Md. Code Regs. 03.06.01.32-2

Current through Register Vol. 51, No. 22, November 1, 2024

Section 03.06.01.32-2 - Tangible Personal Property Used in a Production Activity

A. This regulation applies to sales and purchases on or after July 1, 2000.

B. In this regulation, the following terms have the meanings indicated:

(1) Production Activity.

(a) "Production activity" means:

(i) Assembling, manufacturing, processing, or refining tangible personal property for sale or resale, except for processing food or beverages by a food vendor;

(ii) Generating electricity for sale or for use in another production activity;

(iii) Laundering, maintaining, or preparing textile products for rental;

(iv) Producing or repairing production machinery or equipment;

(v) Establishing or maintaining clean rooms or clean zones as required by applicable provisions of the federal Food, Drug and Cosmetic Act, the Public Health Service Act, and the Virus-Serum-Toxin Act, and the regulations adopted thereunder, pertaining to the manufacture of drugs, medical devices, or biologics;

(vi) Providing for the safety of employees; or

(vii) Providing for quality control.

(b) "Production activity" does not include:

(i) Servicing or repairing tangible personal property, except servicing or repairing production machinery or equipment;

(ii) Maintaining tangible personal property, except textile products for rental and production machinery and equipment;

(iii) Providing for the comfort or health of employees; and

(iv) Storing the finished product.

(2) "Used directly and predominantly in a production activity" means the:

(a) Use of the property is integral and essential to the production activity, occurs where the production activity is carried on, and occurs during the production activity; and

(b) Property used both in production activities and administrative, managerial, sales, or any other operational or nonoperational activities is used more than 50 percent of the time directly in production activities.

C. Applicability of the Sales and Use Tax. The sales and use tax does not apply to a sale or lease of:

(1) Tangible personal property, a digital code, or a digital product used directly and predominantly in a production activity at any stage of operation on the production activity site, from the handling of raw material or components to the movement of finished product, if the tangible personal property, digital code, or digital product is not installed so that it becomes real property;

(2) A melting, smelting, heating, or annealing coke oven, aluminum furnace, anode bake oven, electrolytic pot, cathode, refractory, or other material used in relining and rebuilding a furnace or oven;

(3) A foundation to support production machinery or equipment or an item required to conform to air or water pollution laws and normally considered part of real property;

(4) Machinery and equipment used to produce bituminous concrete or electricity, fuel, and other utilities used to operate that machinery and equipment; or

(5) Equipment used by a retail food vendor to manufacture or process bread or bakery goods for resale if the:

(a) Taxable price of each piece of equipment is at least $2,000; and

(b) Retail food vendor operates a substantial grocery or market business, as defined in Tax-General Article, §11-206(a), Annotated Code of Maryland, at the same location where the food is sold.

D. Examples of Exempt Personal Property.

(1) Exempt tangible personal property used in providing for the safety of employees includes only tangible personal property worn on or carried by the person engaged in the production activity, such as:

(a) Safety glasses;

(b) Hard hats;

(c) Safety gloves;

(d) Breathing apparatus;

(e) Lab coats; or

(f) Safety shoes.

(2) Exempt tangible personal property used in providing for quality control includes items used for raw material testing and end product testing, such as:

(a) Gauges;

(b) Scales;

(c) Petri dishes;

(d) Test tubes;

(e) Spectrometers; and

(f) Certain computers and software.

(3) Exempt tangible personal property used to move finished goods on a production activity site includes equipment used to move goods into and out of storage, including:

(a) Forklifts;

(b) Cranes;

(c) End product conveyor belts; and

(d) Inventory control systems and related software.

(4) Exempt tangible personal property used to maintain production machinery and equipment includes:

(a) Autoclaves and sterilizers;

(b) Pressure washers;

(c) Cleaning fluids; and

(d) Vacuum systems.

E. Storage equipment, including shelving and storage racks, is subject to tax.

F. Tangible personal property used to provide for the health and comfort of employees, such as antibacterial detergents and soaps, and ventilation and cooling equipment, is not exempt from sales tax.

G. Payment of Tax.

(1) All sales are presumed subject to the tax. The burden of proving that the exemption applies is on the vendor and buyer. A vendor may overcome the presumption by requiring the buyer to produce a signed statement in substantially the following form and retaining that form with the record of sale:

To: (Vendor) Reference: (Vendor's Invoice Number) I hereby certify that the tangible personal property purchased on (date) will be used directly and predominantly in a qualifying production activity, as defined by COMAR 03.06.01.32B -2.

(2) The buyer need not pay the tax on the purchase or use of tangible personal property only if the buyer reasonably expects and in good faith intends to use that property directly and predominantly in a production activity. If, however, the property is used in a way that does not meet the directly and predominantly test, the tax applies to that property. At the time the buyer knows or should know that the tax applies to property on which no tax has been paid, the buyer shall report the price of the property as a taxable purchase for use on the return for that period. The buyer may claim a refund for taxes paid on property that in fact satisfies all the tests and limitations of this regulation.

Md. Code Regs. 03.06.01.32-2

Regulation .32-2 adopted effective October 1, 2001 (28:19 Md. R. 1683); amended effective 49:14 Md. R.704, eff. 7/11/2022