SALES AND USE TAX EXEMPTION FOR MANUFACTURING
MACHINERY AND EQUIPMENT
Issue:
Pursuant to Neb. Rev. Stat. §77-2701.47(1), the exemption from sales tax for machinery and equipment for use in manufacturing is limited to purchases by a person engaged in the business of manufacturing. This revenue ruling defines the term “engaged in the business of manufacturing.”
Conclusion:
For purposes of this ruling, only persons who derive more than 50% of their total annual revenue from sales of tangible personal property they manufacture are engaged in the business of manufacturing and may purchase machinery and equipment for use in manufacturing exempt from sales tax. Persons who derive more than 50% of their total annual revenue from business activities other than manufacturing are not “engaged in the business of manufacturing” for purposes of the manufacturing machinery and equipment exemption.
Definitions:
Annual revenues include the person’s revenues to be computed annually using revenue information from the previous fiscal or calendar year end, as applicable.
Engaged in the business of manufacturing shall mean that a person’s annual revenues derived from sales of products it manufactures and sells as tangible personal property are greater than 50% of its total annual revenues.
Manufacturing machinery and equipment is defined in Neb. Rev. Stat. §77-2701.47(1) as any machinery or equipment purchased, leased, or rented by a person engaged in the business of manufacturing for use in manufacturing.
Manufacturing is defined in Neb. Rev. Stat. §77-2701.46 as an action or series of actions performed upon tangible personal property, either by hand or machine, which results in that tangible personal property being reduced or transformed into a different state, quality, form, property, or thing. Manufacturing does not include retail operations; the generation or transmission of electricity; the production or transmission of information, programming, or data; the preparation of food for immediate consumption; the purification or transportation of water; or commercial agriculture operations or the support of those operations.
Person is defined in Neb. Rev. Stat. §77-2701.25 and includes all departments, divisions, locations, and other sub‑units of such person.
Analysis:
Neb. Rev. Stat. §77-2701.47(1) provides that equipment used to manufacture products will qualify for the sales tax exemption for manufacturing machinery and equipment if it meets two criteria. The exemption requires that: (1) the purchaser is a person engaged in the business of manufacturing as defined in this ruling; and, (2) the machinery or equipment must be used in manufacturing.
It is the position of the Department of Revenue that on and after July 1, 2008, a person must be engaged in the business of manufacturing so that at least 50% of the person’s total annual revenues are derived from sales of products it manufactures and sells as tangible personal property in order to purchase manufacturing machinery and equipment exempt from sales or use tax. This position is consistent with the general rule of law that statutory exemptions are to be strictly construed, and with the previous ruling of the Department of Revenue that qualifying machinery and equipment must be used at least 50% of the time for the purposes of manufacturing. (See Revenue Ruling 1-05-01).
Contractors and other persons deriving more than 50% of their total annual revenues from sales of annexed property, services, or intangible property, are not engaged in the business of manufacturing for purposes of this exemption.
Please read this Ruling in conjunction with Revenue Rulings 1-05-01, Manufacturing Machinery and Equipment, and 1-06-6, Molds and Dies. Also, various sales and use tax regulations are superseded to the extent they do not provide for the exemption for purchases of manufacturing machinery and equipment by a person engaged in the business of manufacturing.
APPROVED:
Douglas A. Ewald
Tax Commissioner
May 19, 2008