(2)(i)(GG).
There are several important factors that weigh against the argument that the replating process constitutes the manufacture of a tool. First is the definition of manufacturing itself, found in Conn. Agencies Regs. § 12-412(34)-1(c):
... the term "manufacturing" means an operation or an integrated series of operations that substantially transform, by physical, chemical or other means, the form, composition or character of raw or finished materials into a product possessing a new name, nature and use which is intended for sale, whether by the manufacturer or by another on whose behalf the manufacturer has undertaken the manufacture.
It is well established that statutes which grant exemptions from sales and use taxes must be strictly construed against the taxpayer, and any ambiguities in such statutes must be resolved in favor of the Department. See, e.g., United Illuminating Co. v. Groppo, 220 Conn. 749, 752-3 (1992). For a process to be considered manufacturing for purposes of the exemption afforded by Conn. Gen. Stat. § 12-412(34), it must be clearly and unequivocally established that the process substantially transforms certain materials into a new product, that is, something identifiably different from that which began the process. The replating of grinding wheels, as described above, begins with a used grinding wheel that is merely stripped and recoated, on a small fraction of its surface, with a thin layer of new cutting material--it is a grinding wheel when it enters, and a grinding wheel when it emerges from the process. Moreover, to be considered to have been "manufactured" for purposes of our exemption, the finished product must be intended for sale. Since the wheel itself remains the Company's property throughout the process, what is being sold to the Company by the Replating Companies is not a new product--a tool--but rather a material (the CBN) and the labor required to strip and recoat the wheel with that material.
New grinding wheels (as opposed to replated ones) may, of course, be purchased exempt as tools, under Conn. Gen. Stat. § 12-412(18). However, that statute also provides an exemption for the purchase of "materials ... used directly in an industrial plant in the actual fabrication of finished products to be sold," apart from the exemption for tools. Conn. Agencies Regs. § 12-412(18)-1(b)(1) defines "materials" as "such items as lubricants, chemicals, solvents, anodes, catalysts, dyes and refrigerants." This list is not meant to be exhaustive, but all the items on the list are by nature more or less fungible, that is, they are the types of materials that are commonly "used up" at some stage in the fabrication process. Exempt materials may (but need not) come into direct contact with the product. Some are used on machinery, some to make molds, and some are applied directly to the product being fabricated. One of the examples of exempt materials in the latter category is "materials that are used to remove impurities from raw materials being fabricated into finished products to be sold ..." Conn. Agencies Regs. § 12-412(18)-1(b)(2)(B).
The CBN that coats the outside of the grinding wheels is a material that, when applied directly to the product by means of a grinding wheel, removes metal from the Company's product and helps shape it to specifications, and is therefore a "material ... used directly in an industrial plant in the actual fabrication of finished products to be sold." Over time, this material wears off, and the wheel must be stripped and recoated with new material. The facts indicate that the majority of the cost of the replating is for the cost of the CBN. This replating process may be contrasted with the sharpening of a saw blade, a labor-intensive repair service that involves the sharpening of the individual teeth of the tool, but not the addition of material to it. Unlike other materials the Replating Company purchases to perform the stripping and replating of the grinding wheels, such as chemicals used in the stripping process, the CBN retains its separate identity even after it is attached to the grinding wheel.
Repairers of tangible personal property are typically allowed to purchase materials that retain their identity on resale, pursuant to Conn. Gen. Stat. § 12-410, and under the provisions of Conn. Agencies Regs. § 12-426-3(a), which provides that "[r]epairmen are retailers of parts and materials furnished in connection with repair work in which the value of the parts and materials is not inconsequential in relation to the total charge." The Replating Companies should be afforded this treatment for the CBN they purchase and sell to their customers in connection with the repair of grinding wheels, if they separately state the charges therefor. (See also Policy Statement 92(8), which provides that repairers of motor vehicles are allowed to purchase certain parts and materials on a resale basis in connection with their repairs.) The resale of the CBN by the Replating Company to the Company will then be exempt as the sale of a "material" under Conn. Gen. Stat. § 12-412(18), provided the grinding wheel is used by the Company to apply the CBN in the actual fabrication of a finished product to be sold.
The labor involved in the stripping and replating process is taxable as the repair or maintenance of an item of tangible personal property under Conn. Gen. Stat. § 12-407(2)(i)(GG), since it is performed to the Company's property (the grinding wheel), which is being restored to its original condition.
The replating of the Company's grinding wheels does not constitute the manufacture of a tool for purposes of Conn. Gen. Stat. §§12-412(18) and (34).
The CBN that is applied in the replating of grinding wheels qualifies as a "material ... used directly in an industrial plant in the actual fabrication of finished products to be sold," and may be purchased by the Company exempt from sales and use taxes under Conn. Gen. Stat. §12-412(18) and Conn. Agencies Regs. § 12-412(18)-1. The CBN may be purchased by the Replating Companies on resale pursuant to the applicable provisions of Conn. Gen. Stat. § 12-410 and Conn. Agencies Regs. § 12-426-3(a).
The labor provided by the Replating Companies in the stripping and replating of used grinding wheels is taxable as the repair or maintenance of tangible personal property under Conn. Gen. Stat. § 12-407(2)(i)(GG).
Ruling No. 91-13 is clarified by this ruling. The replacement carbide tips used to retip saw blades may be purchased on resale and sold at retail by the repairer if the value of the carbide tips is "not inconsequential to the total charge" for the repair service, and if the charge for the tips is separately stated on the repairer's invoice.
FEBRUARY 9, 1994