OVERVIEW OF THE 1%/$80 EXCISE TAX. Rationale. Treatment of Business Inputs. Treatment of Business Inputs. Treatment of Business Inputs

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Mill Machinery for Manufacturers OVERVIEW OF THE 1%/$80 EXCISE TAX REVENUE LAWS STUDY COMMITTEE MARCH 8, 2016 Gasoline engines, pumps Motors, pulleys, conveyors, mixing tanks Gloves, boots, hair nets, lab coats Trina Griffin, Legislative Analysis Division Hand tools, cables, lathes, saws, welding machines Forklifts, cranes Repair parts and accessories Rationale Sales tax should be designed to tax the final household consumption of goods and services. Taxing business purchases of intermediate goods and services can create pyramiding effect. 40% of the sales tax base represents business-tobusiness sales. Treatment of Business Inputs There are over 75 sales tax exemptions for various business inputs. About a dozen of which are geared toward manufacturers. Treatment of Business Inputs No exemptions for equipment used by most service providers or retail outlets. Treatment of Business Inputs Over time, exemptions have been added for various service providers. Broadcasting equipment Passenger air carriers Commercial Fishing Custom software Dry cleaners 1

Fiscal Impact If converted to sales tax exemption = -$45M If taxed at general = $209M (State) $100M (Local) HISTORY OF THE MILL MACHINERY TAX converted converted ports Sales tax exemption for mill, parts, and accessories ports converted converted Sales tax exemption was and preferential ports Preferential converted to excise tax to comply with Streamlined ports 2

converted R&D in Software physical, Major engineering, & datacenters and life sciences ports converted Ports for Industrial waterborne commerce & large & distribution ports Who is eligible for 1%/$80 tax? Article 5F MECHANICS OF THE MILL MACHINERY TAX Manufacturing Industries or Plants (G.S. 105-187.51) Industries Identified by DOR through Admin. Interpretation Industries Specifically Listed in Statute (G.S. 105-187.51B&D) *Major *R&D *Software *Industrial *Company at ports *Lrg. Manufacturing & distribution Who is Eligible? A industry or plant. A contractor or subcontractor in a performance contract with manufacturer. A subcontractor in contract with a general contractor in contract with a manufacturer. Administrative Interpretation Commercial photographers Mining companies Commercial laundries and dry cleaning establishments Public or private water purification plants Bottling plants Hatcheries 3

NOT a Manufacturer What is Eligible? Restaurants Production companies 105-187.51. Tax imposed on mill. (a) Scope. A privilege tax is imposed on the following persons: (1) A industry or plant that purchases mill or mill parts or accessories for storage, use, or consumption in this State. What is Mill Machinery? Production Process Experimentation Research Quality Control DOR Bulletin - All steps where operations are done on ingredient materials on a processing or assembly line turning out a finished product for sale. Other States Most states have a sales tax exemption for M&E used directly and exclusively in or processing TPP for sale. 4 states have a reduced : AL (1.5%), CA (4.1875%), NC, MS (1.5%) 4 states + District of Columbia tax at standard sales tax (HI, NV, NM, SD) Other States GEORGIA Exempts M&E that is necessary and integral to the manufacture of TPP, industrial materials, and packaging supplies. VIRGINIA Exempts M&E and repair parts if preponderance of use is directly in processing,, refining, mining, or converting products for resale. SOUTH CAROLINA Exempts M&E used in, processing, compounding, mining, or quarrying TPP for sale if they are integral and necessary to the process; substantial use. TENNESSEE Exempts M&E that is necessary and primarily used for the fabrication or processing of a product for resale and consumption off premises; taxpayer must be a manufacturer (>50% revenues) ISSUES TO CONSIDER 4

Issues to Consider Single article limitation Define industry Define mill Item Sales Price Tax Forklift $10,000 $80 Conveyor System Part A Part B Part C Part D $1,000 $2,000 $3,000 $4,000 $10,000 $10 $20 $30 $40 $100 Single Article Limitation Considerations Impact of an increase on certain manufacturers Administratively burdensome for Department Issues to Consider Single article limitation Define industry Define mill 105-187.51. Tax imposed on mill. (a) Scope. A privilege tax is imposed on the following persons: (1) A industry or plant that purchases mill or mill parts or accessories for storage, use, or consumption in this State. Define Manufacturing Industry or Plant Must taxpayer be a manufacturer, and if so, what does that mean? Threshold of activity Some states require > 50% revenues derive from ; others look only at use of equipment. At the entity level or the level? Type of business Service providers? Self-service? Type of activity Definition of Manufacturing U.S. Supreme Court Manufacturing implies a change there must be a transformation; a new and different article must emerge, having a distinctive name, character, or use. 5

Definition of Manufacturing Type of activity Many states list various production processes that either do or do not qualify: processing, generating, assembling, fabricating, refining,, mining, extracting. Examples of activity in other states that do not qualify: meat processing, making snow, rebuilding engines, making & packaging ice, pasteurizing milk, making sheet metal components, packaging/bottling, transmission of electricity (but generation does qualify) Define Manufacturing Industry or Plant What about specific industries recognized in DOR administrative bulletin? What about industries specifically listed in G.S. 105-187.51B? Must the manufacturer own the goods being manufactured, processed, refurbished, etc.? Issues to Consider Single article limitation Define industry Define mill 105-187.51. Tax imposed on mill. (a) Scope. A privilege tax is imposed on the following persons: (1) A industry or plant that purchases mill or mill parts or accessories for storage, use, or consumption in this State. Definition of Mill Machinery Modernize terminology? Refer to used in process? Address dual-use equipment threshold? Most states primarily used = >50% SC substantially used = >33% Address beginning and end points of process Issues Raised by 2015 Proposed Legislation Expand tax to secondary metals recyclers. Some but not all of their equipment qualify for 1%/$80. Expand tax to manufacturers that fabricate items for their own use in the fulfillment of a performance contract; not considered the same as goods for sale. To Sum Up The statute does not define industry. The statute does not define mill. The statute does not define or identify the beginning and ending points of the process. It s unclear whether you have to be a manufacturer to qualify. Not all and equipment used by a manufacturer qualifies for 1%/$80. Statute does not address whether a product must be produced for sale. 6

Trina Griffin NCGA, Finance Staff trina.griffin@ncleg.net (919) 733-2578 7