Purchases that Qualify for Production Exemption

Purchase Requirements

An item qualifies for the exemption if it meets all the following requirements:

  • Primarily used in the production process. (See Idaho Code section 63-3607A.)
  • Necessary or essential – can’t produce your goods without it
  • Tangible personal property – must not become real property
  • Allowable by law – not excluded from the production exemption by law or rule
  • Directly used during the production process – after the beginning, and before the end of the process
    • This begins at the processing site, when the operator first handles the raw materials used in production.
    • The process ends at the later of
      – When you place your product in storage, even temporarily, to be prepared for shipment, or
      – When your product is ready to be sold in its final form.
      – Note: Farming and ranching have different beginning and ending points for the production process

Special activities

If you qualify for the exemption, items used in some activities are exempt, even though they’re not directly used in production. These activities include:

Quality control

Quality control is a necessary step of the production process in some industries. Its purpose is to maintain specific product standards. Equipment and supplies are exempt if they’re integral and necessary to maintain specific product standards during a quality control function.

Research and development

Equipment and materials are exempt if they are used more than 50% of the time in an activity that advances knowledge or capability in creating or producing tangible personal property. See Idaho Code section 63-3622RR.

Clean room environment in semiconductor manufacturing

Equipment and materials are exempt if you use them:

  • Exclusively in or to maintain the environment of a clean room, and
  • For research and development or production of semiconductors.

This includes fixtures or improvements to real property that become part of the clean room.

Pollution control

Equipment and materials used to meet air and water quality standards are exempt. The standards must be set by a state or federal agency that has authority to set and regulate them. For producers, the exemption includes tangible personal property that becomes real property used to meet air and water quality emission standards.

Clean-in-place systems

Equipment used in clean-in-place systems in the food processing and food manufacturing industries qualify for the production exemption. The exemption applies to systems that:

  • Have automated cleaning processes (i.e., no human intervention), and
  • Don’t need to be disassembled to clean the equipment.

Buy without paying tax

If you qualify for the production exemption, you can buy the following items without paying tax:

Raw materials

Raw materials that become an ingredient or component part of the product

Examples:

  • Metals bought by a metal fabricator
  • Logs bought by a lumber mill
  • Potatoes bought by a French fry producer
  • Feed bought by a cattle rancher
  • Elk and food bought to maintain an elk herd for hunting packages you sell and charge tax on

Chemicals and catalysts

Chemicals and catalysts that cause a physical change or are used to remove impurities from a product. They don’t become an ingredient or component part, but they qualify when they’re used directly and consumed in the production process.

Examples:

  • Chemicals used by a potato processor to remove impurities from the potatoes
  • Chemicals used to refine metallic ores
  • Chemicals used to strip oil and impurities from electronic parts
  • Chemicals used in a clean-in-place system in food processing/manufacturing
  • Gases used in welding to mold and join a product that’s being fabricated
  • Chemicals used in a research and development laboratory

Equipment that’s consumed

Equipment and supplies, including hand tools, that are consumed or used more than 50% of the time directly in the production process and are necessary to the process.

Examples:

  • A computer used to run manufacturing equipment
  • Equipment used to run or regulate machinery in the production process
  • Equipment and supplies used to perform a necessary quality control step to meet product standards
  • Equipment and chemicals used in clean-in-place systems in the food processing and food manufacturing industries
  • Cranes and lifts used to install production equipment
  • Repair parts, lubricants, hydraulic oil, and coolants that become part of production equipment
  • Fuel used in production equipment during the production process (e.g., diesel, gasoline, propane)
  • Equipment, supplies, and fixtures used in a semiconductor clean room environment

Safety equipment that’s required

Safety equipment and supplies required by a state or federal agency and used in a production area, such as:

  • Hard hats
  • Protective clothing
  • Gloves
  • Fire extinguishers used for the safety of your workers
  • A first aid kit stored and used in the production area