N.D. Admin. Code 81-04.1-01-23
Manufacturing is a process which produces a new article with a different form, use, and name. The modification of articles of tangible personal property is not manufacturing. For example, the creation of steel ducts or I-beams is manufacturing whereas the modification of steel ducts or I-beams to meet the specifications of a particular real property construction contract is not manufacturing. To be considered manufacturing, the raw materials must be materially altered.
By way of illustration and not of limitation, the following are manufacturers: agricultural commodity production facility, food, beverage, confectionary plants; bakeries; textile mills; apparel makers; wood and lumber plants; furniture and fixture makers; paper product makers; printers and publishers (includes newspapers); chemical producers; leather good plants; stone, clay, glass, concrete product makers; cement and asphalt plants; metal ware makers; auto/aircraft makers; dairy processors (not producers); photo finishers (not photographers); and dental, medical, and ophthalmolic labs.
By way of illustration and not of limitation, the following are not manufacturers: farmers or ranchers, construction contractors, refining companies, artists, utilities, nurseries, restaurants, pharmacists, drycleaners, photographers, advertisement agencies, secretarial services, computer programmers, auto body shops, repair shops, radio and television stations, architects, jewelers, grain elevators, and tire retreaders or recappers.
The purchase or rental of machinery and equipment is exempt from sales and use taxes if the machinery or equipment:
The manufacturing process begins at the point where the raw materials are first received at the plantsite and includes all direct processes prior to transporting the finished product from the plantsite. In addition, machinery and equipment used by a manufacturer to conduct research, development, and design activities qualify for the sales and use tax exemption. Examples of research, development, and design equipment include computer software and hardware used to draw, design, or plan products and machinery and equipment used to build or test prototype models.
Machinery and equipment used directly in the manufacturing process include molds and dies that determine the physical characteristics of the finished product or its packaging material, computers and related equipment that directly control or measure the manufacturing process, and testing equipment used to measure or test product quality.
Machinery and equipment used directly in the manufacturing process also include temperature or humidity control equipment necessary to maintain certain temperature or humidity levels in a limited area of the processing or manufacturing facility where either temperature or humidity must be closely regulated for the proper function or production process to occur.
Equipment or machinery used for pollution control or general heating or cooling of the facility or used to otherwise control the working environment does not qualify for the tax exemption. Also, items which are consumed or destroyed in the manufacturing process but which do not become a part of the finished product are not machinery and equipment and are subject to sales and use tax. Machinery and equipment not used directly in the manufacturing process include repair parts and equipment used for repairing, cleaning, or maintaining facilities, machinery, or equipment; handtools; backup or standby power supplies; computer hardware and software used to maintain inventory, production, or scheduling records; waste disposal or treatment facilities; and safety and security equipment such as fire sprinkler systems and burglar alarms. Purchase of these items by a manufacturer is taxable, and suppliers shall charge sales or use tax on these items. If the items are purchased from an out-of-state supplier or if a North Dakota supplier fails to charge the tax, the North Dakota manufacturer shall report the sales or use tax directly to the North Dakota tax commissioner.
Requests by the manufacturer to purchase or lease machinery and equipment without paying tax or for refunds of tax paid on machinery or equipment which qualify for exemption must be made in writing to the tax commissioner. Only the manufacturer may apply for a refund of the sales or use tax paid on exempt machinery or equipment. A request for refund must include documentation showing the amount of tax paid by the manufacturer or the contractor. The tax commissioner reserves the right to make an onsite inspection prior to granting permission to purchase qualifying machinery and equipment without paying tax or prior to approving a refund. An onsite inspection by the tax commissioner does not preclude an audit of the taxpayer's books and records.
The tax commissioner shall respond in writing to each exemption request stating whether or not the machinery or equipment qualifies for the exemption. The manufacturer may provide the approval letter to its equipment and machinery suppliers to avoid paying sales or use taxes on approved equipment. If a manufacturer purchases equipment before requesting a sales tax exemption, it shall pay all applicable sales and use taxes at the time of purchase but may apply to the tax commissioner for a refund of the taxes paid.
A contractor consuming or installing materials, machinery, or equipment shall pay the applicable sales or use taxes and the manufacturer shall apply in writing for a refund of the taxes paid by the contractor on machinery or equipment qualifying for a sales and use tax exemption.
To receive a refund of taxes paid by a contractor, the manufacturer must provide documentation showing that the contractor paid North Dakota sales or use taxes on the qualifying machinery and equipment installed into the manufacturing facility. The tax commissioner may request an onsite inspection of the manufacturing facility before approving the refund of taxes paid by a contractor. The manufacturing facility may request that the refund amount be taken as a credit adjustment on its next sales and use tax return; however, the tax exemption must be approved in writing by the tax commissioner before the tax credit may be applied on a sales and use tax return. A letter from the tax commissioner stating the amount of the approved credit must be attached to the sales and use tax return on which the credit was applied.
N.D. Admin Code 81-04.1-01-23
General Authority: NDCC 57-39.2-19
Law Implemented: NDCC 57-39.2-01, 57-39.2-02.1, 57-39.2-04, 57-39.2-04.3, 57-39.2-25, 57-40.2-02.1, 57-40.2-04, 57-40.2-13