In Florida, the purchase of machinery and equipment is usually subject to sales or use tax. However, there may be exceptions (called exemptions) that allow a purchaser not to pay sales or use tax on the acquisition of machinery and equipment. This article will discuss some of the most popular exemptions and how to claim the exemption when possible.
New/Expanding Businesses Making Items for Sale
A new or expanding business may purchase industrial machinery and equipment to manufacture, process, compound, or produce items of tangible personal property for sale. This must be done from a fixed location in Florida. For new businesses, the purchase must be made before the date the business first begins productive operations. Delivery of the purchased item must be made within twelve (12) months after that date. If the business is an expanding business, then the productive output of the business must be at least five percent (5%).
Industrial machinery and equipment is tangible personal property that has a depreciable life of three (3) years or more and used as an integral part in manufacturing, processing, compounding, or producing of tangible personal property for sale or exclusively used in spaceport activities. A building and its structural components do not qualify, unless so closley related to the machinery and equipment it houses or supports that the building or structural components should be replaced when the machinery and equipment are replaced. Likewise, heating and air conditioning systems do not qualify unless the sole justification for the installation is to meet requirements of the production process despite the system potentially providing nonproduction benefits. Parts and accessories are included so long as consistent with the exemption. The term “productive output” means the number of units produced in a twelve-month period and does not include the dollar amount of sales.
The above exemption does not apply to certain industries. These industries include electric utility companies, communications companies, oil or gas exploration/production operations, publishing firms that do not export at least fifty percent (50%) of their finished product out of the state, and any firm subject to regulation by the Division of Hotels and Restaurants of the Department of Business and Professional Regulation.
For a new or expanding business to receive the exemption, the business must apply directly to the Department of Revenue (“Department”) to obtain a temporary tax exemption permit. If approved, the Department provides a temporary permit to the business, which permit may be renewed/extended upon a subsequent re-application.
Production of Electrical or Steam Energy
Similar to new or expanding businesses, purchases of machinery and equipment should be exempt from sales and use tax if used at a fixed location in Florida to produce electrical or steam energy from the burning of boiler fuels other than residual oil. The electrical or steam energy must be primarily for use in manufacturing, processing, compounding, or producing items for sale in Florida. A de minimis amount of residual fuel used to facilitate the burning of nonresidual fuel does not taint the exemption. If the machinery and equipment needs to burn residual and nonresidual fuel, the exemption is prorated. The proration is based on the production of electrical or steam energy from nonresidual fuels as a percentage of all fuels. If fifteen percent (15%) or less of the energy was generated via residual fuel, the full exemption applies. Unless provided by the Department, a partial exemption is claimed via a refund. Otherwise, the exemption may be claimed directly from the vendor by providing an affidavit stating the item(s) to be exempted are for the exempt use.
Federal Procurement Contracts
A purchase by an expanding business, which manufactures tangible personal property pursuant to federal procurement regulations at a fixed location in Florida, of industrial machinery and equipment will be exempt from sales and use tax if the purchase is used to increase the implicit productive output by at least ten percent (10%). The increase is measured as a deflated implicit productive output for the calendar year during which the installation is completed or during which commencement of production begins for using the items divided by the implicit productive output for the preceding calendar year. The production commencement may not occur more than two (2) years following completion of the installation.
The only means of obtaining the exemption is via a refund from the Department. The exemption solely applies to purchases made pursuant to contracts with United States Department of Defense & Armed Forces, the national Aeronautics & Space Administration, and other federal agencies which have the contracts in a “classified” status.
Semiconductor, Defense, or Space Technology Production
For the semiconductor industry, industrial machinery and equipment will be exempt from tax if used in semiconductor technology facilities certified, as discussed more fully below, that manufacture, process, compound, or produce semiconductor technology products for sale or use by these facilities. Industrial machinery and equipment can include molds, dies, machine tool or other appurtenances/accessors to the machinery and equipment, testing equipment, test beds, computers, and software. Building materials purchased for use in manufacturing or expanding clean rooms in these facilities will also be exempt.
Concerning the defense and space industries, industrial machinery and equipment will be exempt from tax if used in defense or space technology facilities certified, as discussed more fully below, to design, manufacture, assemble, process, compound, or produce defense technology products or space technology products for sale or use by these facilities.
In all cases, a business must be certified by the Department of Economic Opportunity to qualify for the exemption. The business must apply to Enterprise Florida, Inc., which original certification is valid for two (2) years. Near the expiration and instead of submitting a new application, the original certification may be renewed biennially by submitting a statement under oath to the Department of Economic Opportunity that there has been no material change in the business’s entitlement to the original certification.
Sellers must obtain a written certificate from the purchaser that certifies the purchaser’s entitlement to the exemption. If so, the seller is relieved of liability and the Department should look solely to the buyer.
