July 2, 2012

 

I.  Introduction

 

You request a letter ruling on behalf of your client, ************************************ (Taxpayer) regarding the application of the Massachusetts sales tax, G.L. c. 64H, to sales of materials and machinery to a construction contractor engaged by Taxpayer to construct a wind turbine, which will provide electricity to Taxpayer’s manufacturing facility.  In support of your request, you state the following facts. 

II.  Facts

Taxpayer is a Delaware corporation with its principal place of business in **********, Massachusetts.  It is in the business of designing, manufacturing, marketing and selling equipment that is used in the production of semiconductors.  Taxpayer is taxed as a C Corporation for U.S. and Massachusetts income tax purposes, and was granted manufacturing corporation status for Massachusetts tax purposes as of January 1, 2000.  Taxpayer sells its semiconductor processing equipment to virtually all of the major semiconductor manufacturers worldwide. 

Taxpayer owns or leases several buildings (collectively, “the Facility”) that are located together in a fixed location in **********, where all of its manufacturing activity take place.  In addition to the actual manufacturing plant, the Facility houses a number of activities related to this manufacturing activity, including research and development, warehousing, shipping and receiving, and general administration.

Approximately 85% of Taxpayer’s total revenue is derived from its sales of the semiconductor processing equipment that it manufactures at the Facility.  Most of its remaining revenue is generated from services provided worldwide to purchasers of its semiconductor processing equipment.

Taxpayer is in the process of constructing a wind turbine as part of a wind project (Wind Project) at its Facility, which will provide electricity to the Facility.  Taxpayer has executed a turn-key engineering, procurement and construction agreement with its chosen construction contractor (the *** Contractor).  The *** Contractor has, in turn, executed a contract with another company for the procurement of all components of the wind turbine and has responsibility for procurement of all other materials and machinery needed for the construction of the Wind Project, as well as responsibility for subcontracting for all electrical, civil and structural engineering for the Wind Project.  The completed wind turbine is expected to have rated capacity (i.e., maximum output) of 2.5 million watts, or 2.5 MW.

The electricity generated by the Wind Project will be used by Taxpayer to provide power to the Facility.  The expected annual production of electricity by the Wind Project in an average year is approximately 8.3MkW.  Taxpayer estimates that approximately 75% of the electricity produced by the Wind Project will be consumed by the Facility’s direct manufacturing operations.  The total expected annual electricity consumption by the Facility is approximately 24.7MkW.  Taxpayer does not expect the Wind Project in any year to generate power in the aggregate in excess of the annual power needs of the Facility.

III.  ISSUE

 

  1. Whether the sale of  wind turbine components are exempt from sales tax as machinery used directly and exclusively in the “furnishing of power to an industrial manufacturing plant” within the meaning of G.L. c. 64H, § 6(s)?
  1. Whether materials, tools and fuel, which are consumed and used in constructing the wind turbine and whether machinery used in constructing the wind turbine is exempt as being used directly and exclusively in the furnishing of power to an industrial manufacturing plant under G.L. c. 64H, §§ 6(r), (s)?

IV.  Discussion

Massachusetts imposes an excise of 6.25% on sales at retail of tangible personal property in Massachusetts by any vendor, unless such sales are exempt under a particular provision of law.  G.L. c. 64H, § 2.  The exemptions from the sales tax are found in section 6 of chapter 64H.  Section 6(s) of chapter 64H provides a sales tax exemption for, in relevant part, “[s]ales of machinery, or replacement parts thereof, used directly and exclusively . . . in the furnishing of power to an industrial manufacturing plant.”  Similarly, G.L. c. 64H, § 6(r) provides a sales tax exemption for “sales of materials, tools and fuel, or any substitute thereof, which are consumed and used directly and exclusively . . . in the furnishing of power to an industrial manufacturing plant.”  

The Commissioner has issued a number of public written statements relating to the Massachusetts sales tax treatment of materials, tools, fuel and machinery used directly and exclusively in activities that are exempt under G.L. c. 64H, §§ 6(r), (s).  These public written statements have addressed, among other things, the clauses exempting items “consumed and used directly and exclusively in the actual manufacture of tangible personal property to be sold,” and items used directly and exclusively in “furnishing electricity to consumers when delivered to consumers through mains, lines or pipes.”  See, e.g., Letter Rulings 11-7, 10-4, 10-3, 06-5, 05-2; 99-14; Technical Information Releases 99-16, 98-5.  None of these public written statements, however, dealt precisely with the clause exempting items consumed and used directly and exclusively in the “furnishing of power to an industrial manufacturing plant.”[1]

Under this particular exemption clause, and in contrast to the other clauses of G.L. c. 64H, §§ 6(r), (s), a taxpayer is not required to show that the power furnished is being applied directly and exclusively to “actual” manufacture of tangible personal property to be sold, nor is it necessary for a taxpayer to determine the amount of power being consumed specifically by “actual” manufacture .  See TIR 98-5. 

