Letter Ruling  Letter Ruling 08-14: Machinery and Equipment Used in Quarry Operations

Date:	12/24/2008
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Sales and Use

 

December 24, 2008

You request a letter ruling on whether purchases of certain machinery, equipment, or repair and replacement parts used by ******************** ("Taxpayer") during all phases of its quarry operation, are exempt from Massachusetts sales and use tax under G.L. c. 64H, § 6(s). In support of your request, you set forth the following facts.

I. FACTS 

Taxpayer is a Massachusetts corporation based in ********, Massachusetts. It is a wholly owned subsidiary of *********************** ("X") the United States arm of an international aggregate, construction and building materials group based in the United Kingdom. Taxpayer serves X's customers in parts of Massachusetts and New Hampshire. Taxpayer was granted manufacturing corporation status on January 1, 1961, which was renewed on February 3, 1993.

Currently, Taxpayer owns and operates eight large stone quarries (seven in Massachusetts and one in New Hampshire), as well as several sand and gravel sites. In carrying on its quarry operations, taxpayer makes purchases of tangible personal property and services that are used in manufacturing and processing of products such as quarry stone, aggregate, asphalt, and ready-mix concrete to be sold to its customers. Taxpayer has provided a "Summary of Sample Manufacturing Machinery and Equipment," which identifies the items used in four phases of its quarry activities. These items and their uses are summarized as follows:

 

Phase	Asset Name	Asset Description
Quarry Preparation	Dozer	Strips "overburden", such as gravel, clay, waste. . . etc. from mine surface
	Excavator	Strips deep pockets of over burden from mine surface
	Loader	Load "overburden" to stockpile
	Haul Truck	Hauls "overburden" to stockpile
	Water Truck	Wets haul roads to reduce particulate emission
	Dewatering System	Removes storm and ground water from the mine site
	Water Infiltration System	Same as Dewatering.
Quarry Extraction	Dust Suppression System	Water charged system used to suppress dust generated from dumping, crushing and conveying material
	Dump Hopper	Mobile equipment unloads blasted rock into these hoppers to be crushed
	Grizzly Feeder	Feeds stone into crushers at a controlled rate removing smaller material from feed prior to crushing
	Pedestal Hammer	Pedestal mounted hydraulic hammer used to size rock to big for the primary crusher in the dump hopper
	Jaw Crusher	Primary crusher reduces blasted rock to 12" minus
	Gyratory	Primary crusher reduces blasted rock to 12" minus
	Conveyor	Conveys stone to surge pile or next sizing station
	Loader	Loads blasted rock into haul trucks
	Trucks (Haul Trucks and Rock Trucks)	Haul blasted rock to the primary dump hopper
	Excavator	Base machine for hydraulic hammer
	Hydraulic Hammer	Mounted to an excavator and used to size blasted stone to a crushable size
	Electrical Systems	Power and control for fixed equipment
	Transformers	Used to step down line voltage to required voltage
	Capacitors	Regulate electrical demand and efficiency
Quarry Processing	Dust Suppression Systems	Water charged system used to suppress dust generated from crushing, screening and conveying material
	Screen Towers	Screens are used to sort crushed materials into specific sizes
	Vibrating Feeder	Feeds materials into a crusher or plant at controlled rate
	Cone Crushers	Several sizes of cone crushers used to reduce materials to the desired size and shape
	Bins	Used to temporarily store materials prior to crushing, blending and screening
	Conveyors	Conveys materials to next sizing station or stock pile
	Wet Screen (Wash Tower)	Screen with water added at a specific rate to wash lines and dust from materials
	Sand Pump	Pumps sand slurry to sand sizing plant
	Sand Separator	Separates washed stone sand from finer sands and silt
	Cyclone Washing Stations	Separates fine sand from organic and ultra fine materials
	Clarifier	Separates organic and ultra fine materials from wash water so water can be recycled into wash system
	Wash Racks	Pump stations used by customers to wash truck loads of materials
	Loader	Loads finish material to stockpiles
	Haul Truck	Hauls finish materials to stockpile
	Skid Steer	Small sized utility loader used for housekeeping
	Crane	Repair and maintenance
	Hydraulic Engine Boom (Manlift)	Work platform that elevates maintenance personnel to heights 4' to 100'
	Electrical Systems	Power and control to fixed equipment
	Transformers	Used to step down line voltage to required voltage
	Capacitors	Regulate electrical demand and efficiency
Quarry Shipping	Truck Scales	Weigh customers trucks for ticketing and sales
	Loader	Loads customer trucks with finished material

