Thursday, September 29, 2005

What constitutes "direct use?"

What constitutes "direct use?"

I get this question in EVERY seminar when we start talking about manufacturing. In most states, there are exemptions for manufacturing equipment directly used in production. The same idea, by the way, also applies to agriculture, mining, fishing, etc.

So what IS direct use?

Every state has a different definition, but here are my rules of thumb to help you, at least, understand the issues:

Space proximity: How close is the item to the actual process itself. If it is far removed from the production area, it probably isn't directly used.

Time proximity: How close, in time, is the use of the product to the actual production. If it's used at some point in time well before or after the production, then it probably isn't directly used in the process.

For example, a packaging machine used in the shipping department to wrap up a skid of product is used significantly AFTER production and away from the process. But a wrapping machine that packages the product while it's moving through the production equipment IS probably close enough in time and space to be considered to be directly used in the process.

Causal relationship: Does the item cause a change in the product. Or does it affect something else that causes a change. If it's not directly causing a change, it probably isn't directly used in production. For example, if a drill is used to drill a whole in the product, it's directly used. But if it's used to fix a piece of manufacturing equipment, it isn't used directly in the process.

Another example might be a step-down transformer. Does it act on the product? No. It acts on the electricity, which acts on the machinery, which acts on the product. So a step down transformer, under this logic, would be indirect. Note, however, that many states DO consider step-down transformers to be directly used.

Essential to the process: This ropes in a bunch of stuff that may not be previously covered, like foundations, step-down transformers, foundations, safety equipment, etc. The question may simply come down to this question: Would production SHUT DOWN immediately if this item was suddenly to disappear?

Remember, EVERY state has different rules for what they consider to be directly used in the process. So review their rules carefully. But hopefully, you'll now have a better perspective on what "direct use" means.

Sales Tax Guy

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