ipt 2013 sales & use tax symposium monterey, ca · ipt 2013 sales & use tax symposium –...
TRANSCRIPT
IPT 2013 Sales & Use Tax Symposium – Monterey, CA
Industry Issues -
Manufacturing
2
Presenters
Denton Childs – Tyson Foods, Inc.
Adam Scheele – Deloitte Tax LLP
At a Glance
Manufacturing definitions vary from state to state, but are
generally divided into two categories:
- Integrated Plant Theory – Very broad in application and usually
includes machinery and equipment that is essential to the process,
transportation equipment, and other support equipment that is
used during the manufacturing process.
- Direct Use – Narrow in application and usually requires
machinery and equipment must make a direct chemical or physical
change to the product being manufactured to qualify for
exemption.
3
At a Glance
Most states provide an exemption for manufacturing
machinery and equipment.
- Most states require that the machinery and equipment be used
“directly” in manufacturing process.
- Fourteen states have adopted the broader integrated plant theory
for purposes of qualifying for the exemption.
- States that do not provide a full exemption may apply a special or
reduced rate.
- Some states require registration and certification as a
manufacturer and may define manufacturing based on SIC or
NAICS industry codes.
- Twelve states do not have a full exemption for pollution control
equipment. Seven of those states apply a special reduced rate.
4
At a Glance
Common distinctions in state-by-state manufacturing
exemptions:
– Interplant transportation
– Chemicals, Lubricants, and Fluids
– Replacement Parts
– Pollution Control M&E - Sometimes certification is required
– Quality Control, Testing, and Monitoring equipment
– Packaging and Shipping materials
– Divergent use
5
At a Glance
Almost all states have some exemption for utilities used in
the manufacturing process.
– The types of energy and the requirements for the
exemption vary greatly.
– Six states do not have an exemption.
– A few states have reduced rates.
6
At a Glance
Non-Traditional “Manufacturers”
Other industries that may qualify for manufacturing exemptions:
– Mining and aggregate
– Oil & Gas production and extraction
– Poultry and Livestock
– Telecommunications
– Software
– Restaurants
– Recycling
7
Recent Legislation
8
9
Recent Legislation
Arkansas - New Law Expands Manufacturing Exemption for
M&E Used in Petroleum Refining
H.B. 1281 – Amends the sales tax exemption for pollution control
equipment used in manufacturing operations to include sulfur removal
processes during petroleum refining and extends exemption to cities and
towns. Includes repair parts and repair labor of equipment required by
state and federal law or regulations to be used in the refining of
petroleum-based products to remove sulfur pollutants. Effective October
1, 2013.
Recent Legislation
Arkansas – New Law Provides Partial Refund on Certain
Replacement/Repair of Manufacturing M&E
S.B. 334 – Provides a 1% reduction in the form of sales and use taxes for
expenditures on repairs and replacement of certain machinery and equipment used
directly in manufacturing beginning July 1, 2014. The refund will be allowed on
machinery and equipment purchased to modify, replace, or repair either in whole or
in part, existing machinery and equipment used directly in producing,
manufacturing, assembling, processing, finishing, or packaging articles of
commerce at a manufacturing or processing plant or facility in Arkansas and may
only be claimed by holders of direct pay permits.
10
Recent Legislation
Arkansas – New Law Reduces Tax Rate on Utilities Sold to
Manufacturers
S.B. 791 - Beginning July 1, 2014, new law imposes in lieu of the state gross
receipts or gross proceeds tax an excise tax on the gross receipts or gross
proceeds derived from the sale of natural gas and electricity to a manufacturer for
use directly in the actual manufacturing process at the rate of 1%, rather than the
current rate of 4.375%.
11
Recent Legislation
California - AB 93 Eliminates Current Enterprise Zone
Program and Creates New Economic Development Incentives
and a Partial Sales Tax Exemption for Manufacturers
AB 93 - Replaces the current California EZ program with a 4.19% statewide sales
and use tax exemption for manufacturing and biotechnology equipment, including
research and development equipment. Qualified property includes but is not limited
to machinery and equipment with a useful life greater than one year, used primarily
in manufacturing, processing, fabricating, refining or recycling of tangible personal
property, as well as research and development, anywhere in California. The
exemption applies to the first $200 million in qualified property purchases made in a
calendar year by a qualified taxpayer. The exemption also applies to, otherwise
qualified purchases by a construction contractor. The exemption sunsets June 30,
2022.
