This information is not current and is being provided for reference purposes only
SN 93(1)
The Manufacturing Recovery Act of 1992 Exemption
for Purchases of Property Used in Manufacturing,
Processing and Fabricating
This publication has been cited in Ruling 94-3; superseded by SN 93(1.1)
BACKGROUND: In the Manufacturing Recovery Act of 1992, 1992 Conn. Pub. Acts 193, §6, the General Assembly provided for an exemption of up to 50 percent of the purchase price for purchases of materials, tools and fuels and machinery and equipment. The new exemption is available to a broader range of such property than the exemptions for purchases of manufacturing machinery, materials, tools and fuel provided by Conn. Gen. Stat. §12-412(18) and (34).
PURPOSE: This Special Notice describes the application of the new exemption from sales and use taxes provided by the Manufacturing Recovery Act of 1992.
EFFECTIVE DATE: Applicable to sales occurring on and after January 1, 1993.
STATUTORY AUTHORITY: 1992 Conn. Pub. Acts 193, §6.
RELATIONSHIP OF NEW EXEMPTION WITH EXEMPTIONS UNDER CONN. GEN. STAT. §12-412(18) AND (34): Conn. Gen. Stat. §12-412(18) exempts purchases of materials, tools and fuel that become an ingredient or component part of tangible personal property to be sold or which are used directly in an industrial plant in the actual fabrication of finished products to be sold. This exemption is described in detail in Conn. Agencies Regs. §12-412(18)-1. Conn. Gen. Stat. §12-412(34) exempts purchases of machinery used directly in a manufacturing production process. This exemption is described in detail in Conn. Agencies Regs. §12-412(34)-1. Both Conn. Gen. Stat. §§12-412(18) and (34) (and the regulations thereunder), which exempt the entire purchase price for purchases of qualifying materials, tools, fuel and machinery, are unchanged and remain in effect. Thus, where both 1992 Conn. Pub. Acts 193, §6 and either Gen. Stat. §12-412(18) or (34) could apply to sales of materials, tools and fuel and manufacturing machinery, only Conn. Gen. Stat. §12-412(18) or (34), as the case may be, is effective.
DEFINITIONS: The following definitions apply only to the exemption under the Manufacturing Recovery Act of 1992 (referred to in this special notice as "the MRA Exemption"). The definitions provided in Conn. Gen. Stat. Section 12-412(18) and (34) and the regulations thereunder continue in effect for purposes of the total exemptions authorized by those statutes.
(1) "Manufacturing" means converting or conditioning tangible personal property by changing its form, composition, quality or character for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. "Changing the quality" of property includes any substantial overhaul of the property.
(2) "Fabricating" means to make, build, create, produce or assemble components of tangible personal property to work in a new or different manner. For example, the term includes such activities as assembling, cutting, perforating, welding, bending or shaping, painting and coating.
(3) "Processing" means the physical application of materials and labor necessary to modify or change the characteristics of tangible personal property. The repair of tangible personal property by restoring it to its original condition is not considered processing of that property, nor is the remodeling of property. The mere packing, unpacking or shelving of a product to be sold is not considered to be processing of that property. Some examples of activities constituting processing are metal, glass or paper recycling and pipe threading.
(4) "Machinery" means the basic machine itself, including all of its component parts and contrivances such as belts, pulleys, shafts, moving parts, operating structures and all equipment or devices used or required to control, regulate or operate the machinery, including without limitation, computers and data processing equipment. The term also includes all replacement and repair parts therefor, whether purchased separately or in conjunction with a complete machine, and regardless of whether the machine or component parts thereof are assembled by the taxpayer or another party. (Note that the reduced rate of tax provided for in Conn. Gen. Stat. §12-408(1)(a) for purchases of repair and replacement parts applies only to such parts purchased for use in machinery exempted under Conn. Gen. Stat. §12-412(34).
(5) "Equipment" means a device separate from machinery but essential to a manufacturing, processing or fabricating process. Repair and replacement parts for equipment also qualify for the MRA Exemption, under the same terms as provided for parts purchased for machinery. Equipment may be considered "essential" if the manufacturing, processing or fabricating process cannot proceed without that equipment. The fact that equipment is required by law, such as safety equipment, or by practical necessity, such as ceiling lights, does not of itself render equipment "essential."
(6) "Measuring and testing" includes both nondestructive and destructive measuring or testing, and the alignment and calibration of machinery, equipment and tools, in the furtherance of the manufacturing, processing or fabricating of tangible personal property.
(7) "Research and development" means an experimental or laboratory activity that has as its ultimate goal the development of new products, the development of new uses for existing products, or the development or improvement of methods for producing products. Research and development does not include testing or inspection for quality control purposes, efficiency surveys, management studies, consumer surveys or other market research, advertising or promotional activities, or research in connection with literary, historical or similar projects.
(8) "Primarily" means chiefly. For example, if a machine is used for two different functions, one of which would qualify the machine for the MRA Exemption and the other of which would not, the machine is used primarily in the activity in which it is used more than 50 percent of the time. If, however, the machine is used for three or more different functions, the machine is used primarily in the activity in which it is used the greatest percentage of the time.
