A. The gross receipts or gross proceeds
derived from sales of tangible personal property consisting of machinery and
equipment used directly in producing, manufacturing, fabricating, assembling,
processing, finishing, and/or packaging of articles of commerce at
manufacturing plants or facilities in Arkansas are exempt from the tax if, and
only if, the machinery and equipment is purchased and used for purposes set
forth in this rule.
B. NEW
MANUFACTURING PLANTS. The gross receipts or gross proceeds derived from the
sale of machinery and equipment purchased and used to create new manufacturing
plants or facilities in Arkansas are exempt from the tax if:
1. The machinery and equipment performs one
or more essential functions and is utilized directly in the manufacturing
process; and
2. The machinery and
equipment is utilized in actual manufacturing operations at any time from the
initial stage where the raw material is first acted upon and changed in any
essential respect through the completion and packaging of the article of
commerce, as defined in GR-55(F)(6) of this rule; and
3. The machinery and equipment does not
consist of hand tools, buildings, transportation equipment, office machines and
equipment, machinery and equipment used in administrative, accounting, sales or
other such activities of the business involved, or any and all other machinery
and equipment not directly used in the manufacturing operation.
C. PLANT EXPANSION. The gross
receipts or gross proceeds derived from the sale of machinery and equipment
purchased and used to expand a manufacturing plant or facility in Arkansas are
exempt from tax if:
1. The machinery and
equipment satisfy the requirements of GR-55(B)(1), (B)(2), and (B)(3); and
either
2. The purchase of the
machinery results in an economic expansion of the taxpayer's plant or facility
(regardless of whether there is a physical expansion) by:
a. Increasing production, volume;
or,
b. Increasing employment;
or,
c. Increasing the number of
different types or models of property that can be manufactured; or
3. The purchase of the machinery
results in a physical expansion of the taxpayer's plant or facility regardless
of whether there is an economic expansion.
D. REPLACEMENT MACHINERY. Machinery and
equipment purchased to replace existing machinery and equipment and used
directly in producing, manufacturing, fabricating, assembling, processing,
finishing or packaging of articles of commerce at manufacturing or processing
plants or facilities in this state will be exempt from the tax if:
1. The machinery and equipment satisfies the
requirements of GR-55(B)(1), (B)(2), and (B)(3); and
2. The "machinery and equipment purchased to
replace existing machinery" means that substantially all of the machinery and
equipment required to perform an essential function is physically replaced with
new machinery. The term "substantially" is intended to exclude routine repairs
and maintenance and partial replacements - but is not intended to mean that
foundations and minor components that can be economically adapted, rebuilt, or
refurbished must be substantially replaced when such replacement would be more
expensive or impractical than adapting, rebuilding or refurbishing the old
foundation or minor components.
3.
When individual machines or machinery are interconnected in order to accomplish
a single function and the function of each such individual machine is not
complete before the adjacent machines begin to function, the result is a new
single identifiable machine. The machinery purchased to replace this resulting
existing machine must satisfy the requirements of GR-55(D)(2) above and the
exemption is not available for the replacement of only some of the individual
machines that now form component parts of the aforementioned machine. An
individual machine that performs a separate distinct function in the
manufacturing operation as part of a production line, constitutes a single
machine for purposes of this exemption and may be replaced tax
exempt.
E. SOFTWARE.
Software necessary for the operation of machinery used directly in
manufacturing is exempt if the software is specifically designed for the
machine. Operating system software which is commercially produced for general
use, such as Windows, Linux, BeOS, DOS, OS/2, UNIX, or Macintosh, is not
exempt. Software which provides word-processing, accounting, graphics,
database, or another similar function not directly associated with the
operation of the manufacturing machinery is subject to tax.
F. DEFINITIONS.
1. "Machinery" means mechanical devices or
combinations of mechanical powers and devices purchased or constructed by a
taxpayer or his agent and used to perform some function and to produce a
certain effect or result. Machinery includes electrical, mechanical, and
electronic components which are a part of machinery and are necessary for the
machine to produce its effect or result.
2. "Equipment" means any tangible personal
property other than machinery as defined in GR-55(F)(1) of this rule, used
directly in the manufacturing process except those items specifically excluded
from the exemption as provided in GR-55(B)(3). In certain circumstances
chemicals can be considered "equipment" for purposes of this exemption. (See
GR-55.1.)
3. "Directly" limits the
exemption to only that machinery and equipment which is used in actual
production during processing, fabricating or assembling raw materials or
semi-finished materials into the form in which such personal property is to be
sold in the commercial market.
Example 1: Machinery and equipment used in actual production include
machinery and equipment that meet all other applicable requirements and which
cause a recognizable and measurable mechanical, chemical, electrical, or
electronic action to take place as a necessary and integral part of
manufacturing, the absence of which would cause the manufacturing operation to
cease. "Directly" does not mean that the machinery and equipment must come into
direct physical contact with any of the materials that become necessary and
integral parts of the finished product. Machinery and equipment which handle
raw, semi-finished, or finished materials or property before the manufacturing
process begins are not utilized directly in the manufacturing process.
Machinery and equipment which are necessary for purposes of storing the
finished product are not utilized directly in the manufacturing process.
Machinery and equipment used to transport or handle product while manufacturing
is taking place are used directly.
