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Sales and Use Tax TAA 17A-013 - Manufacturing Exemptions

QUESTION: TAXPAYER IS IN SEEKING A DETERMINATION WHETHER THE PARTS AND REPAIRS REFERENCED BELOW ARE EXEMPT FROM FLORIDA SALES AND USE TAX UNDER THE PROVISIONS OF S. 212.08(7)(XX), F.S., PERTAINING TO THE REPAIR OF QUALIFYING INDUSTRIAL MACHINERY AND EQUIPMENT.

ANSWERS: TAXPAYER IS A QUALIFYING INDUSTRY CLASSIFIED UNDER SIC MAJOR INDUSTRY GROUP 384. IT USES INDUSTRIAL MACHINERY AND EQUIPMENT TO MANUFACTURE, PROCESS, OR COMPOUND, ITEMS OF TANGIBLE PERSONAL PROPERTY AT A FIXED LOCATION WITHIN FLORIDA. HENCE, ALL LABOR CHARGES FOR THE REPAIR OF, AND PARTS AND MATERIALS USED IN THE REPAIR OF AND INCORPORATED INTO, QUALIFYING INDUSTRIAL MACHINERY AND EQUIPMENT ARE EXEMPT FROM SALES AND USE TAX UNDER S. 212.08(7)(XX), F.S.
SPECIFIC TO THIS ADVISEMENT, TAXPAYER’S PURCHASES RELATING TO THE REPLACEMENT OF THE ABOVE IDENTIFIED COMPONENT ITEMS OF INTERNAL MACHINE TOOLING AS REPAIR PARTS INCORPORATED INTO MILLING MACHINERY; TURNING/BORING MACHINERY; GRINDING, SURFACE FINISHING EQUIPMENT; QUALITY CONTROL EQUIPMENT; AND ENGRAVING MACHINERY WOULD QUALIFY FOR THE EXEMPTION FROM TAX PROVIDED UNDER S. 212.08(7)(XX), F.S. HOWEVER, IT IS EMPHASIZED THAT WHILE THE COMPONENT PARTS (BITS, BLADES, AND OTHER INSERTS, ETC.) OF STAND- ALONE TOOLS WILL QUALIFY FOR THE EXEMPTION, REPLACEMENT OF AN INDIVIDUAL STAND-ALONE TOOL WILL NOT QUALIFY FOR THE EXEMPTION. ADDITIONALLY, WORKSTATIONS AND WORKTABLES THAT ARE NOT INCORPORATED INTO QUALIFYING MACHINERY AND EQUIPMENT THAT ARE IDENTIFIABLE AS FURNITURE WILL NOT QUALIFY FOR THE EXEMPTION.

August 9, 2017

Re: Technical Assistance Advisement 17A-013

XXXXXXXXXX (“Taxpayer”)

Florida Sales and Use Tax

Manufacturing Exemptions

Sections 212.05, 212.055, 212.08(7)(xx), Florida Statute (F.S.)

Rule 12A-1.006, Florida Administrative Code (F.A.C.)

BP#: XXXXXXXXX

Dear XXXXXXXXX:

This letter is in response to your request dated April 14, 2017, and received in this office on April 18, 2017, for issuance of a Technical Assistance Advisement (“TAA”) pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C., concerning manufacturing exemptions. An examination of your request has established you complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for a TAA.

FACTS PRESENTED

Taxpayer is a manufacturer of critical high precision medical device components, implants, surgical instruments, cutting tools, and mechanical/electro mechanical assemblies. Taxpayer also manufactures surgical systems for Arthroscopy, Endoscopy, and Laparoscopy.

The company uses machine tools to manufacture its products for sale at a fixed location in Florida. A machine tool is a machine for shaping or machining metals or other rigid materials by way of cutting, boring, shearing, and grinding. The machine tools used by the company include CNC milling machines and Swiss-type and Automatic Screw lathes/turning machines. The company also has equipment for grinding materials to tolerances, fluting the material, laser welding and etching. Throughout the manufacturing process, the company also has inspection and gauging equipment that is used for purposes of quality control.

Manufacturing Process:

The manufacturing process involves machining stock to precise sizes and shapes to ultimately produce medical products for sale. This is accomplished by milling or turning the stock to be cut, bored, or shaped on a machine. The stock to be cut, bored, or shaped is secured to a work table within the machine. The stock is milled using rotary cutters to remove material from a work piece while the tools rotate around the stock on the milling machine. The stock may be turned or bored using a non—rotary cutter that moves linearly while the work piece rotates on a lathe. The stock may subsequently need to be fluted. Fluting is the threading or grooving of an item. This is accomplished using a lathe known as an Automatic Screw Machine.

