Colorado State Manufacturing Exemptions
Purchases of machinery or machine tools and parts thereof are exempt from state sales and use tax when the machinery will be used in manufacturing. The machinery must be used in Colorado directly and predominantly to manufacture tangible personal property for sale or profit. The items purchased must meet the definition for section 38 property found in the Internal Revenue Code of 1954 and must be of a nature that would have qualified for the investment tax credit against federal income tax. For businesses located outside of a state enterprise zone, the purchase must be capitalized to qualify for the exemption. Each purchase order and/or invoice must be more than $500. Several invoices of less than that amount to reach the $500 total do not qualify unless the items purchased were originally on one purchase order that totaled more than $500. There is no maximum limit on the amount that can be exempted as long as the $500 minimum on each purchase order/invoice is met. Purchases of used equipment qualify only to a maximum of $150,000 annually due to limitations for investment tax credit on the purchase of used equipment. [§39-26-114(11)(d) C.R.S.]
Definition of “Manufacturing”
“Manufacturing” means the operation of producing an item of tangible personal property different from and having a distinctive name, character, or use from raw materials. Only those items used predominantly and directly in the manufacturing process qualify. If the item is used for research and development, repair or maintenance it does not qualify as direct manufacturing use, and if these uses prevent the machine from being predominantly used in manufacturing, the machine is disqualified.
The term “predominantly” is applied to manufacturing, so that any and all non-manufacturing use will be compared to all “direct” manufacturing use, and the manufacturing use must be the majority (greater than 50 percent). For example, a lathe used to repair molds and also used for other miscellaneous functions for a total of 55 percent of its hours, while being used to manufacture new molds 45 percent of its hours, would not be predominantly used in manufacturing and would not be exempt. The maintenance and repair down time of machinery is not counted in the base of manufacturing/non manufacturing hours.
Beginning Point of Manufacturing
Manufacturing is defined to begin at the point raw material stored at a location contiguous to the plant site is picked up to be moved directly to the first machine, and ends at the point that alteration of the product is complete. Packaging can be a completion step in the manufacturing process. Testing machines and transport machines used during the manufacturing line steps are also exempt. Remember, these must be machines.
Definition of “Machinery”
“Machinery” means any apparatus consisting of interrelated parts used to produce an article of tangible personal property. The term includes both the basic unit and any adjunct or attachment necessary for the basic unit to accomplish its intended function.
This definition of machinery requires it to be used to produce tangible personal property, the product, not simply contain the product. The use must be “directly and predominantly” in manufacturing. Testing and transport machines are discussed in the law, and are included as necessary to “produce” a product, but bins, racks, fixtures, tanks, pipes and valves usually do not act to produce a product, but simply contain and protect from loss.
The Test for Inclusion as Manufacturing Machinery
The requirement that each component has to come into contact with and alter the raw materials has been changed. The exemption question is now: Whether each individual component of a system is a constituent part of machinery that acts upon and has a positive effect on the product. This use of this test is limited by the statute of limitations, which is the three year period prior to the filing date of any refund claim.
How to Make a Tax-Exempt Purchase
Complete the “Sales Tax Exemption on Purchases of Machinery and Machine Tools” (Form DR 1191). The form is on the DOR Forms Web site. The form may be photocopied for use in claiming the exemption. An authorized official of the company purchasing the equipment must sign the form, and file a copy of the form with the seller of the machinery and with the Department of Revenue. (For businesses inside an enterprise zone, the local enterprise zone administrator does not need to sign this form.) If purchases subject to the Machinery and Machine Tools exemption number more than 100 during a calendar year, the taxpayer may complete the “Machinery and Machine Tools State Sales Tax Exemption Agreement” (DR 1192) instead of filing several DR 1191 forms. Call the DOR Forms Hotline at (303) 232-2414 to obtain the DR 1192.
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