Minnesota Provides Up-Front Sales Tax Exemption on Capital Equipment

Effective July 1, 2015, Minnesota law allows a sales and use tax exemption at the time of purchase on qualified capital equipment; previously a purchaser was required to file a refund claim for any tax paid at time of purchase. This exemption is available to people who purchase or lease capital equipment for use in Minnesota. 

Qualifications

In order to qualify for the direct sales and use tax exemption, the equipment must be used to primarily manufacture, fabricate, mine, or refine tangible personal property to be sold at retail. “Primarily” means that the equipment must be used 50 percent or more of its operating time in a qualifying activity. The capital equipment must be essential to the “integrated production process of manufacturing, fabricating, mining, or refining.” Capital equipment includes machinery and equipment used by online, computerized data-retrieval systems. Capital equipment also includes repair and replacement parts, including accessories, whether purchased as spare parts, repair parts, or upgrades or modifications to machinery or equipment.  

The integrated production process is a series of activities that begins with the removal of materials from inventory and ends with the last process before shipping. This includes any research and development as well as product design processes. 

In order to qualify for the exemption, the capital equipment must be used by the purchaser or lessee in Minnesota. In addition, any business may qualify for the credit. The state provides an example of a hardware store that purchases a key-making machine. The key-making machine would qualify for the exemption even though the main business is the hardware store and not key manufacturing.

Building Materials and Supplies

Materials and supplies purchased for special-purpose buildings, foundations that support capital equipment, or use in installing capital equipment qualify for a capital equipment sales and use tax exemption. The special-purpose buildings must serve a particular necessary function within the production process. Clean-room facilities, research facilities, and tanks or bins are examples of special-purpose buildings. At least 67% of the total floor area must qualify as a special-purpose building in order to qualify for the capital equipment exemption. To qualify for the sales and use tax exemption, the capital equipment must be purchased by the owner. In general, when a contractor purchases supplies and materials, the contractor is considered the purchaser, and no capital equipment exemption is allowed. For example, any manufacturing equipment that a contractor purchases directly and builds into the contract price does not qualify for the exemption. However, if there is an agreement in place in which the qualifying purchaser appoints a contractor as its agent, the purchaser may claim an exemption in relation to the capital equipment. In order to appoint a contractor as an agent to purchase equipment, there must be an agreement in place that meets specific requirements outlined by the state.

How to Claim the Exemption or Credit

Effective July 1, 2015, you should provide your supplier Form ST3, Certificate of Exemption to receive the upfront exemption. An updated form can be found on the Minnesota Department of Revenue’s website. Use the exemption reason “capital equipment.” 

To get a refund of sales or use tax paid for eligible capital equipment purchases, file Form ST11, Sales and Use Tax Refund Request and Multiple Period Amended Return. Please note that companies can file only two capital equipment refund requests in a calendar year. A refund request must be filed within three and a half years from the 20th day of the month following the month of the invoice date.  The earliest open purchase date currently eligible for refund is December 1, 2013; for which a request for refund must be filed by June 20, 2017.

Other Considerations

For sales completed after June 30, 2015, no sales tax should be charged to a customer that has provided a properly completed exemption certificate. For large purchases that required a down payment to be paid before July 1, 2015, there should be clear notes on the invoice or progress bill that indicate the equipment did not ship, nor was it received, before July 1, 2015.
  
If you are questioning whether or not your purchase qualifies for the capital equipment credit, Wipfli has dedicated sales and use tax specialists who can help.