FACTS: Newprod Corporation (Newprod) has developed a product ready for manufacture that is an item of tangible personal property. Under federal or state law, Newprod must test the new product before it can be sold to the public. During this testing phase of operations, Newprod purchases several pieces of machinery which will be used directly and exclusively, (and certain materials, tools and fuels consumed and used directly and exclusively) in its industrial plant in the actual manufacture of the product during the testing phase and later in the actual manufacture of the product to be sold as soon as it receives governmental approval.

ISSUE: Do the purchased machinery, materials, tools and fuel qualify for the exemption under G.L. c. 64H, § 6(r) or § 6(s), despite the delay in the actual manufacture of products to be sold because of the federal or state mandated testing phase?

DIRECTIVE: Yes, such machinery, materials, tools and fuel may still qualify for sales tax exemption under G.L. c. 64H, § 6(r), (s), so long as the machinery, materials, tools and fuel otherwise meet the requirements for exemption under those provisions. The interim use for such testing during a government mandated testing phase of operations will not be considered an intervening or disqualifying use, provided that Newprod follows the additional procedural requirements stated at the end of this Directive.

DISCUSSION OF LAW:

Under G.L. c. 64H, § 6(s), sales of machinery, or replacement parts which are "used directly and exclusively . . . in an industrial plant in the actual manufacture of tangible personal property to be sold . . . " are exempt from the sales tax. In addition, under G.L. c. 64H, § 6(r) sales of materials, tools and fuel which "become an ingredient or component part of tangible personal property to be sold or which are consumed and used directly and exclusively . . . in an industrial plant in the actual manufacture of tangible personal property to be sold . . ." are exempt from the sales tax.

Some corporations may be required under federal or state law to conduct product testing related to the safety of their products or for other similar public interest reasons, before they receive approval from the government to manufacture and sell their products to the public at large. In such cases, a corporation may have purchased machinery or materials, tools and fuel to be used in manufacturing, but which are used first in the government required testing phase of its operations, before its actual manufacturing processes have begun. So long as such machinery, materials, tools and fuel otherwise meet the requirements for exemption under G.L. c. 64H, § 6(r), (s), and the procedural requirements of this Directive, their use in connection with a government mandated testing phase of operations will not be considered an intervening or disqualifying use that precludes exemption.

PROCEDURAL REQUIREMENTS:

To qualify property for exemption under this Directive, Newprod must state at the top of the Exempt Use Certificate (DOR Form ST-12) used for the property being claimed as exempt the words "FDA OR OTHER GOVERNMENTAL APPROVAL PENDING." Each such ST-12 should specifically identify by name or other description the tangible personal property claimed as being exempt and the tangible personal property that is subject to approval for manufacturing by FDA or other governmental agency. The tangible personal property to be manufactured that is subject to FDA or other governmental approval must be assigned a number by the taxpayer and such number must be stated on the corresponding ST-12 to enable the Department to track the claim of exemption on the machinery, materials, tools and fuel to the product being tested in the event that the government required approval to manufacture such product is not granted or in the event that the product is not manufactured for any other reason. A copy of the Form ST-12 must be sent by Newprod at the time of the exempt purchase to the Bureau of Desk Audit, Special Projects Unit, of the Department of Revenue. Finally, Newprod must sign a Department form waiving the statute of limitations on assessments for each such claimed exempt purchase. The waiver will be sent to Newprod for signature after submission of the Form ST-12 to Bureau of Desk Audit, Special Projects Unit. The exemption will not be effective unless Newprod signs and returns the waiver form to Bureau of Desk Audit, Special Projects Unit, within 30 days of the purchase for which is exemption is claimed or within such other period as the Department in writing may allow. Newprod must notify the Bureau of Desk Audit, Special Projects Unit, within 30 days of any decision from the FDA or other governmental agency approving or denying the manufacture of the tangible personal property which was the subject of the testing. In any case where permission to manufacture is not granted or if the product is not manufactured or sold for any other reason, Newprod must file sales or use tax returns and pay all sales or use taxes due, along with any interest due, on all such machinery, materials, tools and fuel previously claimed as exempt under this Directive.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

MA:HMP:jmw

September 27, 1995

DD 95-11