12
Recent Legislation
Georgia - Georgia Legislature Broadens Manufacturing
Exemption
HB 386 - O.C.G.A. § 48-8-3.2 as enacted by Ga. L. 2012, p. 257, § 5-2/HB 386
exempts from tax machinery or equipment which is necessary and integral to the
manufacture of tangible personal property as well as industrial materials, and
packaging supplies.
Additionally, energy used in manufacturing is subject to a four year phase-out.
However, localities may impose an “energy excise tax.”
13
Recent Legislation
Florida – New Law Provides for Temporary Expansion of
Manufacturing Exemption
H.B. 7007 - Effective April 30, 2014, new law under Fla. Stat. § 212.08(7)(kkk) temporarily
expands Florida’s sales/use tax exemption for manufacturers. Under current law, only new or
expanding businesses are eligible for this manufacturing exemption. An eligible manufacturing
business under these new provisions is defined as a business whose primary business activity
(activity representing greater than 50% of all activities) at the location where the industrial
machinery and equipment is located is within the industries classified under 2007 NAICS codes
31, 32, and 33. This new temporary sales/use tax manufacturing exemption is part of a broad
economic development accountability bill and is set to expire April 30, 2017. Note that
taxpayers not meeting the eligibility requirements for this new temporary exemption
nevertheless may find relief under Fla. Stat. § 212.08(5)(b), which will continue to provide a
state sales/use tax exemption for new and expanding manufacturing businesses.
14
Recent Legislation
New Mexico - New Law Expands Manufacturing Exemption to
Include TPP Consumed in Process
H.B. 184 - Effective January 1, 2013, new law expands an existing gross receipts tax (GRT)
manufacturing deduction for tangible personal property to include the property consumed in the
manufacturing process, provided that the tangible personal property is not a tool or equipment
used to create the manufactured product. The existing deduction extends only to tangible
personal property incorporated as an ingredient or component part of the products that the
buyer is in the business of manufacturing. Accordingly, because utilities are defined as “tangible
property” for GRT purposes, the amended deduction would cover utilities. This expanded
deduction is permitted on a phased-in basis, with 100% of such receipts eventually deductible
on or after January 1, 2017. The new law contains other tax-related changes in the
manufacturing and construction industries which are intended to reduce the incidence of
“pyramiding” or multiple points of taxation of manufactured goods.
15
Recent Legislation
North Carolina - Exemption for Electricity Used in Operation
of Manufacturing Facility
Effective July 1, 2010, state law provides that sales at retail and the use, storage,
or consumption in North Carolina of electricity sold to a manufacturer for use in
connection with the operation of a manufacturing facility is exempt from state
sales/use taxes. The exemption applies to electricity used both inside and outside
of the facility, including electricity used for parking lot lighting at the facility.
On July 23, 2013, Governor Pat McCrory signed legislation, House Bill 998 (“H.B.
998”) in an effort to boost the state’s economy. The bill, known as the Tax
Simplification and Reduction Act, provides changes to the corporate income tax,
individual income tax, and sales and use tax. There were no significant changes or
additions to exemptions available to manufacturers.
16
Recent Legislation
Mississippi – New Law Partially Exempts Fuel Used in Certain
Manufacturing Activity
H.B. 844, signed by gov. 4/23/13. Effective July 1, 2014, new law partially exempts
from state sales/use taxation sales of electricity, current, power, steam, coal,
natural gas, liquefied petroleum gas or other fuel to certain manufacturers, custom
processors, technology intensive enterprises or public service companies for
industrial purposes.
17
Recent Rulings and Cases
18
Recent Rulings and Cases
Colorado - DOR Holds that Certain Gases Qualify as Exempt
"Fuel" Used in Manufacturing
Private Letter Ruling, No. PLR-12-005, Colo. Dept. of Rev. (11/6/12). Regarding a company
selling industrial, medical, and specialty gases and various goods, including welding machinery
and associated tools, parts, and attachments to manufacturers in Colorado, the department
explains that welding gases that are a fuel or energy source used in one of the enumerated
"manufacturing/processing" industries are exempt from Colorado sales/use tax. In this respect,
the company's sale of acetylene used in manufacturing qualifies for this exemption. However,
oxygen and inert gases used in welding are not exempt gases because they do not constitute
"fuel." Additionally, hand-held torches and welding attachments, parts, and related tools are not
exempt from Colorado sales/use tax because they are not considered qualifying "machinery or
machine tools."