 

The production of Taxpayer's saleable products involves a number of activities. First, the overburden ( i.e., the soil) that lies on top of the quarried stone must be removed. After removing the overburden, holes are drilled directly into the rock formation. The holes are then filled with explosives, which enable the operators to blast the rock face to shear the stone from the larger rock formation. After blasting, various progressive stages of crushing, screening, washing, and blending of the rock occur.

The stone is segregated by size at the site. The smaller pieces are brought by trucks and loaded onto the conveyor belt leading to an on-site stone crusher. The larger pieces are then broken down into smaller pieces using a drop ball attached to a crane on-site, hammers, or an on-site stone crusher. The final size of the stone or rock fragments depends on specific customer orders, or the type of products required, such as aggregate, asphalt, or ready-mix concrete.

At this stage of the manufacturing process, the stones are considered to be saleable aggregate. If the stone is going to be made into asphalt or ready-mix concrete, some of Taxpayer's quarries have a ready-mix concrete plant operation ("RMC") and a hot mix asphalt plant operation ("HMA") on the same sites to process the aggregate further. If a quarry site does not have the RMC and HMA or these plants do not produce the types of asphalt or ready-mix concrete requested by the customer, the stone is transported to a location that would allow stone to be processed further in accordance to customer specifications. The aggregate is shipped to other product line plants and dumped into stockpiles and/or bins that keep the aggregate product separate. These bins feed the aggregate into the RMC and HMA at specified rates to be combined with asphalt or concrete depending on the type of plant producing the asphalt and concrete products. Activities include but are not limited to feeding the stone into the processing plant, performing secondary crushing, final screening of stones, washing and de-dusting mixing stones, and loading and dispatching of aggregate processed.
 

II. REQUESTED RULING 

Taxpayer requests that we rule that its purchases of machinery, equipment, or repair and replacement parts used during all four phases of its quarry operations in Massachusetts are exempt from sales tax under G.L. c. 64H, § 6(s). 

III. RULING

For reasons discussed below, we rule as follows:

1) Taxpayer's purchases of items used solely in its "quarry extraction" and "quarry processing" phases, ( i.e., from the point of blasting of rock in the quarry through stockpiling for sale to customers), are exempt under G. L. c. 64H, § 6(s), with the exception of the following items, which are not exempt: dust suppression system, wash racks used by customers, bins, skid-steer, cranes, and hydraulic engine boom (manlift).

2) Taxpayer's purchases of items used in its "quarry preparation" and "quarrying shipping" phases are not exempt under G.L. c. 64H, § 6(s), subject to the following limited exception. To the extent that any loaders or other items of portable or mobile machinery are used interchangeably in these phases and in the "quarry extraction" and "quarry-shipping" phases, those items may be partially exempt.

IV. DISCUSSION OF LAW 

Chapter 64H, § 2 of the General Laws imposes an excise upon sales at retail in the Commonwealth by any vendor of tangible personal property or telecommunications services, unless otherwise exempt. The excise is imposed at the rate of five percent of the gross receipts of the vendor from all such sales. Id.

The exemptions from the sales tax are found in chapter 64H, § 6. Section 6(s) provides an exemption in relevant part, for "sales of machinery, or replacement parts thereof, used directly and exclusively . . . in an industrial plant in the actual manufacture of tangible personal property to be sold . . . ." For purposes of § 6(s), the term "industrial plant" means "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." Id.

In order for the machinery at issue to fall within the § 6(s) exemption, it must be [1] machinery used "[2] directly and exclusively . . . [3] in an industrial plant [4] in the actual manufacture of tangible personal property [5] to be sold. . . ." Maxymillian Technologies Inc. v. Commissioner of Revenue, A.T.B. Docket Nos. F239614, F239615 (1999), citing Commissioner of Revenue v. V.H. Blackinton, 420 Mass. 259, 262 (1995). If one of the requirements for receiving the exemption is lacking, a taxpayer is not entitled to the exemption. See, e.g., Letter Ruling 03-11.