Within the milling and turning machines are tool holders/tooling centers that hold the machine’s tooling. The machine and the machine’s internal tooling together are what compromise a single working unit.

The medical products produced from the milling machines and lathes may need further processing. The items may need to be polished. The items may need to be ground to remove burrs and blemishes. The company uses surface finishing machines such as grinders and polishers to accomplish these tasks.

As part of the company’s quality control procedures, the medical products produced are inspected and tested to ensure that the items meet the correct tolerances and are the correct thickness. The company has equipment that performs these functions. After the products pass quality control testing and inspection, they are engraved with identifying information such as the manufacturer, serial number, and part number. The company has laser welding and engraving machinery to perform this final task.

Manufacturing Machinery:

Milling Machines

Milling is a cutting process that uses a milling cutter to remove material from the surface of a work piece. The milling cutter is a rotary cutting tool, often with multiple cutting points. As the milling cutter enters the work piece, the cutting edges (flutes or teeth) of the tool repeatedly cut into and exit from the material, shaving off chips from the work piece with each pass to produce specific shapes and patterns. The milling machines are known as CNC machines, as they use a computerized numeric code to direct the angle of the cuts made by the cutter. The milling machine’s internal tooling is what allows the machine to cut, bore, and turn the raw material into items of tangible personal property for sale.

The component parts of the internal tooling for milling machines consist of end mills, fluted mills, ball mills, reamers, shanks, tapers, inserts, draw bars, and keyway broaches; collets, arbors, drill chucks, and stops which hold the cutters within the spindle; spindles which are mounted within the quill, which is held in the tooling center tool holders and tooling centers; stationary or rotary work tables and the jaws, clamps, and brackets used to hold the work piece.

Turning/Boring Machines:

Turning or boring of material is done on a lathe. A Swiss—type lathe is a turning machine that feeds stock through a guide bushing and past the tooling which cuts, bores, or shapes the material. When turning, a piece of relatively rigid material (such as wood, metal, plastic, or stone) is rotated, and a cutting tool traverses along the material to produce precise diameters and depths. Boring is the process of enlarging or the truing of a hole by removing material with a cutter bit.

Another type of lathe the company uses in producing tangible personal property for sale is known as an Automatic Screw Machine. After a hole in the stock is enlarged or trued by the boring process, the hole needs to be threaded or grooved. Using cutting tools (fluted end mills), the bored holes can be threaded or grooved.

The machine’s internal tooling is what allows the machine to turn and bore the raw material into items of tangible personal property for sale. The parts for the internal tooling need replacement due to wear. The component parts of the internal tooling for lathes are cutting tools/bits consisting of end mill, centers, tapered shanks, reamers, inserts, draw bars, and taps; collets, arbors, drill chucks, and stops, which hold the cutters within the spindle; spindles, which are mounted within the tool holder; tool holders and tool posts that attach the tool holders to the lathes; parts for the tool posts, such as posts, screws, washers, and collars, mandrels and jaw chucks used to hold the work piece within the lathe.

Grinding, Surface Finishing Equipment:

The medical products produced on the milling machines and lathes sometimes have markings, grooves, burls, or other imperfections on their surface. The company uses grinders, polishers, and surface finishing machinery to polish and smooth the surfaces of the items produced. The grinders and polishers are hand held tools that a sanding/grinding disc is attached to. The grinder/polisher passes over the item of tangible personal property until the desired finish is achieved. The items to be polished may be secured in a surface finishing machine. A sanding/grinding belt is passed over the item until the desired finish is achieved.

The internal parts of the grinders, polishers, and surfacing machinery need to be replaced due to wear and if not replaced would not allow the unit to function or operate as intended to produce tangible personal property. The parts of the grinders and polishers include the trigger assembly, the spindle, and the disc holder. Parts for the surface finishing machinery include the work table the item being processed is secured to, the sanding/grinding belt holder, and the spindle.

Quality Control Equipment:

Throughout production, Taxpayer’s products go through a quality control/inspection process. The items produced are tested for tolerances and correct thicknesses using equipment that have gauges mounted within the equipment. The equipment includes bench analyzers, hardness testers, and visual inspection machines. The gauges for the quality control equipment need to be replaced due to wear.

Engraving Machinery:

The items produced have serial numbers and other identification laser welded or etched onto the item by way of engraving machines. The machine uses a scribe or a stylus to etch the information onto the item. The scribes and stylus in the engraving machinery must be replaced on occasion due to wear.