19
Recent Rulings and Cases
Illinois - Storage Tank Used to Hold Chemical in Liquid State
Qualifies for Manufacturing Exemption
Private Letter Ruling, ST 12-0002-PLR, Ill. Dept. of Rev. (3/30/12). The
department explains to a chemical company that its chemical storage tank
would qualify for Illinois’ manufacturing machinery and equipment
exemption if it is used primarily (i.e., over 50% of the time) to store
chemical in its liquid state as an integral part of the chemical production
process at its plant. However, storage tanks or other equipment that are
used after production of the chemical by a distributor or transporter in
order to store the product would not qualify for this exemption.
20
Recent Rulings and Cases
Indiana – “Essential” Items Do Not Necessarily Fall Under
Manufacturing Exemption
Letter of Findings No. 04-20120255, Ind. Dept. of Rev. (2/27/13). The department held that an
Indiana steel products manufacturer did not qualify for Indiana’s sales/use tax manufacturing
exemption on certain purchased transformers, filter reactors, reactor coils, harmonic filters, and
bushing replacement, because it failed to show they were directly used in its direct production
process. The department generally explained that state law exempts items and equipment
directly used by the purchaser in the production process provided that such items have an
immediate effect on the article being produced. While the items at issue were arguably
essential to conducting its manufacturing business, the “fact that particular property may be
considered essential to the conduct of the business of manufacturing because its use is
required either by law or by practical necessity does not itself mean that the property has an
immediate effect upon the article being produced.”
21
Recent Rulings and Cases
Indiana - Bleach Manufacturer's Steel & Fiberglass Tanks Fall
Under Manufacturing Exemption
Letter of Findings No. 04-20120532, Ind. Dept. of Rev. (3/27/13). The department held that a
bleach manufacturing company did not owe Indiana use tax on purchased steel tanks and
fiberglass tanks, because the tanks fell under Indiana's manufacturing exemption as directly
used in the direct production of bleach. Regarding the steel tanks, the tanks were used to
continuously circulate sodium hydroxide, and this continuous circulation of sodium hydroxide is
a necessary step in the company's integrated bleach production process. The circulation of
sodium hydroxide occurs after the production process begins and continues during the
integrated process of producing bleach. Regarding the fiberglass tanks, the unfinished bleach is
required to settle for several hours to allow particles to be separated from the remaining bleach.
This settling process occurs during the company's integrated production process. The settling
process has an immediate effect on the bleach and occurs prior to the completion of the bleach
production process. Therefore, the fiberglass tanks were directly used in the company's direct
production of bleach and qualified for Indiana's manufacturing exemption.
22
Recent Rulings and Cases
Indiana - Certain Purchased Equipment & Computer Software
Fall Under Manufacturing Exemption
Letter of Findings No. 04-20120467, Ind. Dept. of Rev. (3/27/13). Regarding a coal company's
purchased equipment, the department held that only equipment directly used to process coal
would fall under Indiana's manufacturing exemption and the company's "integrated production
process" began at the point where the coal was initially sized, manipulated, and sorted at its
"grizzly" which caused a "substantial change" in the form, composition and character of the coal
itself. The equipment which followed continued within the integrated process and were also
entitled to the manufacturing exemption until "Transfer Tower Three," which marked the final
point at which the coal underwent any "substantial change." Equipment and devices used
subsequent to Transfer Tower Three were not entitled to the manufacturing exemption because
the "integrated production process" had concluded and the coal had been altered to its
completed form. The department also held that certain purchased software qualified for the
manufacturing exemption in functioning as "an integral and essential part of the integrated
production process" by which the company controlled and operated its coal processing facility.
23
Recent Rulings and Cases
Indiana - Corn Product Company Qualifies for Manufacturing
Exemption on Purchased Magnets
Letter of Findings No. 04-20120461, Ind. Dept. of Rev. (2/27/13). The department held that an
Indiana company producing dry milled corn product qualified for Indiana's manufacturing
exemption on three of four purchased magnets, because it successfully showed that they were
directly used in its direct production process where the corn had been milled but not yet placed
in storage. Under the facts, these three magnets check the milled corn for metal pieces before
the milled corn was placed in storage, and were components of tubes through which different
milled corn products flowed on the way to conveyors that transported the product to storage. If
metal pieces were found in the milled corn, that batch was returned for further processing. The
fourth magnet was deemed used in the post-production process and thus was not exempt from
state sales/use tax, as it was used when the stored milled corn was removed from storage for
loading into transport trucks.
