North Dakota Administrative Code › Title 81 - Tax Commissioner › Article 81-04.1 - Sales and Use Taxes › Chapter 81-04.1-01 - General Rules › Section 81-04.1-01-23 - Manufacturing machinery and equipment

Current through Supplement No. 393, July, 2024
Manufacturing is a process which produces a new article with
				  a different form, use, and name. The modification of articles of tangible
				  personal property is not manufacturing. For example, the creation of steel
				  ducts or I-beams is manufacturing whereas the modification of steel ducts or
				  I-beams to meet the specifications of a particular real property construction
				  contract is not manufacturing. To be considered manufacturing, the raw
				  materials must be materially altered.
By way of illustration and not of limitation, the following
				  are manufacturers: agricultural commodity production facility, food, beverage,
				  confectionary plants; bakeries; textile mills; apparel makers; wood and lumber
				  plants; furniture and fixture makers; paper product makers; printers and
				  publishers (includes newspapers); chemical producers; leather good plants;
				  stone, clay, glass, concrete product makers; cement and asphalt plants; metal
				  ware makers; auto/aircraft makers; dairy processors (not producers); photo
				  finishers (not photographers); and dental, medical, and ophthalmolic labs.
By way of illustration and not of limitation, the following
				  are not manufacturers: farmers or ranchers, construction contractors, refining
				  companies, artists, utilities, nurseries, restaurants, pharmacists,
				  drycleaners, photographers, advertisement agencies, secretarial services,
				  computer programmers, auto body shops, repair shops, radio and television
				  stations, architects, jewelers, grain elevators, and tire retreaders or
				  recappers.
The purchase or rental of machinery and equipment is exempt
				  from sales and use taxes if the machinery or equipment:
1. Is used directly in the process of
				manufacturing tangible personal property for wholesale, retail, or lease;
2. Is used in a new manufacturing
				plant or in a physical or economic expansion of an existing plant; and
3. Is used directly in the
				manufacturing process more than fifty percent of the time the machinery or
				equipment is used by the manufacturer.
The manufacturing process begins at the point where the raw
				  materials are first received at the plantsite and includes all direct processes
				  prior to transporting the finished product from the plantsite. In addition,
				  machinery and equipment used by a manufacturer to conduct research,
				  development, and design activities qualify for the sales and use tax exemption.
				  Examples of research, development, and design equipment include computer
				  software and hardware used to draw, design, or plan products and machinery and
				  equipment used to build or test prototype models.
Machinery and equipment used directly in the manufacturing
				  process include molds and dies that determine the physical characteristics of
				  the finished product or its packaging material, computers and related equipment
				  that directly control or measure the manufacturing process, and testing
				  equipment used to measure or test product quality.
Machinery and equipment used directly in the manufacturing
				  process also include temperature or humidity control equipment necessary to
				  maintain certain temperature or humidity levels in a limited area of the
				  processing or manufacturing facility where either temperature or humidity must
				  be closely regulated for the proper function or production process to occur.
Equipment or machinery used for pollution control or general
				  heating or cooling of the facility or used to otherwise control the working
				  environment does not qualify for the tax exemption. Also, items which are
				  consumed or destroyed in the manufacturing process but which do not become a
				  part of the finished product are not machinery and equipment and are subject to
				  sales and use tax. Machinery and equipment not used directly in the
				  manufacturing process include repair parts and equipment used for repairing,
				  cleaning, or maintaining facilities, machinery, or equipment; handtools; backup
				  or standby power supplies; computer hardware and software used to maintain
				  inventory, production, or scheduling records; waste disposal or treatment
				  facilities; and safety and security equipment such as fire sprinkler systems
				  and burglar alarms. Purchase of these items by a manufacturer is taxable, and
				  suppliers shall charge sales or use tax on these items. If the items are
				  purchased from an out-of-state supplier or if a North Dakota supplier fails to
				  charge the tax, the North Dakota manufacturer shall report the sales or use tax
				  directly to the North Dakota tax commissioner.
Requests by the manufacturer to purchase or lease machinery
				  and equipment without paying tax or for refunds of tax paid on machinery or
				  equipment which qualify for exemption must be made in writing to the tax
				  commissioner. Only the manufacturer may apply for a refund of the sales or use
				  tax paid on exempt machinery or equipment. A request for refund must include
				  documentation showing the amount of tax paid by the manufacturer or the
				  contractor. The tax commissioner reserves the right to make an onsite
				  inspection prior to granting permission to purchase qualifying machinery and
				  equipment without paying tax or prior to approving a refund. An onsite
				  inspection by the tax commissioner does not preclude an audit of the taxpayer's
				  books and records.
The tax commissioner shall respond in writing to each
				  exemption request stating whether or not the machinery or equipment qualifies
				  for the exemption. The manufacturer may provide the approval letter to its
				  equipment and machinery suppliers to avoid paying sales or use taxes on
				  approved equipment. If a manufacturer purchases equipment before requesting a
				  sales tax exemption, it shall pay all applicable sales and use taxes at the
				  time of purchase but may apply to the tax commissioner for a refund of the
				  taxes paid.
A contractor consuming or installing materials, machinery, or
				  equipment shall pay the applicable sales or use taxes and the manufacturer
				  shall apply in writing for a refund of the taxes paid by the contractor on
				  machinery or equipment qualifying for a sales and use tax exemption.
To receive a refund of taxes paid by a contractor, the
				  manufacturer must provide documentation showing that the contractor paid North
				  Dakota sales or use taxes on the qualifying machinery and equipment installed
				  into the manufacturing facility. The tax commissioner may request an onsite
				  inspection of the manufacturing facility before approving the refund of taxes
				  paid by a contractor. The manufacturing facility may request that the refund
				  amount be taken as a credit adjustment on its next sales and use tax return;
				  however, the tax exemption must be approved in writing by the tax commissioner
				  before the tax credit may be applied on a sales and use tax return. A letter
				  from the tax commissioner stating the amount of the approved credit must be
				  attached to the sales and use tax return on which the credit was applied.
General Authority: NDCC
					 57-39.2-19
Law Implemented: NDCC
					 57-39.2-01,
					 57-39.2-02.1,
					 57-39.2-04,
					 57-39.2-04.3,
					 57-39.2-25,
					 57-40.2-02.1,
					 57-40.2-04,
					 57-40.2-13