Bare Rentals: The “renting or leasing of tangible personal property,” sometimes referred to as a bare rental or true lease, is eligible for the M&E exemption if all other conditions of the exemption are satisfied. For example, the rental of a crane on a bare rental basis to a manufacturer, whose employee operates the crane to move equipment to the top of a building, may be eligible for the M&E exemption.
Rental of Equipment with an Operator: The “rental of equipment with an operator” is a separate and distinct activity from the “renting or leasing of tangible personal property.” The “rental of equipment with an operator” is a sale of a service and not a sale of tangible personal property. While the seller is providing equipment along with the equipment operator, the customer is purchasing the knowledge, skills, and expertise of an operator needed to operate the equipment at the customer’s direction. Because the “rental of equipment with an operator” is not a sale of tangible personal property, it is not eligible for the M&E exemption.
For example, manufacturer hires a company to provide a crane with operator to move equipment to the top of a building. While the company’s employee operates the crane, the equipment is actually installed by manufacturer’s employees. The purchase of the crane with operator service is not eligible for the M&E exemption.
The tax application of any scenario depends on the facts and circumstances of the particular situation. For example, consider the situation where a manufacturer hires a company to provide a crane with operator to move equipment to the top of a building and the personnel to install the equipment. In this case, the purchased services may be eligible for the M&E exemption because the company hired by the manufacturer is responsible for installing the equipment.
Refer to WAC 458-20-211 for additional guidance for distinguishing when a person is renting or leasing tangible personal property, providing a rental of equipment with an operator, or is performing construction or installation services. ETA 3118
Electrical Apparatus - Manufacturing Operations and Testing Operations: Electrical apparatus such as motor control centers, starters, switches, regulators, and exciters “act upon or interact with” tangible personal property, often in a sequential manner. The motor control center, for example, produces an action that results in a reaction by the motor. Switches and exciters work in much the same way. Similarly, circuit breakers and comparable equipment react to an event in another item, and this cause and effect behavior falls under the “acts upon or interacts with” criteria. Thus, these items are eligible for the M&E exemption, subject to meeting the other requirements of the exemption. Converters, transformers, and other equipment on site, that alter the characteristics of the electricity “produce power” for machinery and equipment, and qualify for the M&E exemption, subject to meeting the other requirements of the exemption. Apparatus that are part of a utility system used for qualifying and non- qualifying purposes should be examined using the allocation standard set forth below. Transmission and distribution systems located off site do not qualify for the M&E exemption. ETA 3120
Utility Systems used for Qualifying and Nonqualifying Purposes – Allocation: The M&E exemption defines “machinery and equipment” to, in part, exclude building fixtures that are not integral to the manufacturing operation, testing operation, or research and development operation that are permanently affixed to and become a physical part of the building, such as utility systems for heating, ventilation, air conditioning, communications, plumbing, or electrical.
Conversely, building fixtures are eligible if they are integral to the manufacturing operation, testing operation, or research and development operation, and meet the other requirements of the exemption, such as the “used directly” test. Thus, while the M&E exemption contemplates that these utility systems are to be separately considered as potentially eligible industrial fixtures and not a part of a “building” for purposes of exemption, not all such systems are eligible for the exemption. Utility systems that serve a building purpose, as opposed to a manufacturing purpose, do not qualify. ETA 3120
For example, a utility system used to perform a general building purpose, such as a HVAC system controlling the air temperature or air quality in general, is not eligible for the M&E exemption. If a utility system is used for both qualifying and non-qualifying purposes, the system should be allocated so that only the qualifying portion of the system receives the exemption, and the building portion does not receive an exemption. One way of allocating a utility system is by applying the ratio of the qualifying use made of the system to the total use of the system. This ratio must be established and substantiated by sufficient documentation, such as, but not limited to, engineering analyses and power bills. Thus, if the taxpayer can document that 30 percent of a system is used for the manufacturing activity (e.g., 30 percent of the system is dedicated to manufacturing frozen raspberries vs. 70 percent dedicated to cold storage) then this 30 percent qualifies for the exemption.
The concept of allocating portions of a utility system as qualifying or non-qualifying for purposes of the M&E exemption is limited to utility system machinery and equipment considered a building fixture, when used to support both manufacturing machinery and equipment and the building systems. Allocation is not applicable to any other situation. In other areas dealing with dual use of machinery and equipment (dual use meaning property is used in both qualifying and non-qualifying activities) the majority use threshold is applicable. Rule 13601(10) sets forth the criteria used in applying the majority use test.
Devices: Device is defined as “an item that is not attached to the building or site.” Examples include “forklifts, chainsaws, air compressors, clamps, free standing shelving, software, ladders, wheelbarrows, and pulleys.” These examples fit within the common dictionary definition of “machinery and equipment” and “device.” ETA 3121
Books: In order to be eligible for the M&E as a device the property has to perform a task and do work. Books are used for reference and to assist in or guide or control decision making but are not used by a person in the same manner as machinery and equipment, which have an applied function. Therefore, books do not qualify for the M&E.
Software: Computer software satisfies the definition of device because it performs a task and is also not attached to a building or site. Consequently, software can qualify for the M&E exemption if it meets a used directly test. The issue is whether the software performs a task in relation to the qualifying operation.
For example, a software program that controls the operation of equipment that cuts logs into lumber qualifies for the M&E exemption. It performs a task, the control of a piece of eligible machinery, and is used directly in the manufacturing operation. On the other hand, a CD-ROM of a repair manual for this equipment does not qualify for the M&E exemption because the software does not perform a task in the manufacturing operation.
“Computer software" means a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. All software is classified as either prewritten or custom. Consistent with this definition "computer software" includes only those sets of coded instructions intended for use by an end user and specifically excludes retained rights in software and master copies of software. (RCW 82.04.215)