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Manufacturing Equipment
Manufacturing Equipment
Sales/Use Tax Exemption for Manufacturing Equipment(Revised 12/98)
General Information
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.
Exemption for Businesses Inside an Enterprise Zone
For purchases made on or after June 7, 1989, materials for construction or repair of machinery or machine tools are also exempt from the state sales and use tax. This constructed or repaired machinery must be used solely and exclusively in a designated enterprise zone.
Purchases of machinery, machine tools, parts, and materials used in an enterprise zone are exempt whether the machinery is capitalized or expensed. However, the machinery must still meet the basic investment tax credit requirement of having a three-year useful life if expensed.
Exemptions for Mining and Machinery in an Enterprise Zone
For businesses in an enterprise zone, the definition of "manufacturing" includes refining, blasting, exploring, mining and mined land reclamation, quarrying for, processing and beneficiation, or otherwise extracting from the earth or from waste or stockpiles or from pits or banks any natural resource. [§39-30-106(1)(B) C.R.S.] This exemption is effective for purchases made after June 8, 1991. For detailed information on the mining exemption, see FYI Sales 69, "Sales/Use Tax Exemption for Machinery and Machine Tools Used in Mining in an Enterprise Zone."
Common Questions
Can I claim the exemption on machinery and machine tools used outside an enterprise zone in addition to the exemption on machinery and machine tools used inside a zone?
You can claim the regular exemption on items used anywhere in Colorado. Items which are exempt only in enterprise zones (materials for machine tool construction, expensed equipment and mining machinery) must be used solely and exclusively in an enterprise zone. Equipment which is used partly within and partly outside of a zone only qualify for the regular exemption.
Should Special Mobile Machinery (SMEs) be registered with the county?
SMEs are various forms of tracked and wheeled construction, warehouse and other mobile machinery that are viewed by Colorado law to be vehicles subject to registration. The county Motor Vehicle office will issue either "SME" license plates for vehicles with some on-road use, or "Z" tabs for vehicles with no on-road use. This requirement to register remains regardless of the manufacturing equipment exemption from Colorado sales tax which will only occasionally apply to this SME category because construction is not manufacturing. No Colorado sales tax will be charged at registration on qualifying manufacturing if a copy of the "Sales Tax Exemption on Purchases of Machinery and Machine Tools" form (DR 1191) is presented to the county Motor Vehicle office. The RTD, Scientific and Cultural Facilities District (SCFD), Baseball District (BD), and local taxes will be collected where applicable.
What about sales tax on mixed use machinery?
The law on mixed use changed July 1, 1996. After that date, machinery may be predominantly used in manufacturing. As stated above, the manufacturing use must be the majority use (greater than 50 percent). The machine must still be used "directly" in manufacturing.
The previous law required that the machinery be for exclusive use in manufacturing has been strictly enforced. However, several instances where exclusive use equipment is mounted on road-going chassis for mobility have been decided by allowing the cost of equipment as exempt, and applying sales tax to the chassis portion of the vehicle as it is not exclusive manufacturing use. Purchasers should provide county motor vehicle offices with separate purchase invoices or purchase option breakdown quotes to make the taxable/nontaxable valuation.
Can I claim a refund for sales tax paid on enterprise zone exempt materials or mining equipment before the enterprise zone was created?
No. You may only claim credit for items purchased on or after the date your zone was established. [§39-30-106 C.R.S.]
Are eligible purchases also exempt from city and county sales taxes?
Not necessarily. Local governments have the option of exempting or not exempting such purchases. RTD, for example, does not exempt machinery purchases. Therefore, you must check with your local sales tax jurisdictions.
Is there a cut-off or sunset date for the Colorado Enterprise Zone Program?
No. The 1998 sunset date was repealed. However, the Colorado Economic Development Commission may terminate zones or zone areas beginning July 1, 1997.
Further Information
For more information on related topics, consult the following DOR publications:
- FYI General 1 "Department of Revenue Publications";
- FYI General 6 "General Information About Colorado Enterprise Zones";
- FYI General 8 "The FYI Program - Index and General Information";
- FYI Income 11 "Enterprise Zone Investment Tax Credit."
Other Colorado "FYI" Tax Publications
Colorado Tax Forms (commonly requested forms)
