North Carolina ~ Sales and Use Tax: Mill Machinery, Fulfillment Facility Exemptions, and Transformative Projects Refund Enacted

The North Carolina privilege tax on mill machinery is repealed and replaced by a sales and use tax exemption, a sales and use tax exemption is enacted for large fulfillment facilities, and an annual refund of sales and use taxes paid is allowed for transformative projects.

Mill Machinery Exemption

Effective July 1, 2018, the North Carolina 1% privilege tax, capped at $80 per article, on mill machinery and mill machinery parts and accessories is repealed and replaced by a sales and use tax exemption for the items. The exemption applies to:

sales of mill machinery or mill machinery parts or accessories to any of the following: (1) a manufacturing industry or plant; (2) a contractor or subcontractor if the purchase is for use in the performance of a contract with a manufacturing industry or plant; and (3) a subcontractor if the purchase is for use in the performance of a contract with a general contractor that has a contract with a manufacturing industry or plant;

sales to a major recycling facility of certain tangible personal property for use in connection with the facility;

sales of equipment, or an attachment or repair part for equipment, that: (1) is sold to a company primarily engaged in research and development activities in the physical, engineering, and life sciences included in industry group 54171 of NAICS; (2) is capitalized by the company for tax purposes under the Internal Revenue Code; and (3) is used by the company in the research and development of tangible personal property;

sales of equipment, or an attachment or repair part for equipment, that: (1) is sold to a company primarily engaged in software publishing activities included in industry group 5112 of NAICS; (2) is capitalized by the company for tax purposes under the Code; and (3) is used by the company in the research and development of tangible personal property;

sales of equipment, or an attachment or repair part for equipment, that: (1) is sold to a company primarily engaged in industrial machinery refurbishing activities included in industry group 811310 of NAICS; (2) is capitalized by the company for tax purposes under the Code; and (3) is used by the company in repairing or refurbishing tangible personal property;

sales of the following to a company located at a ports facility for waterborne commerce: (1) machinery and equipment that is used at the facility to unload or to facilitate the unloading or processing of bulk cargo to make it suitable for delivery to and use by manufacturing facilities; and (2) parts, accessories, or attachments used to maintain, repair, replace, upgrade, improve, or otherwise modify such machinery and equipment;

sales of certain equipment and utilities to a secondary metals recycler;

sales of equipment, or an attachment or repair part for equipment, that: (1) is sold to a company primarily engaged in processing tangible personal property for the purpose of extracting precious metals to determine the value for potential purchase; (2) is capitalized by the company for tax purposes under the Code; and (3) is used by the company in the precious metal extraction process;

sales of equipment, or an attachment or repair part for equipment, that: (1) is sold to a company that is engaged in the fabrication of metal work and that has annual gross receipts, including the gross receipts of all related persons from the fabrication of metal work of at least $8 million; (2) is capitalized by the company for tax purposes under the Code; and (3) is used by the company in the fabrication or manufacture of metal products or used by the company to create equipment for the fabrication or manufacture of metal products; and

sales of repair or replacement parts for a ready-mix concrete mill, regardless of whether the mill is freestanding or affixed to a motor vehicle, to a company that primarily sells ready-mix concrete.

The exemption is applicable to sales made on or after July 1, 2018.

Legislative Intent Regarding Mill Machinery

The legislation specifically provides the following: sales of mill machinery to manufacturers and certain industrial processors have historically enjoyed preferential tax treatment, whether in the form of a reduced wholesale tax, a preferential rate of sales and use tax, or a 1% privilege tax with an $80 cap per article. Despite the nature of the tax, the operational language has remained virtually unchanged for over 60 years and lacks clear guidance with regard to its application. Specifically, Article 5F of Chapter 105 of the General Statutes, and its predecessors, did not define “manufacturing industry or plant” or “mill machinery.” This lack of guidance has resulted in a substantial body of administrative interpretation being developed over the years by the North Carolina Department of Revenue. These interpretations are not included in the statutes and may not necessarily comport with the traditional definition of manufacturing, but they may be consistent with the General Assembly’s intent to provide preferential tax treatment to certain industrial equipment. The General Assembly recognizes that, once this transition has occurred, efforts need to be made to provide more guidance and specificity to taxpayers and the Department with respect to the treatment of manufacturing and industrial processing equipment.

As a result, the Revenue Laws Study Committee is directed to study methods to clarify the scope of the mill machinery exemption by modernizing and further defining the statutory language and by incorporating existing administrative interpretations of the Department, to the extent the General Assembly wants to maintain those interpretations. The Committee may report its findings and any recommended legislation to the 2018 Regular Session of the 2017 General Assembly upon its convening.

Large Fulfillment Facility Exemption

Effective July 1, 2017, a sales and use tax exemption is enacted for sales of equipment, or an accessory or attachment, or a repair part for equipment, that:

is sold to a large fulfillment facility;

is used at the facility in the distribution process, which includes receiving, inventorying, sorting, repackaging, or distributing finished retail products; and

is not electricity.

A “large fulfillment facility” is a facility that:

is used primarily for receiving, inventorying, sorting, repackaging, and distributing finished retail products for the purpose of fulfilling customer orders; and

the Secretary of Commerce has certified that an investment of private funds of at least $100 million has been or will be made in real and tangible personal property for the facility within five years after the date on which the first property investment is made, and that the facility will achieve an employment level of at least 400 within five years after the date the facility is placed into service and maintain that minimum level of employment throughout its operation.

If the required level of investment or employment is not timely made, achieved, or maintained, then the exemption is forfeited. If the exemption is forfeited due to a failure to timely make the required investment or to timely achieve the minimum required employment level, then the exemption is forfeited on all purchases. If the exemption is forfeited due to a failure to maintain the minimum required employment level once that level has been achieved, then the exemption is forfeited for those purchases occurring on or after the date the taxpayer fails to maintain the minimum required employment level. A taxpayer that forfeits this exemption is liable for all past sales and use taxes avoided as a result of the forfeiture, computed at the applicable state and local rates from the date the taxes would otherwise have been due, plus interest. Interest is computed from the date the sales or use tax would otherwise have been due. The past taxes and interest are due 30 days after the date of forfeiture.

This exemption is applicable to sales made on or after July 1, 2017.

Transformative Projects Refund

Effective July 1, 2017, an annual refund of sales and use taxes paid is allowed for transformative projects. A “transformative project” is a project for which the agreement requires that a business invest at least $4 billion in private funds and create at least 5,000 eligible positions. An owner or lessee of a business that is the recipient of a grant under the Job Development Investment Grant Program (JDIG) on or before June 30, 2019, for a transformative project is allowed a refund of the sales and use tax paid by it on building materials, building supplies, fixtures, and equipment that become a part of the real property of the facility. Liability incurred indirectly by the owner for sales and use taxes on these items is considered tax paid by the owner.

This exemption is applicable to purchases made on or after July 1, 2017.

Corporate income, personal income, and franchise tax provisions affected by this legislation are discussed separately. (TAXDAY, 2017/06/30, S.20)

Ch. 57 (S.B. 257), Laws 2017, effective and applicable as noted

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