Machinery and Equipment Used to Blend and Apply Fertilizer are Exempt from Sales Tax
April 30, 2021
This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of Regulations 12 CSR 10-1.020, in response to your letter dated March 25, 2021. You requested a renewal of a letter ruling issued on June 5, 2018.
The facts as presented in your letter ruling request are summarized as follows and are the same facts that you provided in the letter ruling request you sent to the Department in 2018:
Applicant is principally engaged in the manufacturing of feed, seed, fertilizer, chemicals, and grain. Applicant operates an on-site grain elevator for storage of both company-owned and customer-owned commodities. Applicant also owns and operates a fertilizer facility that produces fertilizer that is sold at retail. A variety of fertilizers are produced through the blending of raw materials. The raw materials used in producing fluid fertilizer may include urea-ammonium nitrate, monoammonium phosphate, soluble potash, anhydrous ammonia, ammonium thiosulfate, and fluid clay. Applicant also blends some dry components in the production of some fertilizers. Most of the raw materials used would not be useable as fertilizer in their original state or concentration. Applicant also owns and operates equipment for the custom application of the fertilizer it sells to farmers. Applicant uses soil samples to determine the best mix of fertilizers for each application. It is estimated that approximately 95 percent of the retail tonnage sold is custom.
Do Applicant's purchases of machinery, equipment, and parts that are used directly in its blending operations qualify for the manufacturing exemption from sales and use tax provided by Sections 144.030.2(4) or (5), RSMo?
Yes. Applicant's purchases of machinery, equipment and parts that are used directly in its blending operations qualify for the manufacturing exemption from sales and use tax, only if the requirements of Sections 144.030.2(4) or (5), RSMo are met. Purchases of machinery, equipment, and parts used only in the storage of beginning inventory or ending inventory are not exempt from sales and use tax.
Applicant does not specifically describe how the machinery, equipment, and parts at issue are used in the manufacturing process. For machinery, equipment, and parts to be "used directly in" manufacturing, they must both be essential to, and comprise an integral part of, the manufacturing process. Under Missouri Code of State Regulations 12 CSR 10-111.010, the factors that determine whether an article is directly used are:
1. Whether the item is essential or necessary to the process;
2. How close, causally, the item is to the production process; and
3. Whether the item operates harmoniously with other machinery to make an integrated and synchronized system.
"Manufacturing consists of the alteration or physical change of an object or material in such a way that produces an article with a use, identity, and value different from the use, identity and value of the original." Galamet, Inc. v. Director of Revenue, 915 S.W.2d 331,333 (Mo. banc 1996). Based upon the facts presented by Applicant, and as the Director understands Applicant's operations, its blending operations are manufacturing. Additionally, the fertilizer is intended to be sold for final use or consumption. Therefore, Applicant's purchases of machinery, equipment, and parts that are used directly in its blending operations are exempt from sales and use tax as manufacturing equipment only if all requirements of Sections 144.030.2(4) or (5), RSMo are met.
Are Applicant's purchases of machinery, equipment, and repair or replacement parts that are used exclusively for the custom application of fertilizer, owned or leased, by its customers exempt from sales and use tax under Section 144.030.2(22), RSMo?
Yes. Applicant's purchases of machinery, equipment, and repair or replacement parts that are used exclusively for the custom application of fertilizer are exempt from sales and use tax if the requirements of Section 1440.30.2(22), RSMo, are met.
Section 144.030.2(22), RSMo, exempts from all sales tax all sales of farm machinery (other than motor vehicles, airplanes, and trailers). Farm machinery is defined as new or used farm tractors, and such other new or used machinery, and equipment, and repair or replacement parts:
1. Used exclusively for agricultural purposes;
2. Used on land owned or leased for the purpose of producing farm products, and;
3. Used directly in producing farm products to be sold, ultimately in processed form or otherwise, at retail or in producing farm products, to be fed to livestock or poultry, to be sold ultimately in processed form at retail.
Applicant does not specifically describe the machinery, equipment and repair or replacement parts at issue in its fertilizer application process. Based on the limited facts presented, if Applicant's purchases of machinery, equipment, and repair or replacement parts are used exclusively for the application of fertilizer, to farmland owned or leased by its customers, then Applicant's purchases may be exempt from sales tax only if the requirements of Section 144.030.2(22), RSMo, are met.
This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.
Should additional information be needed, please contact Senior Counsel Thomas A. Houdek, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.