Does a farmer-owned cooperative building a new feed mill get a sales tax exemption on the construction materials and manufacturing equipment it buys?

Plain-English summary

A farmer-owned cooperative was about to build a new feed mill to convert raw grains into finished animal feed rations, and — after getting inconsistent answers from several Commission staff by phone — wrote in for a written advisory opinion before it started buying equipment. Its own theory was that the project should qualify either under the agricultural exemption (since the co-op returns profits to its farmer-members) or, failing that, the manufacturing exemption.

The Commission ruled the agricultural exemption doesn't apply here. Under § 59-12-104, that exemption is limited to tangible personal property used or consumed primarily and directly in farming production itself — not in peripheral activities like processing, distribution, or transportation of farm products. Building and equipping a feed mill counts as processing, not farming production, so materials and equipment for the mill fall outside the exemption even though the cooperative's members are farmers and profits flow back to them.

The manufacturing exemption, however, is a real possibility. Because the mill primarily produces prepared feeds and feed ingredients for livestock and fowl, the Commission classified the operation under SIC code 2048, qualifying it as a manufacturer. That opens up two separate exemptions:

• New/expanding operations exemption (100%): covers machinery/equipment used in a new or expanding manufacturing operation, but only if the item is used to actually manufacture the finished product and has an economic life of three years or more. It does not cover materials used to construct the mill facility itself, nor equipment used in nonqualifying activities like R&D, refrigerated/other storage of raw materials or finished product, distribution, or transportation.
• Normal operating replacements exemption (partial, phased in): covers equipment/machinery that replaces existing equipment serving the same function (where the old equipment is retired within 12 months of the new purchase, or kept as a backup), again requiring a 3+ year economic life. This exemption phases in gradually: 30% for tax years beginning July 1, 1996; 60% beginning July 1, 1997; and the full 100% beginning July 1, 1998. Ordinary repair and replacement parts don't qualify.

Applying this to the co-op's specific plans, the Commission flagged the four steel storage bins for raw grain as likely nonqualifying storage (not exempt), while other listed equipment — receiving, grinding, rolling, scales, micro, pelleting, loadout, air, and steam systems — could qualify if it's genuinely part of the mill's integrated continuous production cycle, inviting the taxpayer to follow up on specific items.

What this means for you

Agricultural cooperatives building processing facilities

Don't assume farmer ownership or profit-sharing extends the agricultural exemption to processing facilities like feed mills, grain elevators, or similar operations — that exemption is narrowly tied to on-farm production activity, not downstream processing, even when the processor is a farmer-owned entity serving its own members.

Manufacturers evaluating new-facility construction

Separate your purchase list into (1) building/structure materials (never exempt under the manufacturing exemption), (2) storage/distribution/transportation equipment (generally nonqualifying), and (3) equipment genuinely part of the continuous production process (potentially 100% exempt if new/expanding, or partially exempt if replacing existing equipment). Confirm your SIC code classification first — it's the gateway to the whole exemption.

Businesses replacing existing manufacturing equipment

Check the phase-in percentage for the tax year in question — the normal-operating-replacements exemption wasn't fully phased in until tax years beginning July 1, 1998; earlier years only got a partial (30% or 60%) exemption.

Common questions

Q: Does a farmer-owned cooperative get the agricultural sales tax exemption when it builds a feed mill?
A: No. The agricultural exemption covers only property used directly in farm production, not processing facilities like feed mills, even when the co-op is owned by farmers and profits return to them.

Q: What SIC code applies to a feed mill for the manufacturing exemption?
A: SIC code 2048, covering prepared feeds and feed ingredients for animals and fowl, based on the facts described in this ruling.

Q: Are storage bins for raw grain exempt as manufacturing equipment?
A: The Commission flagged the steel storage bins described in this request as likely nonqualifying storage, not exempt manufacturing equipment.

Q: Is the mill building itself exempt from sales tax as manufacturing equipment?
A: No. Materials used to construct the mill facility are not eligible for the manufacturing exemption regardless of the equipment installed inside it.

Q: Does this ruling apply to my cooperative's or manufacturer's construction project?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. It can't be relied on as binding by anyone else, though it may carry weight if your facts closely match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104 (agricultural exemption — property used or consumed primarily and directly in farming operations)
• Utah's manufacturing exemption framework (SIC-code-based eligibility; 100% new/expanding-operations exemption; phased-in normal-operating-replacements exemption: 30% for tax years beginning 7/1/1996, 60% beginning 7/1/1997, 100% beginning 7/1/1998)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-027.pdf

Original ruling text

97-027

Response
May 8, 1997

REQUEST
LETTER

April
18, 1997

Subject

• Advisory Opinion

We
here at COMPANY A are about to begin construction on a complete new
manufacturing feed mill. We along with the contractor have a concern about what
items are taxable and what items that are exempt. The contractor is COMPANY B
out of XXXXX, XXXXX. A NAME from
COMPANY B has made several calls to the tax commission and has spoke to five or
six different ones at the commission and I likewise have done the same thing
and have no real answers to our questions.