The § 6(s) exemption relates to the machinery that changes raw materials into a manufactured product. See Maxymillian Technologies, Inc. v. Commissioner of Revenue, A.T.B. Docket Nos. F239614, F239615 (April 12, 1999), citing Lawrence-Lynch Corp. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 245, 251 (1997).

 

The Massachusetts Supreme Judicial Court (SJC) and the Appellate Tax Board (A.T.B.) have repeatedly held that G.L. c. 64H, § 6(s) should receive a liberal interpretation. See Wakefield Ready-Mixed Concrete Co., Inc. v. State Tax Commission, 356 Mass. 8 (1969). Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254, 255 (1976); Lawrence-Lynch Corp. Commissioner of Revenue, A.T.B. Docket No. 195193 (1997); San-Vel Concrete Corp. v. Commissioner of Revenue; A.T.B. Docket No. 179087 (1993) aff'd 38 Mass. App. Ct. 1114 (1995). DiStefano v. Commissioner of Revenue, 394 Mass. 315. 325-26 (1985).

Nevertheless, a broad interpretation is not without limits. In order to qualify for exemption under § 6(s), the machinery still must be used solely during a manufacturing, conversion, or processing operation in performing one of the five activities set forth in subsection 2, below. See, e.g., Commissioner of Revenue v. V.H. Blackinton & Co., Inc. 420 Mass, 259; 649 N.E. 2d 160 (1995). We now examine each of the requirements for exemption.

1. Machinery

The SJC defines "machinery" as "any combination of mechanical means designed to work together so as to effect a given end." Warner Amex Cable v. Board of Assessors, 396 Mass. 239, 242 (1985). For purposes of the § 6(s) exemption, the Appellate Tax Board has defined "machinery" as:

A mechanical, electrical or electronic device designed to be used and which is used in manufacturing, converting or processing tangible personal property to be sold. It includes not only the basic unit but also any adjunct or attachment necessary for the basic unit to accomplish its intended function. It also includes all devices used or required to control, regulate or operate a piece of machinery, provided such devices are directly connected with or are an integral part of the machinery and are used exclusively for the purposes mentioned. Western Electric Co., Inc. v. Commissioner of Revenue, A.T.B. Docket No. 113779 (1984).

With respect to items listed in the "quarry preparation", "quarry extraction" and "quarry processing" phases, we conclude that all of them qualify as machinery, including the wet screens. While the wet screens, in and of themselves, are not necessarily machinery in the strict sense, we conclude that they nevertheless qualify as "adjuncts" necessary for the machinery to accomplish its intended function, and therefore fall within the broader definition of "machinery" above.

Similarly, to the extent that the electrical systems, transformers and capacitators may be viewed as devices used or required to control, regulate or operate a piece of machinery, they would also be included in this definition, provided that they are directly connected with, or are an integral part of machinery. If they are used directly and exclusively in the actual manufacture of tangible personal property to be sold, they would be exempt. Whether or not they meet all of the requirements for exemption under that clause of § 6 (s), we rule that they nonetheless qualify for exemption under an independent clause of G.L. c. 64H, § 6(s), which exempts

machinery used directly and exclusively in "the furnishing of power to an industrial manufacturing plant."

With respect to the truck scales and loaders used in the "quarry shipping" phase, we conclude that they also qualify as machinery. However, in order to be exempt under § 6(s), all of these items must nonetheless meet all of the additional requirements discussed below.

• The requirements that machinery be used "directly and exclusively" in "actual" manufacture

Under G.L. c. 64H, § 6(s), machinery is deemed to be used directly and exclusively in the actual manufacture, conversion or processing of tangible personal property to be sold only where such machinery is used solely during a manufacturing, conversion or processing operation to perform one of the following functions:

• to effect a direct and immediate physical change upon the tangible personal property to be sold;

• to guide or measure a direct and immediate physical change upon such property where such function is an integral and essential part of tuning, verifying or aligning the component parts of property to be sold;

• to test or measure such property where such function is an integral part of the production flow or function;

• solely to store, transport, convey or handle such property during the manufacturing, converting, or processing operations described above; or

• solely to place such property in the container, package or wrapping in which such property is normally sold to the ultimate consumer thereof.

