I. Introduction

This Technical Information Release (TIR) explains the Commissioner's interpretation of c. 64H, §§ 6(i) and (r) with respect to gas, steam or electricity consumed and used in an industrial plant in the actual manufacture of tangible personal property to be sold.

II. Discussion

A. Background

Chapter 64H includes three separate but interrelated exemptions that pertain to the use of different kinds of power in an industrial plant in the actual manufacture of tangible personal property to be sold, §§ 6(i), (j) and (r). Each exemption defines an "industrial plant" as "a factory at a fixed location primarily engaged in the manufacture, conversion, or processing of tangible personal property to be sold in the regular course of business." G.L. c. 64H, §§ 6(i), (j), (r). Sections 6(i) and (j) were enacted in their current forms in 1990. See St. 1990, c. 150, § 360. Section 6(r) was enacted in its current form in 1971, but was amended in 1990 to reference § 6(i) in its present form. See St. 1971, c. 555, § 45; St. 1990, c. 150, § 361.

Chapter 64H, § 6(i) provides an exemption for "[t]he sales, furnishing or service of . . . gas, steam or electricity which are consumed and used directly and exclusively in an industrial plant in the actual manufacture of tangible personal property to be sold or in the heating of such industrial plant." G.L. c. 64H, § 6(i). This exemption is subject to the additional requirement that it:

. . . shall only be allowed with respect to a metered building, location or premises at which not less than seventy-five percent of the gas, steam or electricity consumed at such metered building, location or premises is used for the purposes of such [actual] manufacturing or heating.

Id.

Chapter 64H, § 6(j) provides an exemption for "fuel used for heating purposes in an industrial plant." G.L. c. 64H, § 6(j). However, this exemption is allowed only "with respect to a building, location or premises in which not less than seventy-five percent of the building, location or premises is used in the actual manufacture of tangible personal property to be sold." Id.

Chapter 64H, § 6(r) provides an exemption for sales of fuel or any substitute therefor which is "consumed and used directly and exclusively in the furnishing of power to an industrial manufacturing plant," or which is "consumed or used directly and exclusively in an industrial plant in the actual manufacture of tangible personal property to be sold." G.L. c. 64H, § 6(r). The latter exemption, insofar as it applies to sales of electricity, gas or steam, is expressly "limited to the extent allowed in paragraph (i)." Id. (1)

Each of the exemptions discussed in this TIR relies upon the definition of the phrase "actual manufacture of tangible personal property to be sold." This phrase was first added to § 6(r) in 1971, when that provision was enacted in its current form. The term "actual manufacture" is more narrow than the corresponding term used in the predecessor version of § 6(r), which did not include the qualifier "actual." See Houghton Mifflin v. State Tax Commission, 373 Mass. 772, 776 n.5 (1977). The Legislative addition of the term "actual" to § 6(r) generally eliminates from the application of that exemption processes that are preliminary or extraneous to manufacturing activity that actually produces the tangible personal property to be sold. See id. See also Commissioner of Revenue v. V.H. Blackinton & Co., 420 Mass. 259 (1995). A corresponding limitation is included in §§ 6(i) and (j), to the extent that these sections incorporate the qualifier "actual." (2)

B. Analysis

The rules announced in TIR 90-7 narrowly construed the availability of the provisions of § 6(i) relating to manufacturing use. Moreover, that TIR did not consider the exemption set forth in § 6(r) which applies to sales of fuel and any substitute therefor "consumed and used directly and exclusively in the furnishing of power to an industrial manufacturing plant." See G.L. c. 64H, § 6(r). The application of these two exemptions have proven administratively confusing and burdensome to taxpayers.

(1) Section 6(i)

TIR 90-7 stated that the § 6(i) exemption for gas, steam or electricity consumed and used directly and exclusively in an industrial plant in the actual manufacture of tangible personal property to be sold or in the heating of the industrial plant would only be allowed with respect to a metered building, location or premises at which not less than seventy-five percent of the gas, steam or electricity consumed at the meter was used for a combination of such actual manufacture or heating. It stated that the seventy-five percent consumption requirement would be applied on a billed meter basis.

Taxpayers seeking to comply with TIR 90-7 as it pertains to § 6(i) experienced administrative difficulty in seeking to comply with both the billed meter and seventy-five percent tests. Thus, while the Commissioner will continue to honor the § 6(i) exemption when asserted by taxpayers in compliance with TIR 90-7, the Commissioner is also announcing a safe harbor which may be used in the alternative to those rules.

