Revenue Ruling 01-11-1
Nebraska Sales and Use Tax
Supersedes Revenue Ruling 01-08-2 (May 19. 2008)
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. What is a person “engaged in the business of manufacturing” for purposes of this exemption?
Conclusion:
“Engaged in the business of manufacturing” means that manufacturing is the primary commercial activity of the person. Only persons who derive more of their total annual revenues from sales of tangible personal property they manufacture and sell, or from production labor performed on products sold as tangible personal property by other manufacturers, than from any other commercial activity, are engaged in the business of manufacturing. Persons who derive more of their total annual revenue from a commercial activity other than manufacturing, such as sales of products manufactured by others, annexed property, intangible property, or services, are not “engaged in the business of manufacturing” for purposes of the manufacturing machinery and equipment exemption.
Website hosting by a service provider is not one of the statutorily enumerated services subject to tax in Nebraska.
Definitions:
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; or the purification or transportation of water.
Manufacturing machinery and equipment. 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.
Person. Person is defined in Neb. Rev. Stat. § 77-2701.25 as any individual, firm, partnership, limited liability company, joint venture, association, corporation, estate, trust, business trust, receiver, trustee, syndicate, cooperative, assignee, or other group or combination acting as a unit.
Production labor. Production labor is defined in Nebraska Sales and Use Tax Reg-1-082, Labor Charges, subsection 02A, as labor used for producing, fabricating, processing, printing, or imprinting tangible personal property for consumers during which the tangible personal property is created, transformed, or reduced to a different state, quality, form, property, or thing.
Total annual revenues. Total annual revenues mean the person’s revenues from all of the activities, locations, divisions, departments, or operations of the person, both within and outside this state, and includes sales of annexed property, tangible personal property, services, or intangibles. Total annual revenues are measured over a period of 12 consecutive months, including the month in which the manufacturing machinery and equipment is placed in service.
Analysis:
Neb. Rev. Stat. § 77-2701.47(1) provides that equipment used to manufacture tangible personal property will qualify for the sales tax exemption for manufacturing machinery and equipment if it meets two criteria. The exemption requires that:
It is the position of the Nebraska Department of Revenue that on and after October 1, 2010, a person must be primarily a manufacturer in order to be considered “engaged in the business of manufacturing.” “Primarily a manufacturer” means that more of the person’s total annual revenues are derived from sales of products it manufactures and sells as tangible personal property, or from production labor performed on products sold as tangible personal property by other manufacturers, than is derived from any other commercial activity. For example, a business that derives 40% of its total annual revenues from sales of tangible personal property it manufactures, 30% from sales of tangible personal property manufactured by others, and 30% from servicing both would be primarily a manufacturer and could purchase machinery and equipment used in its manufacturing operation exempt from sales and use tax. This position is consistent with the general rule of law that statutory exemptions are to be strictly construed.
This ruling must be read in conjunction with Revenue Rulings 1-05-01, Manufacturing Machinery and Equipment, and 1-06-6, Molds and Dies. This Ruling supersedes Revenue Ruling 01-08-2.
APPROVED:
Douglas A. Ewald
Tax Commissioner
April 18, 2011