In Technical Information Release 99-16, the Commissioner announced that any machinery that is used solely in any one of the above five activities is deemed to be used "directly and exclusively" in the "actual" manufacture of tangible personal property. Id. citing Associated Testing Laboratories, Inc. v. Commissioner, 429 Mass. 628 (1999). Accordingly, the Commissioner does not require additional proof regarding the qualifiers "actual," "directly," and "exclusively". [1] We therefore examine the remaining issue of whether taxpayer's quarrying activities qualify as "manufacturing".

The SJC has defined manufacturing as "ordinarily and commonly denot[ing] the process of transforming raw or finished materials by hand or machinery, and through human skill and knowledge, into something possessing a new nature and name and adapted to a new use." Commissioner of Corporations & Taxation v. Assessors of Boston, 321 Mass. 90, 94 (1947), quoted in Westinghouse Broadcasting Co. v. Commissioner, 382 Mass. 354, 357 (1981).

The SJC and the A.T.B. have observed that manufacturing activities typically involve a "multiplicity of processes." See William F. Sullivan & Co. v. Commissioner of Revenue, 413 Mass. 576 (1992); Alcan Aluminum, 21 Mass. App. Tax Bd. Rep. at 85-86. In discussing the term "manufacturing," Massachusetts authorities have held that "[p]rocesses which do not themselves produce a finished product are nonetheless 'manufacturing' if they comprise an essential and integral part of the total manufacturing process." See, e.g., Associated Testing Laboratories, Inc. v. Commissioner of Revenue, 429 Mass. 628 (1999); [2] Commissioner of Revenue Houghton Mifflin Company, 423 Mass. 42 (1996), citing William F. Sullivan & Co. v. Commissioner of Revenue, 413 Mass. 576, 580 (1992); quoting Joseph T. Rossi Corp. v. State Tax Comm'n, 369 Mass. 178; 182 (1975). To constitute an essential and integral part of the total manufacturing process, it has been held that the process in question must effect a change and cause a degree of refinement to source material. See, e.g., Letter Ruling 95-1 [3], citing Sullivan at 581. See also Rossi; Department of Revenue Manufacturing Corporations regulation, 830 CMR 58.2.1. [4]

A number of Massachusetts decisions have examined whether a taxpayer involved in the business of crushing rocks was engaged in manufacturing. See, e.g., Southeastern Sand and Gravel, Inc. v. Commissioner of Revenue, 384 Mass. 794 (1981) (taxpayer not engaged in manufacturing within the meaning of G.L. c. 63, § 38C), Tilcon-Warren Quarries, Inc. v. Commissioner of Revenue, 392 Mass. 670 (1984) ("extracting pieces of rock from the ground and crushing then usable sizes does not compel the conclusion that the process fits within the natural and ordinary meaning of 'manufacturing'".) These cases, however, are not controlling here, since they did not involve the applicability of the § 6(s) exemption, but rather the issue of manufacturing corporation classification under G.L. c. 63 and the exemption from local property tax for machinery used in manufacturing. [5]

Other cases, however, suggest that at least some of the taxpayer's purchases qualify for the § 6(s) exemption. See, e.g., San-Vel Concrete Corp. v. Commissioner of Revenue, A.T.B. Docket No. 179087 (1983); Maxymillian Technologies, Inc. v. Commissioner of Revenue, A.T.B. Docket Nos. F239614, F239615 (1999); Lawrence-Lynch Corporation v. Commissioner of Revenue, A.T.B. Docket No. 195193 (1997); Rowe Contracting Co. v. State Tax Commission, 361 Mass. 158 (1972).

San-Vel Concrete involved the availability of the sales tax exemption for machinery used in a taxpayer's sand and gravel operations under G.L. c. 64H, § 6(s). There, the taxpayer took rocks from real estate and crushed them to produce aggregate. The issue was whether machinery used in that process was exempt by virtue of § 6(s). Neither the Commissioner nor the taxpayer disputed that the machinery used by the taxpayer to produce aggregate was used in an industrial plant, and that it was used directly and exclusively in the actual manufacture of tangible personal property.