24
Recent Rulings and Cases
Indiana - Though Crucial to Process, Die Ovens Do Not
Qualify for Manufacturing Exemption
Letter of Finding No. 04-20120362, Ind. Dept. of Rev. (11/28/12). The department held that an
in-state aluminum extrusions producer owed state sales/use tax on its purchased die oven
because, even though the oven is a necessary and crucial part of its manufacturing process
(i.e., without heated dies, the company’s manufacturing processes could not continue), the
oven does not have an immediate effect on the aluminum billets, which are the items used to
produce the aluminum extrusions. That is, even though the die oven is critical to the company’s
process, its use – to heat dies prior to the dies' placement on the company’s presses – is one
step removed from the actual manufacturing process and thus is not directly used in direct
production as required by the manufacturing exemption statute.
25
Recent Rulings and Cases
Indiana - Plastics Manufacturer’s Purchased Acetone
Qualified for Manufacturing Exemption
Letter of Finding No. 04-20120337, Ind. Dept. of Rev. (11/28/12). The department
held that a plastic container/accessory manufacturer did not owe state sales/use
tax on purchased acetone because it successfully showed that its use of the
acetone was sufficiently different from the routine use of cleaning supplies
commonly found and instead was used as an integral part of its various
manufacturing processes. Because it had acquired and directly consumed the
acetone in the direct production of its plastics products, the purchased acetone
qualified for Indiana’s manufacturing exemption.
26
Recent Rulings and Cases
Indiana - Printer Ineligible for Manufacturing Exemption on
Balers/Conveyors & Other Equipment
Letter of Findings No. 04-20110282, Ind. Dept. of Rev. (10/31/12). The department held that
an Indiana printer was ineligible for Indiana’s manufacturing exemption on purchased balers,
conveyors, and related parts because the facts showed that it did not manufacture “paper
product” – only that its paper product was a byproduct of its printing process. Its use of balers
and conveyors, therefore, was used post-production and not in connection with the direct
production process of its printed products. The department likewise denied exemption for the
company’s purchase of equipment used in direct mail/fulfillment services as well as certain
packaging equipment (e.g. a "palletizer," "shrink-wrapping system," "bundling equipment,"
"conveyors and labeling," and "high speed strapping machines"), as this equipment also was
deemed used beyond its printing production process.
27
Recent Rulings and Cases
Indiana - Software and Related Maintenance Agreement Fall
Under Manufacturing Exemption
Letter of Findings No. 04-20120001, Ind. Dept. of Rev. (6/27/12). The department held that an
in-state glass products manufacturer's expenses related to a software maintenance agreement
were not subject to Indiana sales/use tax because the underlying software itself fell under the
manufacturing exemption and thus any updates and patches supplied would also fall under this
exemption. Under the facts, the underlying software was used to digitize production drawings
and digitize information to guide the fabrication of the manufacturer's glass products.
28
Recent Rulings and Cases
Indiana - Computer Software Qualifies for Manufacturing
Exemption; Gas Cylinders are Not Exempt
Supplemental Letter of Findings No. 04-20110214, Ind. Dept. of Rev. (3/28/12).
The department held that a corporation was eligible for Indiana’s manufacturing
exemption on purchased computer software, because the software produces a
computer disc which, in turn, programs machinery and equipment that it uses in its
manufacturing process. Computers that are interconnected with and control other
production machinery or are used to make tapes which control computerized
production machinery are exempt from tax. However, the corporation could not
claim the manufacturing exemption on cylinders it uses to contain gas just prior to
the manufacturing process, because even though they serve a crucial function in its
overall process, these tanks are merely used for containment purposes prior to the
manufacturing process.
