The Louisiana Legislature ended a special session dedicated to tax matters on Wednesday, March 17, 2004. As mandated by the Louisiana Constitution, tax matters at the state level can only be addressed by the Legislature in odd-numbered years. This necessitated a special session being called in 2004 in order to consider any tax-related legislative changes.
House Bill 2, as passed by the Legislature, exempts manufacturing machinery and equipment from the state sales and use tax. The exemption will be phased in over a seven-year period beginning July 1, 2005. There are conditions that if met, will accelerate the phase-in. If the State Revenue Estimating Conference estimates a $20 million increase in unexpected revenues this spring, 2% of qualifying purchases will be exempt starting July 1, 2004. If the State Revenue Estimating Conference estimates a $75 million increase in unexpected revenues this spring, 5% of qualifying purchases will be exempt starting July 1, 2004. Additionally, if $20 million or more of unexpected revenues are found this spring, the phase out will be reduced from seven years to six years starting July 1, 2005. These phase-in periods are a compromise made by parties desiring a shorter phase-in period for the exemption.
The exemption contained in the Bill applies to the lease or purchase of qualifying manufacturing machinery and equipment. The qualifying manufacturing machinery and equipment, as defined, includes but is not limited to the following:
- Machinery and equipment that is eligible for depreciation for federal income tax purposes and that is used as an integral part in the manufacturing of tangible personal property for sale
- Machinery and equipment that is eligible for depreciation for federal income tax purposes and that is used as an integral part of the production, processing, and storing of food and fiber or of timber
- Computers and software used directly in the manufacturing process
- Pollution control equipment used to control pollution produced by the manufacturing process
- Machinery and equipment used for testing or measuring raw materials or the finished product when it is a necessary part of the manufacturing process
Qualifying machinery and equipment does not include the following:
- A building and its structural components unless they are so closely related to the machinery and equipment that they can be expected to be replaced when the machinery and equipment are replaced
- Heating, ventilation and air-conditioning systems, unless they are necessary requirements of the manufacturing process
- Tangible personal property used to transport raw materials or manufactured goods before the beginning of the manufacturing process or after the completion of the manufacturing process
- Tangible personal property used to store raw materials or manufactured goods before or after the manufacturing process
A manufacturer is defined as a person whose principle activity is manufacturing. They must also be assigned by the Louisiana Department of Labor a North American Industrial Classification System code within the agricultural, forestry, fishing, and hunting Sector 11 or the manufacturing Sectors 31-33 as they existed in 2002.
Manufacturing is defined as putting raw materials through a series of steps that brings about a change in their composition or physical nature in order to make a new and different item of tangible personal property for sale. Manufacturing begins at the point at which raw materials reach the first machine or piece of equipment involved in changing the form of the material and ends at the point at which manufacturing has altered the material to its completed form. The packaging process is considered part of the manufacturing process.
Manufacturing for agricultural purposes means the production, processing, and storing of food or fiber and the production, processing, and storing of timber.
Manufacturing does not include the following:
- Repackaging or redistributing
- The cooking or preparing food products by a retailer in the regular course of retail trade
- The storage of tangible personal property
- The delivery of tangible personal property to or from the plant
- The delivery of tangible personal property to or from storage within the plant
- Actions such as sorting, packaging, or shrink wrapping the final material for ease of transporting of shipping
The manufacturer must obtain a certificate of exclusion from the secretary of the Department of Revenue certifying that he is a manufacturer in order to avoid paying the tax.
House Bill 2 does not apply to the local taxing jurisdictions. It does, however, give local jurisdictions the option of adopting its provisions by the passing of an ordinance.