Oct 30, 2017
From KPMG TaxWatch
The Colorado Department of Revenue recently issued a General Information Letter addressing whether the sales and use tax exemption for manufacturing machinery and tools applies to the purchase of such items when used by a contract manufacturer. Specifically, in the fact pattern at hand, the company that owns the machines and tools uses them to perform manufacturing services on tangible personal property owned by a third party. The third party does not necessarily sell the finished goods, but might use the goods in its own business. For purposes of the sales and use tax exemption for ingredients used in manufacturing or processing, a Colorado court has previously held that the exemption applies only if the finished goods are subject to sales tax when sold. The reason for this holding is that the purpose of the exemption is to avoid pyramiding of sales taxes, and therefore meaning the exemption for ingredients should apply only if the sale of the finished product is taxable. In contrast, the Department observed that the sales and use tax exemption for machinery and tools is designed to encourage manufacturing enterprises and, by statute, applies to manufactured goods for “sale” or “profit.” Therefore, in the Department’s view, the exemption would likely apply to the purchase of machinery and tools by a contract manufacturer even if the finished product is not sold. Please contact Steve Metz at 303-382-7177 with questions on GIL 17-016.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.