www.revenue.state.mn.us 

Capital Equipment                                                                                     103 

 Sales Tax Fact Sheet 103                                                                             Fact Sheet 

 What’s New  
 We clarified that purchasing agent agreements are not necessary for contractors to purchase capital equipment mate-
 rials exempt from tax. See Building Materials and Supplies (page 5) and Purchases by Contractors (page 7).  
 
If you buy or lease qualifying capital equipment for use in Minnesota, you are eligible for an exemption or a refund of 
state and local sales or use tax you paid. This fact sheet explains how Minnesota sales and use tax applies to capital 
equipment. For information on capital equipment for online data retrieval systems, see Revenue Notice 06-03, Online 
Data Retrieval for Capital Equipment.  
 
Capital equipment means machinery and equipment purchased or leased, and used in Minnesota by the purchaser or 
lessee primarily for manufacturing, fabricating, mining, or refining tangible personal property to be sold ultimately at 
retail if the machinery and equipment are essential to the integrated production process of manufacturing, fabricating, 
mining, or refining. Capital equipment also includes machinery and equipment used primarily to electronically transmit 
results retrieved by a customer of an on-line computerized data retrieval system. 
 
To claim the exemption for eligible purchases give the supplier a completed Form ST3, Certificate of Exemption. 
Specify the Capital equipment exemption.  
 
Any business may qualify for exemption on qualifying equipment used primarily to make a product for sale ultimately at 
retail. For example, a hardware store may claim exemption for a key-making machine – the key making machine quali-
fies as capital equipment even though the main business of a hardware store is not manufacturing.  
 
Capital equipment includes, but is not limited to: 
    Machinery and equipment used to operate, control, or regulate the production equipment 
    Machinery and equipment used for research and development, design, quality control, and testing activities 
    Environmental control devices that are used to maintain conditions such as temperature, humidity, light, or air 
     pressure when those conditions are essential to and are part of the production process 
    Materials and supplies used to construct and install machinery or equipment 
    Repair and replacement parts, including accessories, whether purchased as spare parts, repair parts, or as up-
     grades or modifications to machinery or equipment 
    Delivery and installation charges for qualifying equipment 
    Materials used for foundations that support machinery or equipment 
    Materials used to construct and install special purpose buildings used in the production process 
    Ready-mixed concrete trucks where the ready-mixed concrete is mixed as part of the delivery process. The pur-
     chase of a ready-mixed concrete is exempt up-front from the sales tax on motor vehicles. Beginning July 1, 
     2015, the up-front exemption applies to leases of ready-mixed trucks or purchases of repair or replacement parts.  
 
Note: The term capital equipment is not the same as capitalized assets. Items capitalized for accounting purpose do not 
automatically qualify as capital equipment. Items you expense for accounting purposes, such as leased equipment, may 
be considered capital equipment. 
 
 Sales and Use Tax Division – Mail Station 6330 – St. Paul, MN 55146-6330 This fact sheet is intended to help you become more familiar with Minnesota tax  
Phone: 651-296-6181 or 1-800-657-3777                                     laws and your rights and responsibilities under the laws. Nothing in this fact sheet 
Email: salesuse.tax@state.mn.us                                           supersedes, alters, or otherwise changes any provisions of the tax law, administrative 
                                                                          rules, court decisions, or revenue notices.  Alternative formats available upon request. 

Stock No. 2800103, Revised September 2021                                             Minnesota Revenue, Capital Equipment                                             