29
Recent Rulings and Cases
Iowa - Electricity Generation/Transmission Equipment Do Not
Fall Under Manufacturing Exemption
Document Reference No. 13300004, Iowa Dept. of Rev. (2/27/13). The department held that a
municipal corporation and political subdivision of the State of Minnesota (an electric company)
was subject to state sales/use tax on items and equipment used in the generation and
transmission of electricity, because Iowa's manufacturing exemption specifically excludes such
property from exempt status as "other property that is primarily and directly used in the
production, generation, transmission, or delivery of electricity." The generation and transmission
equipment here was primarily, if not exclusively, used in the generation or transmission of
electricity. Thus, even if the company's purchased equipment was not "operating property," it
was still directly and primarily used in the generation and transmission of electricity and thus
subject to both property tax and state sales/use tax.
30
Recent Rulings and Cases
Iowa - Manufacturing Exemption Does Not Likely Apply to
Live Animals or Certain Lab Supplies
Document Reference No. 12300010, Iowa Dept. of Rev. (4/6/12). Regarding a company that
produces biological medical products for sale at wholesale or eventual retail sale wherein the
biological material that is to be sold at retail is introduced into live animals for cultivation and
development of additional products, the department explains that for purposes of Iowa’s
processing exemption, “it is unlikely that the animals are a part of processing because they are
not part of the product that is sold at retail, nor are they chemicals, solvents, sorbents, or
reagents that are consumed, dissipated or depleted.” The company’s use of beakers, dishes,
and tubing also do not appear to meet the requirements of exempt “processing,” because they
are not integrated with the finished product nor are they chemicals, solvents, sorbents, or
reagents.
31
Recent Rulings and Cases
Kansas - Equipment Used to Light and Cool General Plant
Premises Does Not Qualify for Exemption
Private Letter Ruling No. P-2012-005, Kan. Dept. of Rev. (8/16/12). The department held that
a company's purchase and installation of metal halide lights that are used for interior lighting at
its Kansas manufacturing plant and warehouse, as well as its purchase and installation of fans
used in the same facilities to exhaust interior air, are subject to Kansas sales and use tax.
Additionally, the electricity consumed by these lights and fans is subject to Kansas sales/use
tax. The department explained that while machinery and equipment used as an integral or
essential part of an integrated production operation may qualify for Kansas' manufacturing
exemption, such machinery and equipment does not include machinery or equipment used for
general plant lighting, heating or cooling. Moreover, only electricity consumed by machinery and
equipment actually used to produce tangible personal property is exempt as consumed in
production – the exemption for electricity is not allowed when the electricity is used for heating,
cooling and lighting buildings or business premises.
32
Recent Rulings and Cases
Kansas - Kansas Supreme Court Affirms Integrated Plant Theory
Applies in Manufacturing Exemption Case
In the Matter of the Appeal of LaFarge Midwest/Martin Tractor Co., Inc., Kan. (3/2/12). The
Kansas Supreme Court affirmed a cement manufacturer’s claim for sales/use tax exemption on
repair/replacement parts for loaders and haulers as exempt machinery and equipment.
Essentially, the department and manufacturer disagreed on where the manufacturer’s limestone
excavation and manufacturing facilities, respectively, began and ended. The department
contended that the excavation operations were not a “manufacturing facility” and that the
loaders/haulers were not used in the manufacturing preparation activity, while the manufacturer
claimed that the loaders/haulers were used in the manufacturing process as part of an
integrated production operation.
(Continued on next slide)
33
Recent Rulings and Cases
In the Matter of the Appeal of LaFarge Midwest/Martin Tractor Co., Inc., (Continued)
The Court explained that, by statutory definition, the tax-exempt integrated production
operations of a manufacturing/processing plant or facility include more than the production line
operations where the actual transformation or processing of tangible personal property occurs,
and that the physical location of a manufacturing/processing plant or facility can encompass
more area than the production line assemblage of machinery and equipment. Integrated
production operations also include preproduction operations to handle, store, and treat raw
materials. In this respect, the manufacturing/processing “plant” or “facility” means the entire
single, fixed location owned by the manufacturing or processing business that can consist of
one or more structures or buildings in a contiguous area where integrated production operations
are conducted to manufacture/process tangible personal property. Accordingly, because the
facts here showed that the quarry and cement manufacturing operations were conducted on
adjacent property owned by the taxpayer, the integrated plant theory applied and the
manufacturer successfully showed that the loaders and haulers were used to fulfill essential
functions of its integrated cement production operation.