Aquaculture Activities
Also exempt from tax is industrial machinery and equipment purchased for use in aquacultural activities at a fixed location. Aquacultural activities is defined as the business of cultivation of aquatic organisms and have an aquaculture certification from the Department of Agriculture and Consumer Services. The activities must produce an aquaculture product, which means an aquatic organism and any product derived from aquatic organisms that are owned and propagated, grown, or produced under controlled conditions; however, it does not include organisms harvested from the wild for depuration, wet storage, or relay for purification.
For purposes of the exemption, industrial machinery and equipment is tangible personal property that has a depreciable life of three (3) years or more and used as an integral part in the manufacturing, processing, compounding, or production of tangible personal property for sale. Unlike other exemptions, this exemption also includes the building and its structural components, including heating and air-conditioning systems. Also encompassed are parts and accessories, so long as the parts and accessories otherwise qualify for the exemption.
To claim the exemption, the Department has put together a suggested exemption certificate for purchasers to provide sellers.
General Manufacturer
Eligible manufacturers may purchase industrial machinery and equipment exempt from sales and use tax. The machinery and equipment must be used at a fixed location in Florida to manufacture, process, compound, or produce items of tangible personal property for sale.
An eligible manufacturing business is any business that has a primary business activity code classified under NAICS (North American Industry Classification System) codes 31, 32, 33, 112511, and 423930 for where the industrial machinery and equipment is located. A primary business activity means activity representing more than fifty percent (50%) of the activities conducted at the location where the industrial machinery and equipment or postharvest machinery and equipment is located. Like other exemptions, industrial machinery and equipment is defined as tangible personal property that has a depreciable life of three (3) years or more and is used as an integral part in the manufacturing, processing, compounding, or producing of tangible personal property for sale or recycling of metals for sale. A building and its structural components are not industrial machinery and equipment unless so closely related to the industrial machinery and equipment housed or supported that the building or structural components should be replaced when the machinery and equipment are replaced. Heating and air conditioning will not qualify for industrial machinery and equipment unless solely to meet the requirements of the production process, regardless of ancillary benefits (e.g., comfort of employees). Industrial machinery and equipment also includes parts and accessories if purchased before the date the machinery and equipment are placed in service.
Also exempt will be postharvest machinery and equipment purchased by an eligible postharvest activity business that is used at a fixed location in Florida. An eligible postharvest activity business is a business that has a primary activity of anything under NAICS code 115114 at the location where the postharvest machinery and equipment is located. Postharvest activities is defined to mean services performed on crops, after their harvest, with the intent of preparing the crops for market or further processing. It includes, but is not limited to, crop cleaning, sun drying, shelling, fumigating, curing, sorting, grading, packing, and cooling. Postharvest machinery and equipment has a similar definition to industrial machinery and equipment, except the use must be primarily for postharvest activities.
If a seller receives from the purchaser a signed certificate certifying the purchaser’s qualification for the exemption, then the seller should not have to collect tax on the sale of the exempt items. However, the Department may choose to pursue the buyer if the Department determines the sale should not have been exempt from tax.
Research and Development
Machinery and equipment used primarily for research and development will be exempt from tax. Machinery and equipment includes, but is not limited to, molds, dies, machine tooling, other appurtenances or accessories to machinery and equipment, testing and measuring equipment, test beds, computers, and software. It is irrelevant whether the machinery and equipment is purchased or self-fabricated.
To be considered “predominately,” the machinery and equipment must be used at least fifty percent (50%) of the time in research and development. The term “research and development” is defined as research that has as its goal any of the following: (1) basic research in a scientific field of endeavor; (2) advancing knowledge/technology in a scientific/technical field of endeavor; (3) development of a new product, regardless of whether ultimately offered for sale; (4) improvement of an existing product, regardless of whether the improved product is offered for sale; (5) development of new uses for an existing product, regardless of whether the new use is offered for sale; and (6) design and development of prototypes, regardless of whether the ultimate product is offered for sale. The statute makes it clear research and development does not include ordinary testing/inspection of materials/products used for quality control, market research, efficiency surveys, consumer surveys, advertising and promotions, management studies, or research in connection with literary, historical, social science, psychological, or other similar nontechnical activities.
To claim the exemption, the purchaser must provide the seller an affidavit stating the purchase is of machinery and equipment that will be used predominately for research and development. The affidavit must include the purchaser’s name, address, sales and use tax registration number, and, if applicable, federal employer identification number. A holder of a direct pay permit may provide the direct pay permit in lieu of the affidavit.
Conclusion
In conclusion, there are several exemptions for machinery and equipment. Finding the correct exemption is half the battle. The other half is maintaining the information the Department requires to later prove entitlement to the exemption.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
If you are interested in learning more about Florida sales and use tax, then you can find a listing of our up and coming speaking engagements HERE.
AUTHORITY
ADDITIONAL ARTICLES TO READ
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.