Similarly, in Maxymillian Technologies, the Massachusetts Appellate Tax Board concluded that a crushing machine used in the taxpayer's soil remediation activities was employed in an industrial plant in "actual manufacture" for purposes of the exemption. In that case, contaminated soil was sized for further processing in the crusher machine at issue. The sizing was necessary and integral to the immediately subsequent heat processing operation. The Board found that the evidence indicated a similar degree of physical change and refinement to the raw contaminated soil found sufficient to be considered manufacturing in William F. Sullivan & Co., Inc. v. Commissioner of Revenue, 413 Mass. 576, 581 (1992). The Board found that the crushing machine constituted an essential and integral part of the total manufacturing process effecting the physical changes yielding the finished landfill cover. [6]

In Lawrence-Lynch, the taxpayer's business operations included the manufacture of sand, sized stone, and asphalt, which it used in paving contracts with customers. All of the sand and ninety percent of the sized stone output was either sold to customers or used to manufacture asphalt. It was undisputed that the materials and tools and most of the machinery at issue were used "directly and exclusively" in the "actual manufacture" of sand, sized stone, and asphalt at an "industrial plant," as these terms are used in G.L. c. 64H, §6(r) and (s). [7]

In addition to the cases discussed above, the Commissioner has issued a number of public written statements examining the taxability of certain items similar to those at issue here under various clauses of G.L. c. 64H, § 6(s). S ee, e.g., Department of Revenue Directive 99-8 (exempting switches and transformers used exclusively by cranberry growers for pumps and lines transporting water into cranberry bogs); Letter Ruling 83-7 (Solid Waste Disposal Facility; exempting screens for removing oversized pieces of ferrous waste, a cooling tower and other components of a cooling water system, an electrostatic precipitator, and an electrical switchyard); Letter Ruling 88-11 (Cogeneration Plant) ( superseded on other grounds), exempting, among other items, electrical equipment used to control the operation of the plant; transformers, cooling tanks); Letter Ruling 84-85 (Waste Processing Plant) exempting various items either as "adjuncts" or attachments necessary for exempt machinery to accomplish its intended function, or as devices used or required to control, regulate, or operate exempt machinery and directly connected with or an integral part of such machinery); Letter Ruling 99-14 (Manufacturing Exemption: Wood Reclamation Facility), exempting tub grinders, rubber tire wheel loaders and bulldozers used to push and work wood waste into a long-term composting area, as well as screeners used to screen and mix soil and leaves into loam or compost.

Although some of these rulings exempted these items under a broader exemption clause of § 6(s) than the "manufacturing" clause at issue here, (e.g., the clause which exempts items used in the furnishing of gas, steam or electricity to consumers), we conclude that items such as loaders, and wet screens, (wash tower) used in Taxpayer's quarrying operations also qualify for exemption under the "manufacturing" clause of § 6(s). The same would be true of transformers and capacitators, provided that they are used directly and exclusively in Taxpayer's qualifying phases of operations. If not, they are nonetheless exempt under the clause exempting machinery used directly and exclusively in the furnishing of power to an industrial manufacturing plant.

Like the machinery systems in Lawrence-Lynch, San-Vel, Maxymillian Technologies, and Rowe Contracting Co. v. State Tax Commission, 361 Mass. 158 (1972) , we conclude that Taxpayer's crushing and sizing of the rocks pursuant to customer orders is an essential and integral part of its manufacturing process. However, in order to qualify for exemption under § 6(s), the machinery must be used solely during a manufacturing, conversion, or processing operation to do one of the five things set forth above. See Commissioner of Revenue v. V.H. Blackinton & Co., Inc., 420 Mass. 259 (1995). [8]

We conclude that the machinery used in Taxpayer's "quarry extraction" and "quarry processing" phases of its operations, but not its "quarry preparation" or "quarry shipping phase, can reasonably be viewed as operating solely during its manufacturing, conversion, or processing operations either to effect a direct and immediate physical charge upon the tangible personal property to be sold, or to store, transport, convey or handle such property during the manufacturing conversion, or processing operations. Accordingly, those items meet the first or third criterion, respectively, for being deemed to be used directly and exclusively in the manufacture of tangible personal property under TIR 99-16.