Capital equipment does not include: 
     Farm machinery, aquaculture and logging equipment 
     Motor vehicles taxed under Minnesota Statutes, section 297B (vehicles for road use) 
     Building materials that become part of a general building structure or that are an addition, repair, improvement, 
      or alteration to real property (see Building Materials and Supplies on page 5) 
     Machinery or equipment used to receive or store raw materials 
     Machinery or equipment used in the transportation, transmission, or distribution of petroleum, liquefied gas, 
      natural gas, steam, or water through pipes, lines, tanks, or mains 
     Telecommunications equipment and wire, cable, fiber, poles, or conduit used to provide telecommunications 
      services 
     Machinery or equipment used in restaurants to furnish, prepare, or serve prepared food 
     Machinery or equipment used to provide the following taxable services: 
         o   Laundry and dry-cleaning services 
         o   Motor vehicle washing, waxing, and cleaning services 
         o   Building and residential cleaning, maintenance, and disinfecting and exterminating services 
         o   Detective, security, burglar, fire alarm, and armored car services 
         o   Pet grooming services 
         o   Lawn care, fertilizing, mowing, spraying and sprigging services; garden planting and maintenance; tree, 
             bush, and shrub pruning, bracing, spraying, and surgery; indoor plant care; tree, bush, shrub, and stump 
             removal; and tree trimming for public utility lines 
         o   Furnishing lodging, board, and care services for animals in kennels and other similar arrangements 
     Machinery or equipment used for nonproduction purposes (see Non-Qualifying Activities on page 3) 
     Any other items that is not essential to the integrated process of manufacturing, fabricating, mining, or refining 
  
Definitions (as they relate to capital equipment) 
Accessories to capital equipment – items that cannot function independently but are attached, connected, or fastened to 
a piece of equipment in order to function. Accessories include feeders, tools, jigs, patterns, dies, and molds. Accessories 
also include devices that upgrade, modernize, or modify the capabilities of the underlying equipment.  
 
Equipment and machinery – mechanical, electronic, or electrical devices, tools, or hand tools. It includes computers 
and software used to operate qualifying equipment, as well as any sub-unit or assembly of the equipment. Devices neces-
sary to control, regulate, or operate the production equipment are also included.  
 
Essential – the equipment must perform a necessary or indispensable step in the production process. The fact that a par-
ticular piece of equipment is required by law or is a practical necessity does not make it essential to the production pro-
cess. 
 
Fabricating – making or assembling components to work in a new or different manner. 
 
Foundations – qualify if they are the base or support the structure necessary for qualifying equipment. It does not in-
clude the foundation for a building unless the building is a special purpose building.  
 
Manufacturing – changing the form, composition, or condition of raw materials into a new product. For purposes of the 
capital equipment exemption, manufacturing includes generating electricity or steam for sale at retail. Manufacturing 
does not include repair or refurbishing items returned to the original owner.  
 
Materials and supplies – items necessary to construct or install qualifying capital equipment, such as nails, bolts, 
screws, pipes, lumber, and wire used to secure or assemble the equipment in the facility.  
 
Mining – extracting ore, materials, or peat from the earth. It includes underground, surface, and open-pit mining opera-
tions. It also includes any surface mining to obtain building stone, limestone, gravel, sand, or other surface materials.  
 
Online data retrieval systems – a computerized system whose database of information is equally available and accessi-
ble to all customers.  
 
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Pollution control equipment – used to eliminate, prevent, or reduce pollution resulting from production activities. 
 
Primarily – the equipment must be used 50% or more of its operating time in a qualifying activity.  
 
Product – for this fact sheet, means tangible personal property, electricity, and steam. 
 
Refining – means converting natural resources to a product; purifying materials such as oil, metal, sugar, and fats; and 
treating of water to be sold at retail.  
 
Repair or replacement parts – used to restore capital equipment to its original or intended operating condition, includ-
ing parts that upgrade or modernize equipment, as well as spare parts.  
 
Sold ultimately at retail – the product being produced must be intended for sale at retail. This does not mean that the 
producer must make the retail sale, or that the product be subject to sales tax. For example, equipment used in producing 
a product for sale at wholesale, and equipment used for producing nontaxable products such as clothing, qualify as capi-
tal equipment. A construction contract to improve realty is not a retail sale.  
  
Integrated Production Process  
Capital equipment must be used by the purchaser (see Used by the Purchaser on page 6) primarily in a qualifying activity 
within an integrated production process. The integrated production process means the series of activities that result in the 
production of a product to be sold ultimately at retail, including the actual production process. The production process 
begins with the removal of raw materials from inventory and ends when the last process prior to loading for shipment 
has been completed, and also includes research and development and design of the product. 