Under the terms of the § 6(i) safe harbor, gas, steam or electricity used by a taxpayer to light or air condition a portion of the building, location or premises in which the taxpayer performs actual manufacture will be deemed to be used "for purposes of the actual manufacture" and thus counted towards satisfaction of the seventy-five percent test. Actual manufacture for purposes of this safe harbor will be deemed to include the short-term storage or transportation of in-process manufacturing goods (not including, for example, raw materials or finished goods) when that storage or transportation takes place contiguous to the actual manufacturing activity. Also, any gas, steam or electricity used for purposes of research and development may be eliminated from the percentage calculation. (3)

For purposes of the above-stated safe harbor, the taxpayer may establish that it satisfies the seventy-five percent exempt use requirement either by reference to the gas, steam or electricity recorded at a billed meter, or, if the taxpayer has internal meters that subdivide the power recorded at a billed meter, by reference to the gas, steam or electricity recorded at each such internal meter. In either of these two instances, a taxpayer may claim the § 6(i) exemption for all of the power recorded on each meter at which the seventy-five percent test is met. In addition, if a taxpayer is unable to demonstrate eligibility for the 6(i) exemption by measuring manufacturing activities attributable to a billed meter, and it has not subdivided the billed meter into one or more separate internal meters, it may claim the 6(i) exemption if it establishes that the billed meter is dedicated to an industrial plant in which seventy-five percent of the total cubic feet in such plant is used in the actual manufacture of tangible personal property to be sold. Finally, the Commissioner may approve the use of another reasonable method for computing the use of gas, steam or electricity at a billed meter to satisfy the seventy-five percent test, provided that such method must be approved in writing by the Commissioner in the form of a Letter Ruling. See 830 CMR 62C.3.2.

(2) Section 6(r)

Section 6(r) provides an exemption for sales of fuel and any substitute therefor "consumed and used directly and exclusively in the furnishing of power to an industrial manufacturing plant." The application of this exemption, which was not discussed in TIR 90-7, has proved administratively confusing to taxpayers. Consequently, the Commissioner is announcing the following clarification.

In any instance in which a taxpayer purchases fuel and uses all or part of that fuel in the furnishing of power to an industrial manufacturing plant, the § 6(r) exemption will apply to the percentage of the fuel which is used in the specified furnishing of power. This furnishing of power must be to an "industrial manufacturing plant." For the purpose of this provision, the Commissioner construes an industrial manufacturing plant as a factory at a fixed location primarily engaged in the manufacture of tangible personal property to be sold in the regular course of business. This definition is different than that which applies for purposes of an "industrial plant," since that definition applies to a facility that is primarily engaged in "manufacturing, conversion, or processing." See G.L. c. 64H, §§ 6(i), (j), (r) (emphasis added). However, there is no requirement under the definition of an "industrial manufacturing plant" that the facility in question must be engaged in "actual" manufacture.

When the sale of fuel or any substitute therefor meets the § 6(r) statutory exemption, as discussed above (i.e., it is "consumed and used directly and exclusively in the furnishing of power to an industrial manufacturing plant"), the ultimate use of the power provided is irrelevant. Thus, for example, in any instance in which the statutory requirement is met, it is irrelevant whether the power provided to the industrial manufacturing plant is used for lighting, cooling, R&D, etc. (4)

Mitchell Adams
Commissioner of Revenue

June 3, 1998


1. This limitation was added in 1990, at the time the present version of § 6(i) was enacted. See St. 1990, c. 150, § 361. (return to text)

2. Each of the exemptions discussed in this TIR are conferred with respect to activity that meets the "actual manufacture" standard. This requirement is in addition to the separate requirement set forth in each of these exemptions that the facility in which the actual manufacture takes place must constitute an "industrial plant." An industrial plant is expressly defined in each of the exemptions as "a factory at a fixed location primarily engaged in the manufacture, conversion or processing of tangible personal property to be sold in the regular course of business." G.L. c. 64H, §§ 6(i), (j), (r). The requisite manufacturing activity for purposes of this definition, since it is unqualified, is broader than the concept "actual manufacture." Moreover, the definition of an industrial plant may be met through activity which is not necessarily manufacturing -- that is, "processing" or "conversion." See Rowe Contracting Co. v. State Tax Commission, 361 Mass. 158 (1972). See also Southeastern Sand & Gravel, Inc. v. Commissioner of Revenue, 384 Mass. 794 (1981). (return to text)

3. The Commissioner's interpretation of § 6(i) for purposes of this safe harbor has no application to his interpretation of § 6(r), or any other provision set forth in chapter 64H. However, the Commissioner will recognize a limited, parallel safe harbor under the seventy-five percent test set forth in c. 64H, § 6(j). Under the § 6(j) percentage test "actual manufacture" will likewise be deemed to include the short-term storage or transportation of in-process manufacturing goods (not including, for example, raw materials or finished goods) when that storage or transportation takes place contiguous to the actual manufacturing activity. (return to text)

4. Chapter 64H, § 6(r) also provides an exemption for the sale of fuel or any substitute therefor which is used in research and development by a manufacturing corporation or a research and development corporation within the meaning of c. 63, § 38C or 42B. There is no 75% use requirement for purposes of this provision. (return to text)