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Declaratory Rulings

State of Rhode Island - Division of Taxation

Declaratory Rulings

Ruling Request No. 2012-01

Request for Ruling Regarding the Exemption of Certain Tangible Personal Property, Utilities, and Machinery and Equipment used in the Process of Manufacturing as Provided by R.I.G.L. § 44-18-30(7)(i) and § 44-18-30(22)

On behalf of your client, Company A, ("Taxpayer") and its subsidiary, Company B, ("Subsidiary"), you request a declaratory ruling pursuant to R.I. Gen. Laws § 42-35-8 and Division of Taxation Reg. DR 03-01 regarding the application of the exemptions to the sales and use tax set forth in R.I. Gen. Laws § 44-18-30(7) and § 44-18-30(22) to certain activities of Taxpayer and Subsidiary.

Facts

The facts set forth in your request for ruling dated August 7, 2012 form the basis for this ruling.

The Division of Taxation ("Division") has previously determined with regard to Taxpayer that the process of creating asphalt for resale ("Manufactured Product") is "manufacturing" as that term is used in R.I. Gen. Laws § 44-18-30(7)(iv). Consequently, the tangible personal property and utilities used to manufacture the Manufactured Product is exempt from sales and use taxes pursuant to R.I. Gen. Laws § 44-18-30(7), and the machinery and equipment and related items used to manufacture the Manufactured Product is exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(22).

Since January 1, 2012, Subsidiary, not Taxpayer, has manufactured the Manufactured Product using its machinery and equipment and related items. Subsidiary sells the Manufactured Product directly to customers who install the Manufactured Product, and Subsidiary charges sales tax on those sales. In addition, Subsidiary sells the Manufactured Product to the Taxpayer which uses the Manufactured Product in contracts that it performs. These transactions are bona fide sales at arms length for value. Subsidiary charges sales tax for those sales unless the purchaser, including Taxpayer, qualifies for another exemption, such as the exemption for state or political subdivisions set forth in R.I. Gen. Laws § 44-18-30(8).

Taxpayer represents that to the best of its knowledge or that of its representative, the identical issue is not being considered by the Division of Taxation in connection with an active examination or audit of a tax return already filed.

Taxpayer has not filed and is not filing a ruling request on the same or similar issue to the Internal Revenue Service or the taxing jurisdiction of another state.

Ruling requested

Notwithstanding any ruling in any pending case to which the Division is a party, whether all of the tangible personal property, utilities, and machinery and equipment and related items used in the process of manufacturing the Manufactured Product since January 1, 2012, are exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(7) and § 44-18-30(22).

Discussion

R.I. Gen. Laws § 44-18-30(7) establishes the following exemption from the sales and use taxes for personal property used in a "manufacturing":

(i) From the sale and from the storage, use, or other consumption in this state of computer software, tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, and water, when the property of service is purchased for the purpose of being manufactured into a finished product for resale, and becomes an ingredient, component, or integral part of the manufactured, compounded, processed, assembled, or prepared product, or if the property or service is consumed in the process of manufacturing for resale computer software, tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, or water.

(ii) "Consumed" means destroyed, used up, or worn out to the degree or extent that the property cannot be repaired, reconditioned, or rendered fit for further manufacturing use.

(iii) "Consumed" includes mere obsolescence.

(iv) "Manufacturing" means and includes manufacturing, compounding, processing, assembling, preparing, or producing.

(v) "Process of manufacturing" means and includes all production operations performed in the producing or processing room, shop, or plant, insofar as the operations are a part of and connected with the manufacturing for resale of tangible personal property, electricity, natural gas, artificial gas, steam, refrigeration, or water and all production operations performed insofar as the operations are a part of and connected with the manufacturing for resale of computer software.

(vi) "Process of manufacturing" does not mean or include administration operations such as general office operations, accounting, collection, sales promotion, nor does it mean or include distribution operations which occur subsequent to production operations, such as handling, storing, selling, and transporting the manufactured products, even though the administration and distribution operations are performed by or in connection with a manufacturing business.

R.I. Gen. Laws § 44-18-30(22) establishes the following exemption from the sales and use tax for certain machinery and equipment used in "manufacturing":

(22) Manufacturing machinery and equipment.
 
(i) From the sale and from the storage, use, or other consumption in this state of tools, dies, and molds, and machinery and equipment (including replacement parts), and related items to the extent used in an industrial plant in connection with the actual manufacture, conversion, or processing of tangible personal property, or to the extent used in connection with the actual manufacture, conversion or processing of computer software as that term is utilized in industry numbers 7371, 7372, and 7373 in the standard industrial classification manual prepared by the technical committee on industrial classification, office of statistical standards, executive office of the president, United States bureau of the budget, as revised from time to time, to be sold, or that machinery and equipment used in the furnishing of power to an industrial manufacturing plant. For the purpose of this  subdivision, "industrial plant" means a factory at a fixed location primarily engaged in the manufacture, conversion, or processing of tangible personal property to be sold in the regular course of business;

(ii) Machinery and equipment and related items are not deemed to be used in connection with the actual manufacture, conversion, or processing of tangible personal property, or in connection with the actual manufacture, conversion or processing of computer software as that term is utilized in industry numbers 7371, 7372, and 7373 in the standard industrial classification manual prepared by the technical committee on industrial classification, office of statistical standards, executive office of the president, United States bureau of the budget, as revised from time to time, to be sold to the extent the property is used in administration or distribution operations;

(iii) Machinery and equipment and related items used in connection with the actual manufacture, conversion, or processing of any computer software or any tangible personal property which is not to be sold and which would be exempt under subdivision (7) or this subdivision if purchased from a vendor or machinery and equipment and related items used during any manufacturing, converting or processing function is exempt under this subdivision even if that operation, function, or purpose is not an integral or essential part of a continuous production flow or manufacturing process;

(iv) Where a portion of a group of portable or mobile machinery is used in connection with the actual manufacture, conversion, or processing of computer software or tangible personal property to be sold, as previously defined, that portion, if otherwise qualifying, is exempt under this subdivision even though the machinery in that group is used interchangeably and not otherwise identifiable as to use.

Ruling

The tangible personal property, utilities, and machinery and equipment and related items used in the processing of manufacturing the Manufactured Product since January 1, 2012 by Subsidiary is exempt from the sales and use tax pursuant to R.I. Gen. Laws § 44-18-30(7)(i) and § 44-18-30(22).

This ruling may be relied upon by Taxpayer and Subsidiary and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

David M. Sullivan
Tax Administrator
September 21, 2012