By
Chris Micheli
The California Franchise Tax Board (FTB) issued Legal Ruling 2001-4 on
August 16, 2001. It is the third Legal Ruling issued by the FTB concerning the
manufacturers’ investment credit (MIC). [The
previous ones were LR 98-1 and 2000-1.] LR 2001-4 concerns the MIC and its application to
"ready-mixed concrete and cement trucks."
It
is just over 5 pages in length. "Specifically, this ruling is in
response to questions presented regarding the manufacturing process for
ready-mixed concrete and the characterization of cement trucks for purposes of
the MIC." The FTB makes a
determination concerning whether such equipment is “qualified property”
under the MIC statute and regulations.
The
Legal Ruling addresses two questions: (1)
For purposes of the MIC, what is the duration of the manufacturing process for
ready-mixed concrete? (2) Are
cement trucks that mix and transport ready-mixed concrete qualified property for
purposes of the MIC?
The
LR begins with a brief discussion of the MIC statute and regulations and
provides hypothetical facts. It then proceeds to a "manufacturing
process" analysis and a "cement truck" analysis.
For purposes of the MIC, the law provides that a “qualified
taxpayer/person” is any taxpayer who is described in Standard Industrial
Classification (SIC) Codes 2011 to 3999. This
is Division D (“Manufacturing”) of the SIC Manual.
A qualified taxpayer/person may be an individual, partnership, C or S
corporation, limited liability company, trust, or estate.
For purposes of the definition of “qualified property” under the MIC,
four major requirements must be met: It
must be (1) tangible personal property, (2) which is depreciable or amortizable
under Internal Revenue Code Section 1245(a), (3) which is “primarily used”
in the manufacturing or related process, (4) which is placed in service in
California on or after January 1, 1994.
Ready-mixed concrete manufacturers are described in SIC Code 3273.
FTB notes that “this is the only SIC Code in Division D that refers to
the physical state of the item manufactured in the definition of the product.”
Based upon the description found in the SIC Manual, FTB determines that
job site mixed concrete activities are not considered manufacturing activities
and do not qualify for the MIC. Rather,
they are “generally classified” under SIC Codes 1521-1799.
The MIC statute defines the term “manufacturing” and sets forth a
beginning and ending point of that process, requiring the alteration of tangible
personal property to its completed form. FTB
states that a “facts and circumstances analysis” is required to determine
what constitutes the “completed form” of ready-mixed concrete.
LR
2001-4 concludes with two holdings:
"1.
Due to the unique characteristics of ready-mixed concrete, the manufacturing
process will not be treated as completed until the ready-mixed concrete is
delivered to the job-site in a plastic and unhardened condition. All
qualified costs for the manufacturing activity that otherwise meet the
requirements of the MIC statute during this time are eligible for the MIC.
It makes no difference whether a wet mix (mixed at a central plant) or a dry mix
(mixed entirely in a cement mixer) method of manufacturing is utilized; for
purposes of the MIC, the manufacturing process does not end until the mixture is
delivered to the job site.
“2.
Cement trucks used to transport ready-mixed concrete to the job site will be
treated, for MIC purposes, as dual-purpose assets. While the cost of the
concrete mixing drum and related truck-mounted equipment may be eligible for the
MIC, the cost of the truck or trailer chassis does not qualify for the MIC since
the chassis components are used primarily for transportation, which is
specifically not a qualified activity for purposes of the MIC."
Due to the nature of ready-mixed concrete, cement trucks are generally necessary for delivery of the product to the job site. The LR notes that, "for federal tax purposes, cement trucks have historically been recognized as having a dual-purpose function: manufacturing and transportation." [Former IRC Section 4063(a)(5)]
Moreover,
the chassis of the truck is utilized almost exclusively for transportation and
transportation activities are not considered qualified activities for purposes
of the MIC. As such, the chassis is
to be treated as a non-qualified cost for MIC purposes to reflect its primary
use as a transportation item of property.
As
a result, “only qualified property placed or mounted on the truck chassis that
is primarily used for the actual manufacturing activity will be eligible for the
MIC.” Examples of qualified property would include mixing drum and
any related equipment designed primarily for use in connection with the mixing
drum.
In
another footnote, the LR states that, "it should be noted that, for MIC
purposes, this analysis pertains only to dual-purpose assets with a
transportation element. For example, this analysis should not be applied
to other modes of transportation not approved for highway use. Cement
trucks are approved for highway transportation and thus contain both a
transportation and a manufacturing element. Other modes of non-highway use
transportation, such as small forklifts, do not require a dual-purpose analysis
for purposes of the MIC."
While
the MIC statute does not differentiate between "dual-purpose assets,"
it does contain the requirement that the property (in order to be qualified)
must be "primarily used" in a qualifying activity.
"Primarily" is defined to be "50% or more of the time."
Chris Micheli is an
attorney and registered lobbyist for the Sacramento governmental relations firm
of Carpenter Snodgrass & Associates (916) 447-2251 or cmicheli@carpentersnodgrass.com,
where he specializes in tax legislative and administrative matters.