APPLICABLE LAW

Unless a specific exemption applies1, s. 212.05, F.S., provides it is the legislative intent that every person is exercising a taxable privilege that engages in the business of selling or repairing tangible personal property2 in this state. For exercising such a privilege, a tax is levied on each taxable transaction or incident. The tax is due and payable at the rate of 6 percent, plus any applicable surtaxes imposed under s. 212.055, F.S., on the total consideration received for each item or article of tangible personal property when sold at retail or repaired in this state.

Repairs to Tangible Personal Property; Exemption for Industrial Machinery and Equipment

Where parts are furnished by the repairer, the entire charge the repairer makes to a customer for adjusting, applying, installing, maintaining, remodeling, or repairing tangible personal property is taxable. See Rule 12A-1.006(1)(a), F.A.C.

Section 212.08(7)(xx), F.S., provides, with specified limitations based on a business’ Standard Industrial Classification Code (SIC)3, that there are exempt from sales and use tax all labor charges for the repair of, and parts and materials used in the repair of and incorporated into, industrial machinery and equipment which is used for the manufacture, processing, compounding, production, or preparation for shipping of items of tangible personal property at a fixed location within Florida.

If a purchaser qualifies and adheres to the requirements of s. 212.08(7)(xx), F.S., and provides a properly executed exemption certificate4 to the selling dealer relating to the purchase of parts and materials used in the repair of, and incorporated into, qualifying industrial machinery the sales transaction would be exempt from tax. It is noted that Taxpayer asserts its SIC is 3599. However, research by the Department reflects the appropriate classification code is within Major Industry Group 384 and the applicable SIC is 3841 and/or 3845.

REQUESTED ADVISEMENT & DETERMINATION

Taxpayer is seeking a determination whether the parts and repairs referenced below are exempt from Florida sales and use tax under the provisions of s. 212.08(7)(xx), F.S., pertaining to the repair of qualifying industrial machinery and equipment.
• Replacement of internal machine tooling parts for milling machinery.
• Replacement of internal machine tooling for turning/boring machinery.
• Replacement of parts for grinding and surface finishing equipment.
• Replacement of the gauges for quality control equipment.
• Replacement of the scribes and stylus for engraving machinery.

Taxpayer is a qualifying industry classified under SIC Major Industry Group 384. It uses industrial machinery and equipment to manufacture, process, or compound, items of tangible personal property at a fixed location within Florida. Hence, all labor charges for the repair of, and parts and materials used in the repair of and incorporated into qualifying industrial machinery and equipment are exempt from sales and use tax under s. 212.08(7)(xx), F.S.

Specific to this advisement, Taxpayer’s purchases relating to the replacement of the above identified component items of internal machine tooling as repair parts incorporated into milling machinery; turning/boring machinery; grinding, surface finishing equipment; quality control equipment; and engraving machinery; would qualify for the exemption from tax provided under s. 212.08(7)(xx), F.S. However, it is emphasized that while the component parts (bits, blades, and other inserts, etc.) of stand-alone tools will qualify for the exemption, replacement of an individual stand-alone tool will not qualify for the exemption. Additionally, workstations and worktables that are not incorporated into qualifying machinery and equipment that are identifiable as furniture, will not qualify for the exemption.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based, may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 15 days of the date of this letter.

Kind Regards,
Alan R. Fulton
Tax Law Specialist
Technical Assistance & Dispute Resolution
850-717-6735
ARF\tadrstaff
Record ID: XXXXXXXXXX

End Notes:

1 The Department must point out that while taxing statutes are strictly construed against the taxing authority, statutes that grant an exemption are strictly construed against the taxpayer. See Asphalt Pavers v. Dept. of Revenue, 584 So.2d 55 (Fla. 1st DCA 1991), at 57 (citing the rule that exemptions from tax are strictly construed against the taxpayer, with any ambiguity resolved in favor of the administrative agency); State ex rel. Szabo Food Services Inc. v. Dickinson, 286 So.2d 529 (Fla. 1973) (“Exemptions to taxing statutes are special favors granted by the Legislature and are to be strictly construed against the taxpayer.”). See also, United States Gypsum Co. v. Green, 110 So.2d 409 (Fla. 1959) (also stating that exemptions from tax are strictly construed against the taxpayer) and Wanda Marine Corp. v. Dep’t of Revenue, 305 So.2d 65, 69 (Fla. 1st DCA 1975).

2 Tangible personal property means and includes personal property which may be seen, weighed, measured, or touched or is in any manner perceptible to the senses. See s. 212.02(19), F.S.

3 This exemption applies only to industries classified under SIC Industry Major Group Numbers 10, 12, 13, 14, 20, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, and 39 and Industry Group Number 212. See s. 212.08(7)(xx)2., F.S.

4 See Tax Information Publication 00A01-15, dated July 5, 2000.

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