In contrast, Taxpayer's dust suppression system appears to be more akin to the pollution control equipment that was found not to be exempt in the Blackinton case. This system does not meet any of the five criteria required for exemption. Unlike the equipment at issue in Letter Ruling 01-6, (clean room equipment including specialized air-handling equipment, controls, and alteration systems used to create and maintain a clean room manufacturing environment), the dust suppression system here is not necessary to create a specific manufacturing environment that is required for the manufacture of Taxpayer's products for sale, nor does it effect the requisite physical change on the Taxpayer's products to be manufactured. Therefore, this system fails the requirements that justified exemption in that ruling.

As to taxpayer's "quarry preparation" phases, the Massachusetts Supreme Judicial Court in Rowe Contracting has not interpreted the quarry preparation process similar to the one at issue here ( i.e., removal of "overburden" activities) as falling within the overall process of exempt activities under an even broader predecessor version of § 6(s), exempting items used in "manufacture, conversion, or processing. Consequently, items used solely in the removal of overburden during the quarry preparation phase are not exempt.

However, there is a limited exemption in § 6(s) that provides that "[w]here a portion of a group of portable or mobile machinery is used directly and exclusively in the actual manufacture, conversion or processing of tangible personal property to be sold. . . the number represented by such portion, if otherwise qualifying, shall be exempt under this paragraph even though the machinery in said group is used interchangeably and not otherwise identifiable as to use." Under this provision, if Taxpayer's mobile machinery, which would include loaders and

haul trucks, is used directly and exclusively in its qualifying quarry extraction and quarry processing operations, but is also used interchangeably in its nonqualifying quarry preparation and quarry shipping operations, those items are partially exempt from sales tax. The exemption is based on the percentage represented by the portion of exempt use in relation to non-exempt use.

With respect to items used in Taxpayer's "quarry shipping" phase, we find that they are used after manufacturing has been completed. Accordingly, unless the limited partial exception above applies, those items are fully subject to sales tax.

3. The industrial plant requirement

For purposes of G.L. c. 64H, § 6(s), the term "industrial plant" means "a factory at a fixed location primarily engaged in the manufacture, conversion, or processing of tangible personal property to be sold. [9] The Commissioner has previously stated that the requisite manufacturing activity for purposes of meeting the "industrial plant" requirement is broader than the concept of "actual manufacture". See TIR 98-5. There, the Commissioner acknowledged that the definition of an industrial plant may be met through activity which is not necessarily manufacturing that is, "processing" or "conversion." Id. , citing Rowe Contracting Co. v. State Tax Commission, 361 Mass. 158 (1972). See also Southeastern Sand and Gravel, Inc. v. Commissioner of Revenue, 384 Mass. 974 (1981). Accordingly, if the qualifying manufacturing activity takes place in a place where manufacturing, conversion, or processing occurs, the place qualifies as an "industrial plant."

In examining whether taxpayer's quarry operations were conducted at an industrial plant, the Court, in Rowe, determined that the taxpayer's quarry operations were reasonably integrated, beginning with the initial blast to separate the rock from the real estate and continuing until the product was stockpiled for delivery. Accordingly, the Court found that the machinery used in that process was exempt. Although the statute was amended in 1990 to exempt items used in the actual manufacture of tangible personal property, rather than the "manufacture, conversion or processing" of such property, nothing in the amendment nor subsequent case law alters our conclusion that Taxpayer's quarry extraction and quarry processing activities qualify for the exemption. As noted above, Taxpayer's quarry preparation activities are not within the scope of activities falling within the § 6(s) exemption.

4. " To be sold" requirement

The final criterion to examine is whether the machinery is used solely during the processing of rock to be sold. That requirement is met here. This may hold true even if a de minimus amount of the rock may not be sold. See San-Vel Concrete Corp. v. Commissioner of Revenue, A.T.B. Docket No. 179087 (Dec. 14, 1993).

IV. CONCLUSION 

Except for the dust suppression system, bins, wash racks used by customers, skid steer, cranes, and hydraulic engine boon (manlift), the items listed in Taxpayer's "quarry extraction" and "quarry processing" phases are exempt from sales tax as machinery used directly and exclusively either 1) in an industrial plant in the actual manufacture of tangible personal property to be sold, or 2) in the furnishing of power to an industrial manufacturing plant under G.L. c. 64H, § 6(s). The items in Taxpayer's "quarry preparation" and "quarry shipping" phases are subject to tax, unless they qualify for the limited mobile machinery exemption discussed above.