(9) "Substantial overhaul" means an activity that results in a significantly greater service life than the property undergoing the manufacturing, processing or fabricating process would have had in the absence of such overhaul or with significantly greater functionality within the original service life of the property. In other words, "substantial overhaul" means materially enhancing the value, use, life expectancy, strength or capacity of the property. "Substantial overhaul" requires more than merely restoring the original functionality for the balance of the original service life, such as by correcting an existing defect or putting the property back in efficient operating condition.
(10) "Metal finishing" includes, but is not limited to, the following activities: grinding, filing or sanding surfaces of metal items; removing excess metal with presses equipped with trimming dies or grinding wheels; examining the surface of metal to detect defects, such as dents, scratches or breaks; removing defects and filling an uneven surface with solder;smoothing the surface of an item to a specified finish with sandblasting or shot-blasting equipment; removing scale by dipping a metal forging in acid solution; heat treating to improve the physical properties of metal; and polishing a metal surface.
(11) "Industrial plant" means an establishment which has manufacturing, processing or fabricating of finished products to be sold as its predominant purpose and that is generally recognized as such. For purposes of this definition, "predominantly" means more than 50 percent. In determining whether an establishment has such manufacturing, processing or fabricating as its predominant purpose, the Department will examine the facts and circumstances of each case, using the following principles as guidelines:
(A) If the floor space of the establishment is predominantly devoted to manufacturing, processing or fabricating of finished products to be sold, it is more likely to be an industrial plant. Floor space of the establishment devoted to research and development preparatory to the process or to measuring and testing will be considered to be floor space devoted to manufacturing, processing or fabricating.
(B) If the number of employees working at the establishment are predominantly working in manufacturing, processing or fabricating of finished products to be sold, it is more likely to be an industrial plant. The number of employees working at the establishment at research and development preparatory to the process or to measuring and testing will be considered to be employees working at manufacturing, processing or fabricating.
(C) If the wages and salaries of employees working at the establishment are predominantly wages and salaries of employees working in manufacturing, processing or fabricating of finished products to be sold, it is more likely to be an industrial plant. The wages and salaries of employees working at the establishment at research and development preparatory to the process or to measuring and testing will be considered to be wages and salaries of employees working at manufacturing, processing or fabricating.
(D) If the costs of operating the establishment are predominantly attributable to the costs of manufacturing, processing or fabricating of finished products to be sold, it is more likely to be an industrial plant. The operating costs of the establishment attributable to research and development preparatory to the process or to measuring and testing will be considered to be operating costs of manufacturing, processing or fabricating.
(E) If sales made at the establishment are predominantly of products manufactured, processed or fabricated elsewhere, it is more likely that the manufacturing, processing or fabricating aspect of the establishment is incidental to its retail aspect, and it is less likely to be an industrial plant.
The term "industrial plant" does not encompass cottage industries. The term "cottage industries" means establishments at which manufacturing, processing or fabrication takes place in a residential dwelling or in a building on the grounds of a residential dwelling. If an establishment is not located in an area zoned as commercial or industrial, or if residential use is among the uses being made of the establishment, it is less likely to be an industrial plant.
(12) "Retail-based manufacturing, processing or fabricating" means any establishment primarily engaged in business (A) as a retailer of tangible personal property, (B) as a retailer of services, or (C) in the furnishing, preparing or serving of food, meals or drinks, which manufactures, processes or fabricates tangible personal property as an incidental part of its business. Establishments of this type include retailers such as restaurants, grocery stores, caterers, meat and fish markets, candy, nut and confectionery stores which process food products primarily for direct sale on the premises to consumers, photographic studios, artists, tailors and establishments that primarily perform fabricating or processing services on the property of others on a retail basis (such services are taxable under Conn. Gen. Stat. §12-407(2)(c)).
EXEMPTION FOR PURCHASES OF MATERIALS, TOOLS AND FUELS: The Manufacturing Recovery Act of 1992 exempts purchases of materials, tools and fuels which:
(1) become an ingredient or component part of tangible personal property to be sold; or
(2) are used or consumed in an industrial plant in the manufacturing, processing or fabricating of tangible personal property to be sold; or
(3) are used or consumed in an industrial plant in any process preparatory or related to the manufacturing, processing or fabricating of tangible personal property to be sold; or
(4) are used or consumed in an industrial plant in the measuring or testing of tangible personal property to be sold.
It must be emphasized that the establishment at which a manufacturing, processing or fabricating process, or a process preparatory or related to such process, or the measuring or testing of tangible personal property to be sold, takes place must be an industrial plant in order for the MRA Exemption to apply to purchases of materials, tools or fuels used or consumed in such processes.
The exemption includes purchases of materials, tools and fuels used in repairing and maintaining machinery and equipment qualifying for the MRA Exemption (as discussed below), because such items are used in a process related to manufacturing, processing or fabricating of products to be sold. The exemption also includes purchases of materials, tools and fuels used in a preparatory process involving activities carried on in research and development or performed with regard to preparing the materials to be used or consumed, or in making ready the machinery, equipment or tools to be used, in the manufacturing, processing or fabricating process itself.