Qualifying Activities 
   Constructing, cleaning, maintaining, and repairing equipment, tools, or repair parts for equipment used in a quali-
    fying activity 
   Maintaining conditions such as temperature, humidity, light, or air pressure when those conditions are essential to 
    and a special requirement of the production process. This includes maintaining finished goods inventory by the 
    producer but does not include general space heating and lighting. 
   Outside fabrication labor services contracted for by a manufacturer if those services are essential to the produc-
    tion of the product 
   Packaging of the completed product. This includes all packaging done before loading the completed product for 
    shipping but does not include returnable items such as pallets used in shipping.  
   Production activities to produce the product. This includes machinery and equipment that operate, control, or reg-
    ulate production equipment 
   Quality control and testing activities done on the product 
   Removal of raw materials from stock to begin the actual production activities 
   Research, development, and design to product a product (see page 7) 
   Storing work-in-process, but not including storing raw materials in inventory 

Non-Qualifying Activities 
   Plant cleaning, disposal of scrap waste, plant communications, heating, cooling, lighting, or safety 
   Plant  ecurity, fire prevention, first aid, and hospital stations s
   Pollution control, prevention, or abatement 
   Receiving or storing raw materials 
   Support operations or administrative activities used to maintain the integrated production process including man-
    agement, direction, and overseeing of a business, for example: 
          o Cleaning, repair, or maintenance of the plant facilities 
          o General janitorial activities 
          o Inventory management 
          o Warehousing 
          o Internal product and production tracking 
          o Sales and distribution activities 

                                                     3                                    Minnesota Revenue, Capital Equipment     

  o     Construction, maintenance, or alteration of real property, unless such items are foundations for qualifying 
        equipment or are for special purpose buildings, as defined later in this fact sheet 
  o     Providing a safe work environment for employees 
  o     General office administration including clerical, personnel, and accounting activities 
  o     Customer service activities, including repairs 
  o     Managerial functions such as business and production analysis and supervision 
         