Very truly yours,

/s/Navjeet K. Bal

Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:wrd

LR 08-14

 

[1] Cf. TIR 01-10, Application of Winthrop Printing, Inc., v. Commissioner, where the Commissioner adopted the Appellate Tax Board's acknowledgement that the types of activities that sustain the § 6(s) exemption are broader than the types of activities that sustain the § 6(r) exemption, which requires that materials, tools and fuels be used in the "actual manufacture" of tangible personal property to be sold.
[2] In that case, the SJC evaluated whether certain testing equipment was exempt from sales tax under § 6(s) as being used directly and exclusively in the actual manufacture, conversion of processing of tangible personal property to be sold. In its analysis, the SJC examined whether the machinery was an integral part of the production flow or function. This inquiry, in turn, focused on whether the testing was a "sine qua non of the produced items ultimate saleability." Id. 

[3] In Letter Ruling 95-1, the Commissioner ruled that the refrigeration of frozen products by a food warehouse and distributor does not constitute an essential and integral part of the total manufacturing process, because refrigeration of storage space for the purposes of preserving frozen food and ice cream does not effect a change or refinement to the source material as described by the Court in Sullivan. Consequently, refrigeration of storage space was found not to be manufacturing.

[4] Section (6)(b)8 of that regulation provides that "[a] process which does not produce a finished product, but constitutes an essential and integral part of the total manufacturing process, is manufacturing. A process which is a practical and necessary step in the production of a finished product is an essential and integral part of a total manufacturing process." Id.

[5] In Southeastern Sand and Gravel, the Court distinguished the activity of "processing" materials in Rowe Contracting for the purpose of the sales tax exemption from the question of manufacturing for the purpose of local taxation." The Court stated: "… the exemption from local property taxes for 'manufacturing corporations' under G.L. c. 58, § 2… is a matter of special favor or grace to be recognized only where the property falls clearly and unmistakably within the express words of a legislative command." Id., quoting Children's Hospital Medical Center v. Assessors of Boston, 353 Mass. 35, 43 (1967).

[6] Compare King Crusher, Inc. v. Commissioner of Revenue, A.T.B. Docket No. C278113 (2008), a more recent case that concluded that a taxpayer's auto crushing activities alone did not cause a sufficient degree of change and refinement to a source material to constitute "manufacturing" for purposes of manufacturing corporation classification under G.L. c. 63, § 38C. The taxpayer in that case did not itself perform further activities on the crushed flats that rose to the level of manufacturing.

[7] The use of four pieces of machinery in "actual manufacture" was disputed by the parties (a truck scale, two batch silos and a safety gate closure mechanism). The Board found that three of the four pieces of machinery played an integral role in effecting the physical change which characterizes manufacturing and therefore used in the "actual manufacture" of tangible personal property. The fourth piece, the safety gate closure mechanism, in contrast, was found not to be ordinarily engaged in bringing about the requisite physical change that produced the taxpayer's asphalt. Unlike the batch silos in that case, we find that the bins at issue here do not play a similar role in effecting the requisite physical change to the stones, and consequently, are not used in "actual manufacture."

[8] The Appellate Tax Board ruled in Blackinton that, in light of the proximity of the equipment to the product being manufactured, its necessity to the manufacturing process, and its integration with the manufacturing machinery, the equipment fits within the statutory exemption of G.L. c. 64H, § 6(s). The Massachusetts Supreme Judicial Court ("SJC") reversed the Board's decision, noting that the machinery still had to be used solely in one of the five activities set forth in subsection 2.

[9] In 1971, the Legislature amended G.L. c. 64H, § 6(r) and (s) to include the definition of an industrial plant mentioned above. 1971 Mass. Acts 555, § 45. "The legislature added this definition to the statute in response to the Supreme Judicial Court's decision in Wakefield Ready-Mixed Concrete Co., Inc., 356 Mass. 8 (1969), which interpreted an 'industrial plant' as including cement trucks even though mobile." Denis Corporation v. Commissioner of Revenue, 34 Mass. App. Ct. 909 (1993).