Note that there is no requirement that materials, tools and fuels be directly used as there is in the exemption under Conn. Gen. Stat. Section 12-412(18) and Conn. Agencies Regs. Section 12-412(18)-1 to apply.
EXEMPTION MACHINERY AND EQUIPMENT: The Manufacturing Recovery Act of 1992 exempts purchases of machinery and equipment which will be used primarily in manufacturing, processing or fabricating tangible personal property; specifically, in one or more of the uses set forth in the statute:
(1) Research and development, measuring or testing with respect to or in furtherance of the manufacturing, processing or fabricating of tangible personal property;
(2) Use at any stage of the manufacturing, processing or fabricating process from the time any raw materials are received to the time the product is ready for delivery or storage, including overpacking and crating. Thus, activities such as weighing and testing materials upon receipt, and placing packages in a form to be sold at retail in large boxes, stacking the boxes on pallets, and covering the pallets with shrink-wrap for shipment are considered to be within the scope of the process qualifying for the MRA Exemption, whereas, equipment which loads the packaged product into storage or delivery vehicles is beyond the scope of the qualifying process, and the purchase of such equipment is fully taxable;
(3) Use primarily to maintain or repair any machinery or equipment described in (1) or (2) above; or
(4) Use primarily for metal finishing.
ITEMS THAT DO NOT QUALIFY FOR EXEMPTION UNDER THE MANUFACTURING RECOVERY ACT OF 1992: The exemption for purchases of materials, tools and fuels and machinery and equipment does not apply to purchases of such items used primarily in administration, general management, sales or any other activity which does not constitute manufacturing, processing or fabricating. In addition, purchases of machinery and equipment used primarily in retail-based manufacturing, processing or fabricating do not qualify for the exemption.
PURCHASES BY INDEPENDENT CONTRACTORS PERFORMING ACTIVITIES FOR MANUFACTURERS, PROCESSORS OR FABRICATORS: Purchases of items used in conducting the activities of manufacturing, processing or fabricating, or research and development, measuring and testing (including adjusting and calibrating machinery, equipment and tools) and maintaining and repairing machinery and equipment may qualify for the MRA Exemption even if those activities are performed by independent contractors instead of by the manufacturer, processor or fabricator itself.
An independent contractor may purchase machinery and equipment under the MRA Exemption if the contractor is primarily engaged in (A) performing research and development with respect to or in furtherance of manufacturing, processing or fabricating, (B) performing measuring and testing with respect to or in furtherance of manufacturing, processing or fabricating, or (C) maintaining or repairing qualifying manufacturing, processing or fabricating machinery or equipment.
An independent contractor who is engaged in research and development or who performs maintenance and repair services to qualifying machinery and equipment may purchase materials, tools and fuels under the MRA Exemption only if the contractor's establishment is an industrial plant.
PROVIDERS OF TAXABLE MAINTENANCE AND REPAIR SERVICES: The services of adjusting and calibrating machinery, equipment or tools (such services are included in the definition of "measuring and testing") or maintaining or repairing machinery and equipment are considered to be taxable under Conn. Gen. Stat. §12-407(2)(i)(GG) as repair or maintenance services to tangible personal property. While providers of such services must collect sales tax on their charges, they may purchase their machinery and equipment and materials, tools and fuels under the MRA Exemption if they qualify under 1992 Conn. Pub. Acts 193, §6.
PERCENTAGE OF GROSS RECEIPTS OR SALES PRICE TO BE EXCLUDED FROM THE MEASURE OF SALES AND USE TAXES: The MRA Exemption is phased in over a five-year period, culminating in a maximum exemption of 50 percent of the gross receipts or sales price. Following is the schedule of applicable percentages:
| January 1, 1993 to June 30, 1993: | 10% |
| July 1, 1993 to June 30, 1994: | 20% |
| July 1, 1994 to June 30, 1995: | 30% |
| July 1, 1995 to June 30, 1996: | 40% |
| July 1, 1996 and beyond: | 50% |
Thus, for example, when a qualifying item is purchased in May 1993 for $10,000, the tax is calculated as follows:
Purchase price - $10,000
less 10% of purchase price - 1,000
= 9,000
multiplied by tax rate - x 6%
Sales tax to be paid - $ 540
CERTIFICATE OF EXEMPTION: A certificate (CERT-108) must be presented to the seller by the purchaser of materials, tools or fuels on the purchase of which exemption under the MRA Exemption is claimed. A certificate (CERT-109) must be presented to the seller by the purchaser of machinery or equipment on the purchase of which exemption under the MRA Exemption is claimed. Acceptance of these certificates in good faith by the seller from a purchaser engaged in manufacturing, processing or fabricating shall relieve the seller of the burden of proving that the property purchased is subject to the MRA Exemption. If the purchaser makes any use of the property other than the use stated on the certificate, the property shall become subject to tax at the time of such use based upon the full purchase price.
SN 93(1)
Sales and use taxes
Issued: 1/19/93