Example 2: Machinery and equipment "used directly" in the manufacturing
process shall include, but shall not be limited to the following: molds and
dies that determine the physical characteristics of the finished product or its
packaging materials to the extent that the dies and molds satisfy the
requirement of GR-56; testing equipment to measure the quality of the finished
product; computers and related peripheral equipment that directly control or
measure the manufacturing process; machinery and equipment that produce steam,
electricity, or chemical catalysts and solutions that are essential to the
manufacturing process but which are consumed during the course of the
manufacturing process and do not become necessary and integral parts of the
finished product. NOTE: The exemption is limited only to the machinery and
equipment that produce steam, electricity, or chemical catalysts and solutions
and does not exempt the steam, electricity, or chemical catalysts and
solutions.
Example 3: Machinery and equipment "used directly" in the manufacturing
process shall not include the following: hand tools; machinery, equipment, and
tools used in maintaining and repairing any type of machinery and equipment;
transportation equipment, including conveyors, used solely before or after the
manufacturing process has been started or completed; office machines and
equipment including computers and related peripheral equipment not directly
used in controlling or measuring the manufacturing process; buildings;
machinery and equipment used in administrative, accounting, sales or other such
activities of the business; all furniture; and all other machinery and
equipment not used directly in manufacturing or processing operations as
defined herein.
Example 4: Machinery and equipment used by a manufacturer to produce or
repair replacement dies, molds, repair parts, or replacement parts used or
consumed in the manufacturer's own manufacturing process are not "used
directly" and are not exempt.
4. "Manufacturing" includes those operations
commonly understood within their ordinary meaning, and shall also include
mining; quarrying; extracting and refining of brine, oil, and gas; cotton
ginning; the drying of rice, soybeans and other grains; the manufacturing of
feed; the processing of poultry or eggs and livestock and the hatching of
poultry; and printing of all kinds, types, and characters, including the
services of overprinting and photographic processes incidental to printing; the
processing of scrap metal into grades and bales for further processing into
steel and other metals; the retreading of tires for automobiles, trucks, and
other mobile equipment powered by electrical or internal combustion engines or
motors; the rebuilding or remanufacturing of used parts for automobiles,
trucks, and other mobile equipment powered by electrical or internal combustion
engines or motors, provided that the rebuilt or remanufactured parts - are not
sold directly to the consumer but are sold for resale; and the production of
protective coatings which increase the quality and durability of a finished
product.
5. "Hand tool" means any
tool which is solely powered by a human being.
6. "Article of commerce" includes any
property to be placed on the market for retail sale to the general public and
any property which becomes a recognizable integral part of a manufactured
product in its finished and packaged form ready to be placed on the market for
retail sale. Custom items which are produced for specific customers in response
to special orders and which are not readily marketable to the general public
are not articles of commerce.
7.
"Foundation," as used in GR-55(D)(2), means a customized foundation necessary
for the support and proper operation of the machinery. The foundation may be
affixed to a building foundation but must be capable of being removed without
major structural damage to the building or its foundation.
8. The exempt gross receipts or gross
proceeds under this rule include gross receipts or gross proceeds as defined in
GR-3. See also GR-66 for the exemption related to pollution control machinery
and equipment.
G.
CONTRACTORS. A contractor may claim an exemption from sales tax for machinery
and equipment that meets all the requirements for exemption as manufacturing
machinery and equipment if the contractor purchases the machinery and equipment
in connection with a construction contract with a manufacturer who will use the
machinery and equipment for manufacturing articles of commerce. A contractor
may not claim the manufacturing exemption on items of machinery and equipment
that the contractor will use to perform installation or construction work
necessary to complete or perform the contract with the manufacturer.
H. PACKAGING AND LABELING MACHINERY AND
EQUIPMENT. Machinery and equipment that generally meets the requirements for
exemption as machinery and equipment used in manufacturing and that is used in
the packaging of articles of commerce may be purchased by the manufacturer
exempt from tax. Machinery and equipment that is used for the manufacturer's
own convenience to palletize or otherwise package items for warehousing or
shipping purposes other than to ship the product to the purchaser does not
qualify for the exemption from tax.
Example: Manufacturer sells a product which is shrink-wrapped and
palletized for shipping to its customers. The shrink-wrapping machine and the
palletizer used for these functions may be purchased exempt from tax.
Manufacturer purchased a second palletizer which is located in the warehouse
and is used to palletize items for efficient storage in the warehouse. The
purchase of this palletizer is taxable.
I. TESTING EQUIPMENT. Testing equipment that
is used to measure the quality of the manufactured article of commerce and
otherwise meets the requirements for exemption as manufacturing machinery and
equipment is exempt from tax. The equipment is exempt if it is used to test any
portion of the product from the point when manufacturing begins. Testing
equipment that tests the raw materials prior to the beginning of manufacturing
is not exempt. Testing equipment that tests items other than the product, or
its component parts, is not exempt. For example, equipment that tests whether
the manufacturing machinery is functioning properly is not exempt as testing
equipment.
J. COMPUTERS AND RELATED
PERIPHERAL EQUIPMENT. Computers and related peripheral equipment that directly
control or measure the manufacturing process meet the "used directly"
requirement for manufacturing machinery and equipment and are exempt provided
they meet the other requirements for the exemption. Computers and related
peripheral equipment must either (i) directly control, measure, or record an
aspect of the manufacturing process itself; or (ii) directly control, measure,
or record the operation of other items of exempt manufacturing machinery and
equipment used in the manufacturing process. Except as provided in GR-66,
computers and related peripheral equipment that controls, measures, or records
the environment, processes other than the processes directly involved in
manufacturing, or equipment that does not itself qualify for the exemption as
manufacturing machinery and equipment are not exempt.
