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Ruling 92-16

Sales and Use Taxes Manufacturing Production Process


A limited partnership engaged in the business of satellite broadcasting (hereinafter "the Broadcaster") provides its subscribers with about 80 channels, including pay-per-view movies and several pay-super stations, from its broadcast facility in Connecticut.

In order for the Broadcaster to beam movies from its satellite to its subscribers, it must first transform a movie recorded on a standard analog video tape into a special optical disk. This process is performed by means of a highly technical system of specially-designed high-speed encoders. The encoding machinery reads the film and converts it to a digital format through a series of steps. This procedure must be completed for each film which the Broadcaster plans to broadcast. Once produced, the optical disks are stored and played back for broadcast from the Broadcaster's Connecticut facility. The optical disks produced are thus not provided to the subscribers; in fact, the information on the optical disks is useless to the subscriber without a decoder, which allows the data contained on the optical disk, beamed to the subscriber via satellite, to be played back on a standard television set.


Whether the sale of encoding machinery used to produce the optical disks is exempt from sales and use taxes, under Conn. Gen. Stat. §12-412(34), as machinery used in a manufacturing production process.


Sales and use taxes are imposed, inter alia, on the sale of tangible personal property for a consideration; Conn. Gen. Stat. §12-407(2). Certain of such transactions are exempt from sales and use taxes, including, "[sales of, and the storage, use or other consumption of machinery used directly in a manufacturing production process." Conn. Gen. Stat. §12-412(34). Conn. Agencies Regs. §12-412(34)-1 guides the Department's construction and interpretation of the exemption for manufacturing machinery.

In order for any machinery to be exempt from tax under Conn. Gen. Stat. §12-412(34), it must be used in a manufacturing production process. Conn. Agencies Regs. §12-412(34)-1(c) defines "manufacturing" as

an operation or 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. [Emphasis added.]

The requirement that manufacturing must involve a finished product intended for sale is repeated in the definition of "manufacturing production process" in subsection (d) of the regulation:

As used in this regulation, the term "manufacturing production process" means the activities or series of activities of which manufacturing consists, beginning with the movement of materials, after their receipt, inspection and storage, to the first production machine and ending with the packaging of the manufactured product for its sale to the ultimate consumer. [Emphasis added.]

It is well settled that "statutes that provide exemptions are a matter of legislative grace that must be strictly construed against the taxpayer." Plastic Tooling Aids Laboratory, Inc. v. Commissioner, 213 Conn. 365, 369 (1990). In order for any purchases of the Broadcaster to be exempt under Conn. Gen. Stat. §12-412(34), they must fit squarely within the applicable language of that statute and its regulation. The facts presented by the Broadcaster indicate that the optical disk produced is not intended for sale to consumers, but is instead intended for use by the Broadcaster itself in the providing of its satellite broadcasting service. The disks remain the property of the Broadcaster, and in its possession, at all times. Thus, the process involved in producing the optical disks falls outside the definitions of "manufacturing" and "manufacturing production process" in Conn. Agencies Regs. §12-412(34)-1, upon which the qualification for the manufacturing exemption depends. Absent one of the essential elements of manufacturing, it is not necessary to examine the process further to determine whether it would otherwise qualify for the exemption.

Moreover, even if the Broadcaster's activities otherwise fit within the definition of manufacturing, it is evident that the Broadcaster's machinery was intended to be specifically excluded from the ambit of the exemption. Conn. Agencies Regs. §12-412(34)-1(c)(9) states:

The sale, and the storage, use or other consumption, of equipment used directly in the production and transmission of finished radio, television or cable television programming may be exempt from sales and use taxes under section 12-412(44), but not under section 12-412(34).

At the time this regulatory language was drafted, Conn. Gen. Stat. §12-412(44) contained an exemption for "materials or equipment . . . which are used directly in the production and transmission of finished programs . . . broadcast to the general public by a television or radio station . . ." However, 1991 Conn. Pub. Acts 3, §115 (June Spec. Sess.) deleted the reference to materials and equipment. At present, therefore, the §12-412(44) exemption has no applicability to the Broadcaster's activities that are the subject of this ruling request.


The sale of encoding machinery used by a satellite broadcasting company to produce optical disks that remain the property, and in the possession, of the broadcaster, is not exempt from sales and use taxes under Conn. Gen. Stat. §12-412(34).


September 22, 1992