Examples of Integrated Production Process    
  1. A newspaper publisher buys a computer system to permanently store completed news stories for future reference.  
  The publisher also adds devices for security control. Some devices measure the quality of the ink flow and its 
  color, while others are used for employee and job scheduling. The computer system and the devices used to store 
  completed stories and measure the quality of the actual product qualify as capital equipment. The devices used for 
  employee and job scheduling do not qualify because they do not control or regulate production equipment and do 
  not have an effect on the product.  
  2. A wood products fabricator buys boxing, shrink-wrapping, and palletizing equipment to package products before  
  placing them into finished goods inventory. All the equipment is being used to package products prior to loading 
  for shipment and therefore qualifies as capital equipment.  
  3. A meat packer builds a new plant. Environmental control systems are installed throughout the plant. The system  
  used for storage of raw meat does not qualify since capital equipment does not include equipment used to receive 
  or store raw materials. The systems for the production areas qualify as capital equipment – these systems maintain 
  very cold temperatures to ensure that meat products are not contaminated by bacteria, and for storage of the com-
  pleted meat products. The systems for support and administrative areas do not qualify.  
  4. A bakery installs a washing system to clean and sterilize baking pans and production equipment. They also pur- 
  chase pressure washers used to clean the floors and walls. The washing system to clean and sterilize baking pans 
  and production equipment qualifies as capital equipment because it affects the quality of the baked product. The 
  pressure washers do not qualify since they are used in support operations for general plant maintenance and clean-
  ing.  
  5. A foundry adds equipment to construct and maintain special tooling. The equipment is used to assemble and main- 
  tain production equipment and non-production equipment and to make general building repairs. Equipment used 
  primarily (50% or more of its operating time) to create and maintain special tooling and production equipment 
  qualifies as capital equipment. If the equipment is used more than 50% of its operating time for work on nonpro-
  duction equipment or in other non-qualifying activities, it does not qualify as capital equipment.  
  6. An industrial machinery manufacturer adds several pieces of equipment to its research and development shop. The  
  equipment includes additional computer aided design (CAD) and computer aided manufacturing (CAM) systems, 
  a blueprint machine, and an integrated communication system. The blueprint machine prepares blueprints for use 
  by employees during the assembly process. The integrated communication system keeps track of costs and labor 
  hours for each piece of machinery during the assembly process. The CAD and CAM systems and the blueprint 
  machine qualify as capital equipment. The communication system does not qualify since it is used for plant com-
  munications.  
  7. A candy wholesaler buys bulk candies from manufacturers, blends various candies together, and packages the as- 
  sortment into individual bags. The equipment used to blend candies together and to package the candy into indi-
  vidual bags qualifies as capital equipment.  
  8. A wood products manufacturer expands operations by adding collection systems for wood waste, conveyors, a  
  boiler, and equipment to generate electricity. The equipment is used collectively to generate electricity that powers 
  the facility and the production equipment and qualifies as capital equipment.  
  9. A manufacturer contracts with an outside fabricator for precision drilling to be performed on its steel tubes. While  
  the outside fabricator does not produce a product that will be sold ultimately at retail, the precision drilling is es-
  sential to the integrated production process for the manufacturer. Any equipment and machinery used 50% or 
  more of the time to fabricate tangible personal property for another manufacturer’s product qualifies as capital 
  equipment.  
  10. A retailer selling lumber and other building materials, buys a saw and sander to cut and finish wood for its custom- 
  ers. While the business is primarily a retailer, the saw and sander are used to fabricate lumber that is sold at retail. 
  The saw and sander qualify as capital equipment.  
  11. A manufacturer buys catwalks, man lifts, and boom lifts that are used to give employees access to the production  
  equipment for maintenance and repair. The catwalks, man lifts, and boom lifts do not qualify as capital equipment 

                                                    4                            Minnesota Revenue, Capital Equipment        

      since they do not have a direct effect on the maintenance or repair, but rather have the indirect effect of giving the 
      employee access to the equipment. Only equipment used to actually maintain, repair, or install capital equipment 
      qualifies.  
    12. A city sells electricity at retail to its residents. The lines and poles to transport the electricity, up to the last trans- 
      former outside the customer’s location, qualify for the capital equipment exemption. The city also buys digging 
      equipment and a hoist to install the poles. This equipment, including all materials necessary to install the poles, 
      qualifies for the exemption.  
    13. A cabinet maker manufactures and installs cabinets into homes and businesses. The cabinet maker is producing a  
      product, which is installed into real property. Since the cabinet maker does not make a retail sale of cabinets, the 
      equipment is used to manufacture the cabinets does not qualify for the capital equipment exemption. 

Note: The integrated production process is similar but not the same as the industrial production process. The result is that 
even though the equipment may qualify for the capital equipment exemption, items used or consumed in the equipment 
(such as fuels) may not qualify for the industrial production exemption. For more information, see the Industrial Produc-
tion Fact Sheet.  
  
Building Materials and Supplies 
Building materials and supplies for special purpose buildings, for foundations that support capital equipment, or used to 
install capital equipment, qualify as described below. The qualifying materials are exempt when purchased by the owner. 
If the owner provides a completed Form ST3, Certificate of Exemption to the contractor, the contractor may purchase 
the materials exempt. The owner should specify the Capital equipment exemption on Form ST3. (See Purchases by con-
tractors on page 7.)  

Note: It is the purchaser’s responsibility to understand the exemptions for which they qualify before issuing an exemp-
tion certificate. If it is determined the purchaser did not qualify for the claimed exemption, the purchaser is liable for any 
taxes and penalties legally due.  

