N.J. Admin. Code § 18:24-4.4

Current through Register Vol. 56, No. 8, April 15, 2024

Section 18:24-4.4 - Purchase, rental, lease, or use of machinery, apparatus, or equipment directly in production exempt from tax

(a) The purchase, rental, lease, or use of machinery, apparatus, or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing, processing, assembling, or refining is exempt from tax.

(b) Production is limited to those operations commencing with the introduction of raw materials into a systematic series of manufacturing, processing, assembling, or refining operations, and ceases when the product is in the form in which it will be sold to the ultimate consumer, and does not include any activities which are distributive in nature. For example, a machine which packs a product into shipping cases after the product is in the form in which it will be purchased by the ultimate consumer is not considered to be used in production.

(c) Machinery, apparatus, or equipment is considered to be directly used in production only when it is used to initiate, sustain, or terminate the transformation of raw materials into finished products. In determining whether property consisting of machinery, apparatus, or equipment is "directly" used, consideration must be given to the following factors:

1. The physical proximity of the property in question to the production process in which it is used:

2. The proximity of the time of use of the property in question to the time of use of other property used before and after it in the production process; and,

3. The active causal relationship between the use of the property in question and the production of a product. The fact that particular property may be considered essential to the conduct of manufacturing, processing, assembling, or refining because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in manufacturing, processing, assembling, or refining. For example, property used to prevent accidents, which may be required by law, is not considered directly used.

(d) Concerning primary use, where a single unit of machinery, apparatus, or equipment is put to use in two different activities, one of which is a "direct use" and the other of which is not, the property is not exempt from tax unless the manufacturer, processor, assembler, or refiner makes use of the property more than 50 percent of the time directly in manufacturing, processing, assembling, or refining operations, except in those cases where such machinery, apparatus, or equipment is rented, leased, or used by persons other than the purchaser.

1. For example:

i. A manufacturer purchases a machine for self-use in two activities, one of which is a direct use in a manufacturing operation and the other use is distributive in nature. Sixty percent of the time the machine is used in production and 40 percent of the time it is used in a loading activity. Since the machine will be used directly in production over 50 percent of the time, it qualifies for exemption.

ii. Same facts as in example i, except that 30 percent of the time the machine is used in production and 70 percent of the time it is used in a loading activity. The machine is taxable as it is not used directly in production over 50 percent of the time.

iii. A manufacturer purchases a machine for self-use 10 hours a week. The machine is rented or leased for 30 hours a week. The rental or lease of a machine is not deemed a self-use activity. Therefore, where the manufacturer uses the machine for more than five hours a week directly in production, it is used over 50 percent of the time for purposes of qualifying for exemption. Where the machine is used five hours or less directly in production, the purchase of it does not qualify for exemption and the purchase of the machine is taxable.

iv. The lessee of the machine under example iii above uses the machine directly in production for more than 15 hours a week. Since the machine is used more than 50 percent of the time directly in production, the rental or lease charges are not subject to tax. If the machine is used for 15 hours a week or less directly in production, it does not qualify for exemption and the rental or lease charges are subject to tax.

(e) The exemption in this section applies to industrial owners, mechanical contractors, and their suppliers, where an industrial owner awards a contract to a mechanical contractor to install manufacturing machinery, apparatus, or equipment, to be used by the owner to produce tangible personal property for sale. The installation may be made in a new or existing industrial plant of the owner designed for or currently used for the manufacture of tangible personal property. For example:

1. Under the above facts where the installation of machinery, apparatus, or equipment results in an exempt capital improvement to real property, the labor charges for installation are exempt from tax. In determining whether the installation of machinery, apparatus, or equipment results in an exempt capital improvement, such property must be annexed to a structure to carry out the purposes for which the structure was erected or designed or to which it has been adapted, with the intention to remain there permanently, and the removal thereof will result in material injury and does not constitute a taxable capital improvement under 18:24-5.6. The installation would result in a capital improvement when such improvement results in an increase in the capital value or in a significant increase in the useful life of the real property. Where the installed machinery, apparatus, or equipment retains its character as tangible personal property and has not resulted in a capital improvement to real property, the labor charges for installation are subject to tax.

2. Under the facts above, where the installation, upon completion, results in an exempt capital improvement, the owner should issue to the contractor two fully completed certificates:

i. Certificate of Exempt Capital Improvement (Form ST-8) or other approved form, to evidence that the job qualifies as an exempt capital improvement, exempting his or her construction labor from tax; and

ii. Exempt Use Certificate (Form ST-4) or other approved form, to evidence that the machinery, apparatus, or equipment installed qualifies for exemption in manufacturing, processing, assembling, or refining activity.

3. In the above examples, to obtain the exemption of machinery, apparatus, or equipment from tax, the contractor must furnish his or her supplier with a fully completed Exempt Use Certificate (Form ST-4) or other approved form, properly identifying the job, with a copy of the owner's exemption certificate attached.

4. Under the above facts, the lease or rental of equipment or vehicles for use on the job of the mechanical contractor is not exempt from tax.

5. Under the above facts, only machinery, apparatus, or equipment used directly and primarily in the production of tangible personal property by manufacturing, processing, assembling, or refining is exempt. Items that may qualify for exemption include: vessels, pumps, mixers, pipe valves, and fittings. Other materials used by the mechanical contractor for the installation are not exempt from tax.

6. When subcontractors are involved, the mechanical contractor should treat such subcontractors in the same manner as in dealing with his or her suppliers, so far as the classification of the job as an exempt capital improvement and an exempt use is concerned. The use of Form ST-8 and Form ST-4 or other approved form to evidence these classifications is also the same.

7. In addition to the above facts, the mechanical contractor also contracts to install heating, ventilating, and air conditioning, which when installed will constitute an addition or exempt capital improvement to real property. The sale to the installing contractor of tangible personal property from his or her supplier is a retail sale subject to tax. The tax shall be paid by the contractor either to his or her supplier or directly to the Division of Taxation. The contractor should be issued a fully completed Certificate of Exempt Capital Improvement (Form ST-8) or other approved form by the owner of the real property for the purpose of exempting installation charges from tax.

8. Under the above facts, piping, such as air, gas, water, steam, and condensate, is designed for use in both the manufacturing process and incidentally in heating the building. The key to this example is the word "incidentally." If the system is used directly and primarily for the production of tangible personal property, and only incidentally to aid the building environment housing the machinery, apparatus, or equipment, the exemption will apply to property purchased. For installation charges, see (e)1 above.

N.J. Admin. Code § 18:24-4.4

Amended by 48 N.J.R. 824(a), effective 5/16/2016