Legislative Research Commission PDF Version
103 KAR 30:120. Machinery for new and expanded industry.
RELATES TO: KRS139.010, 139.480
STATUTORY AUTHORITY: KRS 131.130(1)
NECESSITY, FUNCTION, AND CONFORMITY: To interpret the sales and use tax law as it ap-
plies to exemption qualification for "machinery for new and expanded industry."
Section 1. Requirements for Exemption. The machinery and the appurtenant equipment neces-
sary to the completed installation of such machinery, together with the materials directly used in
the installation of such machinery and appurtenant equipment, which are incorporated for the first
time into new or existing plant facilities, or which are installed in the place of existing plant ma-
chinery having a lesser productive capacity, and which are directly used in a manufacturing or
processing production operation shall be exempt from the sales and use tax. The term "pro-
cessing production" shall include: the processing and packaging of raw materials, in-process ma-
terials, and finished products; the processing and packaging of farm and dairy products for sale;
and the extraction of minerals, ores, coal, clay, stone and natural gas. In summary, the following
four (4) specific requirements must be met before machinery qualifies for exemption:
(1) It must be machinery.
(2) It must be used directly in the manufacturing process.
(3) It must be incorporated for the first time into plant facilities established in this state.
(4) It must not replace other machinery.
Section 2. Analysis of Requirements. (1) It must be machinery. The term "machinery" shall
mean: machines, in general, or collectively; also, the working parts of a machine, engine, or in-
strument; as, the machinery of a watch. (Webster's New International Dictionary). This definition
does not specify that machinery must have working parts and be able to perform a function in and
of itself, as a "machine" would. The machinery of a manufacturing operation is composed of all
the components making up the process, including the fixed and nonmoving parts as well as the
moving parts. This is illustrated in the example of the machinery of a watch.
(2) It must be used directly in the manufacturing process. Machinery must be intimately in-
volved in production in order to be considered used "directly" in the manufacturing process. The
fact that machinery is necessary for a manufacturing process does not automatically qualify it for
exemption. A single manufacturer may, within his primary manufacturing process, have more than
one (1) production activity.
(a) Primary manufacturing process.
1. The primary manufacturing process is the production operation resulting in a finished prod-
uct which will be transferred from the producing plant for distribution to customers or for further
processing at another plant site. Production begins at a point where the raw material enters a
process and is acted upon to change its size, shape, or composition or is transformed in some
manner. Production ends when the finished goods are packaged or ready for sale. Packaging is
considered complete when the product is in the container in which it is normally received by the
purchaser.
2. All activities preceding the point of introduction of the raw material into the manufacturing
process and following the point at which the finished product is packaged or ready for sale are not
production activities and the machinery used therein is subject to tax.
3. Storage facilities, including those provided for the storage of in-process materials which
have been removed from the production line to await further processing, are not used directly in
the manufacturing process and are subject to tax. Proximity of storage facilities to the production
line is immaterial.