Sales, Use and International Tax Activity Update - October 2009

Integrated Plant Theory in Georgia

The Georgia Department of Revenue has adopted a sales and use tax rule to implement the integrated plant theory with respect to manufacturing machinery and equipment. The rule explains the sales and use tax exemptions under Georgia law for machinery and equipment (and related repair and replacement parts) necessary and integral to the manufacture of tangible personal property in a Georgia manufacturing plant.

Regulation Sec. 560-12-2-.62 provides that property leased or purchased must have the character of machinery or equipment at the time of purchase and must be used for the first time at a new or existing Georgia manufacturing plant to manufacture tangible personal property for sale or further manufacturing, and be necessary and integral to the manufacture of tangible personal property for sale or further manufacturing. In the case of repair or replacement parts, the parts must replace or upgrade machinery or equipment in an existing Georgia manufacturing plant. Repair and replacement parts must qualify as such at the time of purchase or lease. Examples of machinery and equipment that do and do not meet the necessary and integral requirement are provided.

The amended definition manufacture of tangible personal property is used synonymously with manufacturing and means a manufacturing operation, or series of integrated manufacturing operations, engaged in at a manufacturing plant to change, process, transform, or convert industrial materials by physical or chemical means into articles of tangible personal property for sale, or further manufacturing, that have a different form, configuration, utility, composition, or character. The new rule states that the manufacture of tangible personal property begins when industrial materials are received at a manufacturing plant and ends when the packaging operation is complete and the property is ready for shipment or sale, even if the manufacture of the property occurs at more than one manufacturing plant.

The potential opportunities associated with this new doctrine can be illustrated in Zenith Electronic Corp. v. Illinois Dep't of Revenue (Cook County), (Cook County Cir. Ct., 12/27/95). In this case an Illinois district court held that manufacturing activities that took place in two plants could be part of an integrated manufacturing process. The taxpayer's manufacturing facility in Rauland, Ill., produced cathode ray tubes (CRTs) that were assembled into television sets in a facility in Springfield, Ill. The court found that the integrated manufacturing and assembly process that began in Rauland did not end until the CRTs were assembled into the final product in Springfield. The court noted that the Springfield plant was specially designed to handle the production from the Rauland plant on a 'just in time" basis, so that neither plant had to store the CRTs. Accordingly, plastic trays used to protect the CRTs during transportation between the plants qualified for an exemption for equipment used in the manufacturing process.

The definition of repair or replacement part is amended to mean a part for new or existing machinery or equipment that is necessary and integral to the manufacture of tangible personal property. The definition of machinery clothing is amended to mean felts, screen plates, or wires used to carry, form, or dry work in process through the manufacture of tangible personal property. References to paper are removed from the definition. The definition of packaging operation is amended to mean the conclusion of the manufacture of tangible personal property. In addition, illustrative examples are added to the definition of machinery and definitions are added for terms such as consumable supplies, manufacturing plant, and manufacturer.

The new rule requires an exemption certificate to claim the manufacturing machinery and equipment exemption. Detailed information is provided on which exemption certificates are required and how to obtain them. Other details concerning the rule were previously reported. The rule is effective for transactions occurring on and after January 1, 2009 per Regulation Se. 560-12-2-.62(8).

Additional information on the integrated plant doctrine can be found at:

http://www.allbusiness.com/accounting-reporting/corporate-taxes/557576-1.html

---

Subscribe to CyberTax News and receive the latest indirect tax news, including rate changes, rule updates, compliance issues, and more, delivered directly to your email.

Email Address