For manufacturing companies whose process includes the recycling of production scrap back into the manufacturing process, North Carolina has readopted the rules that impact the taxability of this equipment. Effective March 2021, the NC DENR readopted the rules that govern the tax treatment for recycling and resource recovery equipment and facilities, 15A NCAC 13B, specifically Sections 1501, 1502 and 1503. Some of the more significant changes to be aware of include the following:
15A NCAC 13B.1501: Definitions – Many of these have been revised and expanded to provide clarification, most notably those definitions for New Materials, Personal Property, Production Process, Production Scrap and Qualifying Property.
“Production Scrap” means excess or unusable material that is generated during a production process and is returned to be reused in the same production process. An example of production scrap is excess metal or cardboard or textiles from a sheet of metal or cardboard or batting that remains after a portion of the sheet is cut, stamped, trimmed, or formed to make a product, and the excess material is collected and returned to the process or equipment where the original sheet or batting was created.
15A NCAC 13B. 1502: Applicability and Application Requirements – The most significant change in this rule applies to the application process which is now completed through electronic submission of the application and required documents via email to the NC DENR. The DENR no longer requires that the application be submitted through the USPS.
15A NCAC 13B.1503: Standards for Qualification for Tax Certification – This rule explains the requirements that must be met for equipment to be considered for tax exempt certification. The most notable change to this rule is 1503(c)(7) and the language added to further define non-qualifying equipment:
The personal property shall not be used for handling, storing, packaging, or transportation or new materials, production scrap, or solid waste intended for disposal.
The readoption of the last rule and the resulting changes to previously qualifying equipment will likely have the most impact. For manufacturers whose process includes the reintroduction of production scrap back into the manufacturing process, this equipment no longer qualifies for tax certification exemption under the readopted rules.
Fortunately, the readopted rules and their resulting changes have no impact on equipment previously certified by the North Carolina DENR as tax exempt recycling and resource recovery. This equipment is considered “grandfathered” in under the previous rules and will remain exempt for as long as the equipment remains under the same ownership.
We encourage manufacturers whose process includes the reintroduction of production scrap back into the production process to review these changes closely. Equipment that previously qualified as tax exempt recycling or resource recovery will no longer qualify and will be fully taxable. At Baden, we may be able to help reduce the burden of this additional tax. Contact one of our experienced consultants to discuss how we can help your business navigate these changes.