Furthermore, in contrast to the exemption clauses at issue in Letter Rulings 11-7, 10-3 and 10-4, it is not necessary here to determine whether the electricity furnished is delivered to “consumers” through “mains, lines or pipes”.  As discussed below, the applicable authority is clear that once a facility qualifies as an “industrial manufacturing plant,” machinery (or replacement parts thereof), or materials, tools and fuel, or any substitute therefor, that meet the statutory exemption by being “used” (in the case of machinery) or  “consumed and used” (in the case of materials, tools, and fuel) “directly and exclusively in the furnishing of power to [such] industrial manufacturing plant” will qualify for this exemption, and the ultimate use of the power by the industrial manufacturing plant is not relevant.  See TIR 98-5.  See also, e.g., Letter Rulings 01-6 and 08-14.

A.  The Wind Turbine qualifies as “machinery” that is “used directly and exclusively” in furnishing electricity

The Commissioner has previously addressed the sales tax treatment of a wind turbine and its components that are used directly and exclusively in furnishing electricity that is delivered to consumers through mains, lines or pipes.  See Letter Ruling 10-3.  Without further discussion, we conclude that under the facts presented the wind turbine at issue in this ruling qualifies as “machinery” that is used “directly and exclusively” in “furnishing” electricity to Taxpayer.  We also conclude, as we did in Letter Ruling 10-3, that items used by a contractor or its subcontractors in fulfilling their obligations under the contract that do not become part of the electricity furnishing apparatus itself are not exempt from tax.  A contractor and its subcontractors are considered the consumers of such materials, tools, fuel, machinery and replacement parts and are liable for the tax on such items.  Letter Ruling 10-3, citing Letter Ruling 05-2 (Water Desalination Plant) (other citations omitted).  Here, such items would include machinery and replacement parts, materials, tools and fuels that are not physically incorporated in the plant or are not used in the actual furnishing of electricity, or that are consumed and used before the Wind Project begins furnishing electricity to the industrial manufacturing plant.  For example, a contractor will be liable for sales tax on erection cranes, support cranes, bulldozers, motor vehicles and other machinery used during the construction phase of the wind turbine before the apparatus is actually generating and furnishing electricity.  For the rules governing the application of the Massachusetts sales tax to purchases by contractors and subcontractors of tangible personal property that qualifies for one of the exempt uses set forth in G.L. c. 64H, §§ 6(r), (s), see DOR Directive 07-6.

We now examine whether Taxpayer’s Facility qualifies as an “industrial manufacturing plant” within the meaning of G.L. c. 64H, §§ 6(r), (s).

B.  “Industrial Manufacturing Plant”  

For purposes of G.L. c. 64H, § 6(r) and (s), the Commissioner has defined an “industrial manufacturing plant” as (1) a factory at a fixed location that is (2) primarily engaged in (3) the manufacture of tangible personal property to be sold in the regular course of business.  Technical Information Release 98-5.  Although that TIR involved the application of G.L. c. 64H, § 6(r), other rulings and cases establish that to the extent §§ 6(r) and (s) contain identical language, the interpretation of this language has been generally consistent.  See, e.g., Letter Rulings 99-14; 01-14; Rule Industries, Inc. v. Commissioner of Revenue, A.T.B. Docket Nos. 205338 and 205347 (1997); Denis Corporation v. Comm’r. of Revenue, A.T.B. Docket No. 178161 (1991), aff’d 34 Mass. App. Ct. 909 (1993);Spectron, Inc. v. Comm’r. of Revenue, ATB Docket No. F214939 (1998).

The following discussion examines the scope of prongs (1) and (2) of this definition.[2]

1.   “Factory at a fixed location”

The term “factory” has been defined by both statute and case law.  “Factory” has been defined in the General Laws as “any premises where mechanical power is used in aid of any manufacturing process there carried on.”   See, e.g., G.L. c. 149, § 1.  In Letter Ruling 99-14, the Commissioner noted that a facility that does not fit within the common perception of a factory with its billowing smokestacks will still fit within the definition of a “factory” for §§ 6(r) and 6 (s) purposes if the facility is “at a fixed location where machinery is used to effect a change on raw materials that produces a new end product for sale.”

A factory need not be limited to a single building.  For example, the Massachusetts Appellate Tax Board has accepted the general use definition of “factory” for the purposes of G.L. c. 64H, §§ 6(r) and 6(s), which definition provides, in relevant part, that a factory can consist of “a building or a group of buildings in which goods are manufactured by collective production.”  See Denis v. Comm’r, supra, quoting Webster’s New Lexicon Dictionary 338 (1987); The American Heritage Dictionary 485 (2d ed. 1982) (defining a “factory” as “a building or group of buildings in which goods are manufactured”); and Black’s Law Dictionary 708 (4th ed. 1968) (defining a factory as “a building or group of buildings, appropriated to the manufacture of goods. . .”)

Further, in Letter Ruling 99-14, the Commissioner concluded that a physical building is not required in order for a facility to qualify as a factory; instead, the central inquiry for determining whether a facility is an “industrial [manufacturing] plant” [3] is whether the facility where the manufacturing occurs is at a fixed and well-defined location.  This conclusion is consistent with the General Laws definition of “factory” that refers to “premises” rather than “buildings.”