I
called again this week and was directed to NAME. I received the best
information from him that I had been given. I requested from him to come to
Salt Lake with my plans and sit down and go through the project piece by piece.
He advised me that I first go through you with a advisor opinion letter.

This
is a farmer owned cooperative where any earned profit dollars are returned to
the cooperative member owner. This mill that is going to be built is for the
purpose of changing raw materials into complete finished feed rations. I should
think that we would fall under the agricultural tax exempt rulings where this
is the purpose for the mill. If we do not fall under the agricultural exempt we
would fall into the manufacturing exempt rule.

I
am attaching drawings and listing of equipment. As I read the tax law the only
items that should be taxed would be the mill structure and supplies needed to
build it. We will erect four steel storage bins that will house raw grains that
will elevate into the mill to be converted and manufactured into finished feed
rations. There will be many receiving elevators, pits, and legs that will move
feed ingredients into and around in the mill. Under the listing attached is a
complete listing of equipment.. I have high lighted with yellow the different
pieces that will be installed or built. I have noted with a X equipment that
will be moved into the new mill that we have ownership of and are using in our
old mill. There will not need to be a concern over these items. Equipment
listing are as follows, receiving, grinding (our equipment), rolling (part
ours), scales, micro, pelleting (part our equipment), loadout, air, and steam.
Not showing on the listings as equipment will also be many bins that will be
built inside the walls of the feed mill. These bins will be built out of steel
and will be supported with steel structure inside the mill walls. They are not
part of the building. All of these bins as well as the equipment on the
listings are a part of the manufacturing process and will in time wear out and
will need to be replaced. The mills life will be many times that of the
equipment placed in or on it.

I
would be happy as needed to answer any questions about any of the above and
would be willing to come to Salt Lake to go over any of this project. If
possible I need a written answer to my tax questions by May. We will start receiving equipment at that
time and it will be a problem to try to change billings after equipment is in.

NAME

May
8, 1997

NAME

ADDRESS

CITY
STATE ZIP

Advisory
opinion - purchases of items used to construct feed mill operations.

Dear
NAME,

We have received your request for
information concerning the agricultural and the manufacturing sale tax
exemptions. We offer the following
guidelines. If the information contained
in this letter is not specific enough, please feel free to contact our
Technical Research Unit at 297-3257.
Although the Technical Research Unit normally works directly with
taxpayers on sales tax questions, NAME is also an excellent resource.

We begin by outlining the
agricultural exemption. Under Utah Code
section 59-12-104, sales of tangible personal property used or consumed
primarily and directly in farming operations are exempt from sales tax. This exemption does not apply to sales of equipment
used directly in farm production and not for peripheral activities such as
distribution, processing or transportation of farm products. Purchases of materials and equipment to
build a feed mill and to put it into operation do not fall within this
exemption even though the cooperative may be owned by the same agricultural
producers it serves.

The manufacturing exemption applies
to manufacturers who fall within the specified Standard Industrial
Classification (SIC) codes. We assume
from your letter that the mill will primarily produce prepared feeds and feed
ingredients for animals and fowl, such as livestock feed and feed
ingredients. If so, your operation
falls in SIC code 2048 and qualifies as a manufacturer for purposes of this
exemption. If we have not properly
described your operation, please consult with our Technical Research Unit to
determine your correct SIC code.

As a manufacturer, the cooperative
is potentially eligible for two exemptions.
One is a 100% exemption for purchases or leases of equipment and
machinery used in a new or expanding manufacturing operation. The other is a partial exemption for
purchases of equipment and machinery that constitute �normal operating
replacements.�

Exemption
for new and expanding operations: To be
eligible for the 100% exemption, the machinery or equipment must be used in a
new or expanding manufacturing operation and the item must be used to
manufacture an item sold as tangible personal property, and it must have an
economic life of three or more years.
Materials used to construct the mill facility are not eligible for the
exemption. Nor are items used in
nonqualifying activities, such as research and development, refrigerated or
other storage of raw materials, components or finished product, distribution,
or transportation.

Exemption
for normal operating replacements: Normal
operating replacements are items of manufacturing equipment or machinery which
serves the same purpose as existing equipment.
If the existing equipment is retired from service within 12 months
before or after the purchase of new equipment or if the old equipment is
retained as a backup, the new equipment is considered replacement
equipment. To be eligible for this
exemption, the equipment must have an economic life of at least three
years. Normal repair and replacement
items do not qualify for exemption.

The partial exemption will be phased
in over a period of years as set out below:

(i) For tax years
beginning July 1, 1996, 30% of the exemption is allowed.

(ii) For
tax years beginning July 1, 1997, 60% of the exemption is allowed.

(iii) For tax years beginning July 1, 1998, 100% of the exemption is
allowed.

The steel bins mentioned in your
letter appear to be nonqualifying storage bins. Other items mentioned may be eligible for exemption if they are
used as a part of the integrated continuous production cycle. Please contact our staff for assistance if
you have questions about specific items.

For
the Commission,

Joe
B. Pacheco,

Commissioner