Sec. 03.06.01.24. Tangible Personal Property Consumed in a Production Activity

A. This regulation applies to sales on or before June 30, 2000.

A-1. The retail sale or use of tangible personal property that will be consumed directly and predominantly in a production activity, if consumed within 1 year after the property is first used in a production activity, is not subject to tax.

B. Consumed Test.

(1) Tangible personal property is consumed if it is destroyed, used up, or worn out during production activities to the extent that it cannot be repaired, reconditioned, or rendered fit for further use in production activities.

(2) Tangible personal property is not consumed because it becomes obsolete, or because the buyer has no further orders requiring its use, or because it is otherwise not needed or useless. Property is not consumed in production activities because it is changed as a result of preparing it for further use, even though its usefulness may be limited as a result of the changes. The changed property is consumed only if, as a result of its subsequent use in production activities, it satisfies the test described in §B(1) of this regulation.

C. Directly Test.

(1) Tangible personal property is consumed directly in a production activity only if it is used during the production activity, at the location where the production activity occurs, and its use is integral and essential to that activity.

(2) Tangible personal property is not consumed directly in a production activity simply because it is used at some point in a production process, as distinguished from the actual production activity, even if such use may be considered essential to a production activity, either by law or practical necessity. For example, tangible personal property that is consumed in producing items that are not sold, but are used in a production activity, is not consumed directly in that production activity, even though the items produced may be essential to production.

D. Predominantly Test. Tangible personal property is consumed predominantly in a production activity if it is used more than 50 percent of the time directly in a production activity.

E. The 1-year limitation within which tangible personal property shall be consumed begins to run when that property is first used in a production activity, and is not stayed if the property is temporarily withdrawn from use. Property that is not in fact consumed within 1 year does not satisfy this limitation, even if the buyer intended to consume, or would normally consume, the property within 1 year.

F. Payment of Tax.

(1) The buyer need not pay the tax on the purchase or use of tangible personal property only if the buyer reasonably expects and in good faith intends to consume that property directly and predominantly in a production activity within 1 year from its first use, as those terms and conditions are defined and explained in this regulation. If, however, the property is actually used in such a way that it does not satisfy each of the tests set forth above, including the 1-year limitation, the tax applies to that property. At the time a buyer knows or should know that the tax applies to property on which no tax has been paid, the buyer shall report the price of that property as a taxable purchase or use on the return for that period. A buyer may claim a refund for taxes paid on any property that in fact satisfies all of the tests and limitations set forth above.

(2) If a buyer is not required to pay the tax at the time of the purchase or use of property in accordance with §F(1), above, the buyer may claim the exclusion by providing the vendor with a resale certificate, on which a registration number is not required, stating the reason that tax is not payable. A buyer may also issue such a certificate if the buyer cannot determine how much of the property will not be subject to tax pursuant to this regulation, so long as the buyer reasonably expects that more than half the property will not be subject to tax.