Special Purpose Buildings  
A special purpose building is a structure that because of its size or method of installation would normally be considered 
real property, rather than tangible personal property. To be considered a special purpose building, the structure must 
serve or perform a function essential to the production process and must be used in producing a product to be sold ulti-
mately at retail. Purchases of building materials and supplies that become part of a special purpose building qualify for 
the capital equipment exemption.  
 
Examples of special purpose buildings include: 
     Clean-room facilities, independent flash-freeze tunnels, or self-enclosed paint booths.  
     Research facilities such as wind tunnels or test stands used primarily for product development or testing.  
     Tanks, bins, or silos used primarily for temporary storage of work in process. Facilities used to receive or store 
      raw materials prior to the production process or to store raw materials on the production floor do not qualify as 
      special purpose buildings.  
 
Building materials qualify for the capital equipment exemption if at least 67% of the total floor area of an addition, mod-
ification, or new building qualifies as a special purpose building.  
 
Foundations 
Building materials used for foundations that are specifically designed and constructed to support equipment qualify for 
the capital equipment exemption. However, the fact that foundation materials qualify does not mean the building itself 
qualifies as a special purpose building. The building must meet the criteria outlined above to qualify as a special purpose 
building.  
 
Installation and Support 
Building materials and supplies used to install qualifying equipment are eligible for the capital equipment exemption.  
 
                                               5                     Minnesota Revenue, Capital Equipment                                

Non-Qualifying Building Materials 
Building materials used for the following purposes do not qualify for the capital equipment exemption: 
   General purpose manufacturing, industrial, or commercial buildings 
   Buildings designed to protect equipment from the elements, to provide space cooling or heating, or to allow 
    equipment to perform at optimal levels 
   Buildings that are modified to allow for the installation of an assembly line or conveyance system when such 
    modifications do not affect the product 
   Buildings that are only modified by incorporating special foundations to support qualifying equipment 
 
Examples 
   A 10,000 square foot addition for a clean room is added to an existing production facility. About 2,000 square 
    feet of the addition is used for an office and restrooms. The building materials to construct to the entire addition 
    qualify for the capital equipment exemption, since at least 67% of the total floor area of the addition qualifies as 
    a special purpose building.  
   An asphalt mixing plant builds a new facility in Minnesota. A roof is built over the mixing plant equipment to 
    protect it from the elements. The roof is not a special purpose building since it has no direct effect on the product 
    being produced.  
   A brewery builds a new plant in Minnesota. Large silos are needed for storage of the raw hops and barley and 
    other silos are used to maintain constant temperatures of work in process during fermentation. The silos used for 
    fermentation are special purpose buildings and qualify for the capital equipment exemption. The silos used to 
    hold raw materials do not qualify since they are used for storage before the beginning of the production process.  
   A manufacturer builds a new facility in Minnesota. Materials and supplies used to install the equipment and to 
    build necessary support structures for the capital equipment qualify for the capital equipment exemption. The 
    building foundation needs to be reinforced to support the weight of the manufacturing equipment. Therefore, 
    materials and supplies used to build the foundation necessary to support the equipment qualify for the capital 
    equipment exemption. Other building materials used to construct the facility don’t qualify for a capital equip-
    ment exemption.  

Used by the Purchaser 
To qualify as capital equipment, the item must be used by the purchaser or lessee in Minnesota. If a manufacturer buys 
equipment and contracts with another party to use the equipment to produce the manufacturer’s product, the manufac-
turer can claim the exemption if there is a written agreement between the principal purchaser or lessee and a second 
party containing all the following elements: 
   The agreement must state that the principal manufacturer will purchase and provide the second party with capi-
    tal equipment necessary to fulfill the agreement. 
   The agreement must include provisions for payment to the second party for manufacture of the principal’s prod-
    uct. 
   There must be no payment by the second party for use of the machinery or equipment.  
   None of the capital equipment purchased or leased by the principal is used by the second party for its own use.  
   The principal must purchase and pay for the capital equipment in its own name and must include the equipment 
    on its balance sheet as a depreciable asset. 
   The principal must hold title to, or be the lessee of, the equipment at all times, even at the end of the agreement 
    between the principal and the second party.  
   The risks of ownership or leasehold for the capital equipment must remain with the principal at all times rather 
    than with the second party.  

