Request By:
Dr. Dick Robinson
Deputy Commissioner
Department of Commerce
Capital Plaza Office Tower
Frankfort, Kentucky 40601
Opinion
Opinion By: Robert F. Stephens, Attorney General; By William S. Riley, Assistant Attorney General
In your recent letter a question is raised concerning the application of sales and use tax to front-end loaders purchased for the first time by a Kentucky lumber and wood products mill to increase mill output. The lumber and wood products mill is a permanent, fixed manufacturing facility. The front-end loaders are used exclusively for three purposes.
(1) Lifting logs from a storage pile and placing them on a debarking machine which is the first step in the manufacturing process;
(2) Lifting logs from a storage pile and carrying them to a sawing machine; and
(3) Moving lumber and wood stock from one milling machine to another machine.
KRS 139.170 provides that machinery for new and expanded industry shall mean that machinery used directly in the manufacturing or production process which is incorporated for the first time into plant facilities established in this state and which does not replace machinery in such plant. The term "processing production" shall include the processing and packaging of raw materials, in-process materials and finished products.
Under Regulation 103 KAR 30:120 there are listed specific requirements which must be met before machinery qualifies for exemption with an analysis given for each requirement.
It must be machinery used directly in the manufacturing process and intimately involved in production. 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. All activities preceding the point of introduction of raw material into the manufacturing process and following the point at which the finished product is ready for sale is generally not production activities. Any machinery used other than for the production would be subject to tax.
Thus, the answer to purpose (1) and (2) would be that the front-end loaders would not qualify for exemption in those two purposes.
In answer to purpose (3), since the primary or dominant use controls the right to exemption, front-end loaders would have to be used at least 51% of the time in moving lumber from one milling machine to another in order to qualify for exemption.
We are enclosing a copy of Regulation 103 KAR 30:120 for your benefit.