Indiana Administrative Code › Title 45 - DEPARTMENT OF STATE REVENUE › Article 2.2 - SALES AND USE TAX › Rule 5 - Exempt Transactions of a Retail Merchant › Section 5-8 - Sales of manufacturing machinery, tools and equipment used in direct production, manufacture, fabrication, assembly, or finishing of other tangible personal property

Current through July 10, 2024
Authority: IC 6-8.1-3-3
Affected: IC 6-2.5
Sec. 8.
(a) In
				general, all purchases of tangible personal property by persons engaged in the
				direct production, manufacture, fabrication, assembly, or finishing of tangible
				personal property are taxable. The exemption provided in this regulation
[45 IAC 2.2]
extends only to manufacturing machinery, tools,
				and equipment directly used by the purchaser in direct production. It does not
				apply to material consumed in production or to materials incorporated into
				tangible personal property produced.
(b) The state gross retail tax does not apply
				to sales of manufacturing machinery, tools, and equipment to be directly used
				by the purchaser in the direct production, manufacture, fabrication, assembly,
				or finishing of tangible personal property.
(c) The state gross retail tax does not apply
				to purchases of manufacturing machinery, tools, and equipment to be directly
				used by the purchaser in the production process provided that such machinery,
				tools, and equipment are directly used in the production process; i.e., they
				have an immediate effect on the article being produced. Property has an
				immediate effect on the article being produced if it is an essential and
				integral part of an integrated process which produces tangible personal
				property.
-EXAMPLES-
(1)
				Aluminum pistons are produced in a manufacturing process that begins, after the
				removal of raw aluminum from storage inside the plant, with the melting of the
				raw aluminum and the production of castings in the foundry; continues with the
				machining of the casting and the plating and surface treatment of the piston;
				and ends prior to the transportation of the completed pistons to a storage area
				for subsequent shipment to customers. Because of the functional
				interrelationship of the various steps and the flow of the work-in-process, the
				total production process, comprised of such activities, is
				integrated.
(2) The following types
				of equipment constitute essential and integral parts of the integrated
				production process and are, therefore, exempt. The fact that such equipment may
				not touch the work-in-process or, by itself, cause a change in the product, is
				not determinative.
(A) Air compressors used as
				a power source for exempt tools and machinery in the production
				process.
(B) An electrical
				distribution system, including generators, transformers, electrical switchgear,
				cables inside or outside the plant, and related equipment used to produce
				and/or supply electricity to exempt manufacturing equipment used in direct
				production.
(C) A pulverizer for
				raw materials to be used in an exempt furnace to produce and/or supply energy
				to manufacturing equipment used in direct production.
(D) Boilers, including related equipment such
				as pumps, piping systems, etc., which draw water, or produce and transmit steam
				to operate exempt machinery and equipment used in direct production.
(E) A work bench used in conjunction with a
				work station or which supports production machinery within the production
				process.
(F) Safety clothing or
				equipment which is required to allow a worker to participate in the production
				process without injury or to prevent contamination of the product during
				production.
(G) An automated scale
				process which measures quantities of raw aluminum for use in the next
				production step of the casting process in the foundry.
(3) The following types of equipment
				constitute essential and integral parts of the integrated production process
				and are, therefore, exempt. The fact that such equipment is built in a manner
				to service various pieces of exempt equipment, as an alternative to building
				the equipment into each of the pieces of exempt machinery, is not
				determinative.
(A) Pumping and filtering
				equipment and related tanks and tubing used to supply lubricating and coolant
				fluids to exempt drilling and cutting machinery.
(B) Cooling towers and related pumps and
				piping used to cool, circulate, and supply water employed to control the
				temperature of exempt furnaces and exempt machines used in the foundry and
				machining areas.
(C) Pumping and
				filtering equipment, including related tanks and tubing, is used to supply
				lubricating and coolant fluids to both exempt and nonexempt equipment. On the
				average, 90% of the fluid is used for the exempt equipment employed in direct
				production and 10% is used for the nonexempt equipment. The taxpayer is
				entitled to an exemption equal to 90% of the gross retail income attributable
				to the transaction or transactions in which the equipment comprising the
				production process was purchased.
(4) Because of the lack of an essential and
				integral relationship with the integrated production system in Example (1), the
				following types of equipment are not exempt:
(A) Equipment and furnishings located in the
				administrative offices of the plant.
(B) Clothing or other equipment furnished to
				workers that is used primarily for the workers' comfort and convenience if the
				workers are able to participate in the production process without it.
(C) An electrical distribution system,
				including electrical switchgear, transformers, cables, and related equipment
				used to supply electricity to the administrative office building.
(D) A boiler used to produce steam for
				general heating in the plant or administrative office building.
(E) A fire extinguisher hung on a wall inside
				the plant.
(F) Ceiling lights for
				general illumination in the plant area.
(G) Equipment used to remove raw materials
				from storage prior to introduction into the production process or to move
				finished products from the last step of production.
(5) A computer is used to control and monitor
				various aspects of the plating and surface-treatment operations in Example (1).
				The computer is located in a separate room in a different part of the plant
				from the plating and surface-treatment operations but is connected to the
				equipment comprising those operations by means of electrical devices. The
				computer equipment, including related terminals, printer, and memory, data
				storage, and input/output devices, is exempt because its use in this manner is
				an integral and essential part of the integrated production process.
(6) A computer is used to process accounting,
				personnel, and sales data. The computer is taxable because its use in this
				manner is not an integral and essential part of the integrated production
				process.
(7) A computer is used 40%
				of the time to perform the functions described in Example (5) and 60% of the
				time to perform the functions described in Example (6). The taxpayer is
				entitled to an exemption for the computer equipment, including related
				equipment such as that described in Example (5), equal to 40% of the gross
				retail income attributable to the transaction or transactions in which the
				computer equipment was purchased.
(8) A manufacturer of high technology
				electronic equipment uses microscopes to enable technicians to produce
				miniaturized products which could not otherwise be produced. The microscope is
				essential and integral to the production process. The microscopes are exempt
				from tax.
(9) A manufacturer of
				printed circuit boards uses a computerized locator system to assist and direct
				employees in placing components in their correct positions on printed circuit
				boards. The system visually demonstrates the location on the board requiring a
				component and at the same time dispenses the appropriate component for
				insertion by the employee. The locator system is an essential and integral part
				of the integrated production process and is, therefore, exempt.
(10) An electrical distribution system,
				including electrical switchgear, transformers, cables, and related equipment,
				is used to supply electricity to both equipment used in production and to an
				administrative office building. On the average, 90% of the electricity is used
				for the equipment employed in direct production and 10% for the administrative
				office building. The taxpayer is entitled to an exemption equal to 90% of the
				gross retail income attributable to the transaction or transactions in which
				the equipment comprising the electrical distribution system was
				purchased.