Example 
   A snack manufacturer expands its product line and enters into an agreement with a second company to produce a 
    specific snack line. The snacks will be sold under the manufacturer’s label. Under the terms of the agreement, the 
    manufacturer purchased and installed all equipment necessary to produce the new snack line in the second com-
    pany’s plant. The second company receives payment on a per-completed-case basis. 
     
    The terms of the agreement require the equipment be used only for production of the new snack product. Title 
    remains at all times with the snack manufacturer. At the end of the agreement, the equipment will be returned to 
                                                      6                Minnesota Revenue, Capital Equipment                  

        the snack manufacturer. The equipment purchased by the snack manufacturer for the new snack line qualifies for 
        the capital equipment exemption.  

Purchases by Contractors 
To qualify as capital equipment, the items must be used by the purchaser or lessee in a qualifying activity. When a con-
tractor buys and installs equipment as part of an improvement to real property, the contractor is considered the purchaser 
and no capital equipment exemption is generally allowed. However, a qualifying purchaser may provide a contractor a 
completed Form ST3, Certificate of Exemption claiming the capital equipment exemption. 

Capital equipment is excluded from the definition of real property. When a contractor receives a completed Form ST3 
claiming capital equipment, they may purchase the qualifying material exempt from sales tax for the purpose of resale. 
When billing the customer, do not charge sales tax on the capital equipment or related labor charges. 

Note: It is the purchaser’s responsibility to understand the exemptions for which they qualify before issuing an exemp-
tion certificate. If it is determined the purchaser did not qualify for the claimed exemption, the purchaser is liable for any 
taxes and penalties legally due. 
  
Research and Development 
Quality control, testing, design and research and development activities are part of the production process. Equipment 
used by the manufacturer, fabricator, miner, or refiner for research, development and design activities, regardless of 
whether a product is actually produced and sold at retail, qualifies as capital equipment.  

Equipment used primarily by a research and development company, consulting company, or similar organization quali-
fies as capital equipment when both are true: 
       The equipment is used to develop a specific product at the request of a manufacturer, fabricator, miner, or re-
        finer 
       The equipment is used primarily for the research, development, and design of the specific product. 
 
Examples 
       A manufacturer hires a company to develop a treatment to extend the shelf life of a product. The equipment used 
        by the company in its research and development activities qualifies for the capital equipment exemption if it is 
        used 50% or more of its operating time to develop products intended to be sold ultimately at retail.  
       A retailer buys computer equipment to be used exclusively to design packaging for a shirt sold at retail. The re-
        tailer contracts with a manufacturer to produce the packaging and the shirts. Since the package design is a part of 
        the integrated production process, the retailer’s computer equipment qualifies for the capital equipment exemp-
        tion. 
 
Local Sales and Use Taxes         
If you are located or make sales into an area with a local tax, you may owe local sales or use tax. For more information, 
see the Local Sales and Use Tax Guide. 

                                              7                                             Minnesota Revenue, Capital Equipment     

Legal References 
Minnesota Statute 297A.68, subd. 5, Capital Equipment 
Minnesota Statutes 297A.75 
    subd. 1, Tax collected 
    subd. 3, Application 
 
Revenue Notices 
96-08, Construction Contractor as Purchasing Agent 
96-10, Lease Renewal or Buyout 
96-13, Used by the Purchaser 
96-14, Research, Development, and Design 
96-15, What Activities Qualify 
97-04, Special Purpose Buildings 
97-05, Integrated Production Process for Tangible Personal Property 
06-03, Online Data Retrieval for Capital Equipment 
18-04, Improvements to Real Property 
  
Fact Sheets  
Industrial Production 
Use Tax for Businesses 
Utilities Used in Production 
 
Guides 
Contractors and Other Property Installers 
 Local Sales and Use Tax 

                                                      8             Minnesota Revenue, Capital Equipment