The Facility consists of a group of buildings (and the associated land) located in a fixed location in **********, Massachusetts.  Taxpayer conducts the manufacturing of semiconductor processing equipment at the Facility.  The Facility also houses other activities related to this manufacturing activity, such as research and development, warehousing, shipping and receiving and general administration.  For a group of buildings to qualify as a “factory” the buildings as a whole do not need to be engaged solely in actual manufacturing activity.  This conclusion follows logically from the definition of “industrial manufacturing plant” which requires, in relevant part, that a factory be engaged “primarily” in manufacturing.  If the only activity a factory could undertake was manufacturing, then inclusion of this “primarily” requirement in the definition of “industrial manufacturing plant” would not be necessary.  Accordingly, we conclude under the facts presented that the Facility as a whole qualifies as a single “factory at a fixed location.”  The question then is whether the Facility is “primarily engaged” in manufacturing, as further discussed below.

2.   “Primarily engaged” in manufacturing

At any given time, the determination of whether a taxpayer is “primarily engaged” in manufacturing will be made based upon the facts and circumstances then in existence.  Letter Ruling 99-14, fn 2.  In Letter Ruling 99-14, the Commissioner provided guidance as to the meaning of being “primarily engaged” in manufacturing.  The Taxpayer was a wood waste reclamation facility that collected wood waste and, through a series of processes, produced processed wood chips and processed mulch for sale.  In addition to selling its own product, the taxpayer also purchased raw materials from outside vendors, some of which were re-sold in the same condition to customers.  Of all the materials sold by the Taxpayer, 55% (as measured by cubic yards sold) were produced by taxpayer and 45% were purchased from outside vendors for resale.  The Commissioner focused on the percentage of manufactured versus nonmanufactured product sold (measured by cubic yards) in determining whether the taxpayer was primarily engaged in manufacturing, and ruled that “[b]ased upon the facts as presented, this facility was “primarily engaged in the manufacture, conversion or processing of tangible personal property to be sold.”   

Under the facts as represented, approximately 85% of Taxpayer’s total revenue is from sales of the semiconductor processing equipment that is manufactured at the Facility.[4]  Accordingly, since more than 50% of the revenue derived from the Facility is attributable to equipment manufactured at the Facility, we conclude that the Facility is “primarily engaged” in the manufacture of tangible personal property to be sold in the regular course of business.

IV.  Conclusion

For the reasons set forth above, we rule that since all of the electricity generated by the Wind Project will be used solely by Taxpayer to provide power to the Facility and Taxpayer will not otherwise sell any of the electricity to any third party, the sale of the Wind Turbine is exempt from sales tax as machinery that is used directly and exclusively in furnishing power to an industrial manufacturing plant, within the meaning of G.L. c. 64H, § 6(s).  Sales of materials, tools, fuel, and machinery that become part of the electricity furnishing apparatus, i.e., the wind turbine, are exempt from sales tax under G.L. c. 64H, §§ 6(r), (s), respectively.  Taxpayer’s contractor may give Form ST-12 to its vendor when purchasing these items.  Sales of materials, tools, fuels and machinery that do not become part of the electricity furnishing apparatus, or that are consumed and used before the Wind Project is actually generating and furnishing electricity to the Facility are subject to tax.  

 

Very truly yours,
 

/s/Amy Pitter
 

Amy Pitter
Commissioner of Revenue

 

AP:MTF:wrd
 

LR 12-7



[1]  We note that in Letter Ruling 05-2, the taxpayer submitted a series of alternative requests for finding individual tax exemptions for certain items in the event that an exemption was not found under the clause exempting items that “are consumed and used directly and exclusively…in the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes.”  Because the Commissioner found that the items at issue fell within this exemption clause, it was unnecessary to consider whether these items would have been exempt under the clauses exempting materials and machinery… “used directly and exclusively in the furnishing of power to an industrial plant.”
[2] This discussion does not review the details of the law applicable to prong (3) of this definition since there is no question that Taxpayer is engaged in the manufacture of tangible personal property to be sold in the regular course of its business.  As presented in the Statement of Facts, Taxpayer is in the business of designing, manufacturing, marketing and selling equipment that is used in the production of semiconductors.  Furthermore, Taxpayer has manufacturing corporation status for Massachusetts tax purposes.  Accordingly, Taxpayer is engaged in the business of manufacturing tangible personal property to be sold in the regular course of business.  The question then is whether the Facility is a “factory at fixed location” and, if so, whether the Facility is “primarily engaged” in the manufacture of tangible personal property to be sold in the regular course of business.
[3] Letter Ruling 99-14 deals with the meaning of the term “industrial plant”, the definition of which is identical to that of an “industrial manufacturing plant” except that an “industrial manufacturing plant” must engage in manufacturing, whereas an “industrial plant” by definition, can qualify as such simply by engaging in either processing or conversion activities, without any manufacturing activities.
[4] This percentage is determined by (i) including in the numerator only revenue generated from sales of the equipment that is manufactured at the Facility and (ii) including in the denominator Taxpayer’s worldwide services revenue.  If only the services revenue derived from the Facility were included in the denominator, the percentage of the Facility’s revenue generated from sales of equipment manufactured at the Facility would be even greater than 85%.