The Division is issuing this Notice to clarify the application of N.J.S.A. 54:32B-8.13(a) to racks used by a bakery during the production process in light of the Tax Court decision in Liscio's Italian Bakery, Inc. v. Dir., Div. of Taxation, Docket No. 009658-2017 (N.J. Tax Ct. Sept. 27, 2019).
The Sales and Use Tax Act provides an exemption for “sales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing, processing, assembling or refining.” N.J.S.A. 54:32B-8.13(a). “Production is limited to those operations commencing with the introduction of raw materials into a systematic series of manufacturing, processing, assembling, or refining operations, and ceases when the product is in the form in which it will be sold to the ultimate consumer…” N.J.A.C. 18:24-4.4.
Liscio's Italian Bakery produces and sells baked products. The bakery uses custom-made mobile baking pan racks throughout the entire production process, beginning from the time the dough is formed and sent for proofing, then for refrigerating or de-activating, re-activating, and finally, baking.After an in-depth analysis as to the design of the racks and how the bakery uses the racks during production, the Tax Court held that the racks are machinery, apparatus, or equipment, as defined in the Division’s regulations. Based on the facts in this case, the racks were used directly and primarily (more than 50 percent of the time) in the production of bakery products; therefore, the racks are entitled to the exemption. However, if the racks are only used to hold raw materials before the production process, to store finished goods following production, or if they are otherwise used less than 50 percent of the time in the actual production process, the racks do not qualify for the exemption.