34
Recent Rulings and Cases
Kansas - Oil & Gas Companies Can’t Claim Manufacturing
Exemption on M&E that Fails to “Extract”
In the Matter of the Appeals of Edmiston Oil Company, Inc., Kan. Ct. App. (1/13/12). The
Kansas Court of Appeals affirmed that certain oil and gas producers could not claim a Kansas
manufacturing exemption on purchased “down-hole” and surface pumping machinery and
equipment because it was not used as an “integral part of integrated production operations by a
processing plant or facility operated by a processing business” where extracted oil or gas was
then treated or prepared before its transmission to a refinery or wholesale distribution. The
Court explained that, in the case of oil and gas wells, this exemption requires “extraction” that
does not stop at the bottom of the well bore as was the case here, but must also include
withdrawing the fluids to the surface. That is, to remove oil and gas from the earth, wells must
be drilled to extract the oil and gas from the rock and then deliver it to the surface where it can
be sold. The taxpayers unsuccessfully argued that the exemption applied because movement
or migration of fluids occurred in the sub-surface rock formation with such equipment; however,
those fluids were not extracted from the earth until they reached the surface.
35
Recent Rulings and Cases
Kansas - Manufacturer's Purchased Pallets & Shrink Wrap
Qualify as Exempt Resale/Packaging
Opinion Letter O-2011-011, Kan. Dept. of Rev. (11/17/11). A department opinion letter
explains that a pet food manufacturer is not liable for Kansas sales/use tax on purchased
pallets and shrink wrap because they are considered an ingredient or component of the
manufactured product and therefore qualify for resale exemption. Under the facts, the
wholesale or retail buyer that unwraps the shrink-wrapped pet food bags for sale or distribution
has no obligation whatsoever to return the pallets or shrink wrap to the manufacturer or to
anyone else for reuse. Because of this, the pallets are treated as an ingredient or component of
the manufactured products. Accordingly, the manufacturer can claim a resale exemption when
it buys the shrink wrap and pallets or when it buys wood that it fabricates into the pallets.
36
Recent Rulings and Cases
Kansas — Lease of pallets to manufacturers exempt
Kansas Private Letter Ruling P-2013-002, (8/14/2013) The Kansas Department of Revenue
has ruled that leases of pallets to manufacturers are non-taxable, provided that the pallets are
used for exempt purposes for at least 50% of the time, and any associated charges are also
exempt and not viewed as separate receipts from a new retail sale. The taxpayer leases pallets
to manufacturers rather than selling them outright and retains title at all times, charging the
lessee a flat issue fee for each pallet plus daily lease charges, as well as a transfer fee when
pallets are delivered to distributors. Once the pallet is delivered to the distributor, the
manufacturer/lessee has no further contractual duties to the taxpayer, no charges are billed to
the lessee, and the distributor is only billed if the pallet is lost or damaged beyond repair.
Generally, in Kansas, “returnable” pallets are taxable, and “nonreturnable” pallets are exempt,
but Kan. Stat. Ann. § 79-3606(kk)(3)(B) provides a manufacturing and machinery exemption for
a manufacturer's purchases of equipment used to transport or handle property at any point in
the manufacturing process, through warehousing or distribution, which the Department has
adopted to mean that returnable pallets qualify as exempt as long as they are used for exempt
purposes for more than 50% of the time.
37
Recent Rulings and Cases
Kentucky - Manufacturer Fails to Qualify for Exemption with a
'Substance Over Form' Analysis
Ohio Valley Aluminum Co. LLC v. Department, Ky. Bd. of Tax. App. (5/22/12). The Kentucky
Board of Tax Appeals denied an aluminum billet manufacturer's request for Kentucky's partial
sales/use tax exemption on the consumption of "energy or energy-producing fuels used in the
course of manufacturing, processing, mining or refining" – holding that the company must
include in its calculation all costs associated with the production of its aluminum billets at its
plant facility, including the cost of scrap aluminum purchased by its wholly owned subsidiary for
use at the plant. The manufacturer unsuccessfully attempted to exclude the cost of the
raw/scrap aluminum in its cost of production calculation, reasoning that it had now restructured
and created a wholly-owned separate subsidiary to purchase this material and upon which it
now merely performs services. The Board concluded that while the manufacturer may have
allocated the cost of the raw materials to the subsidiary on paper, it cannot allocate the cost of
the raw aluminum to the subsidiary for purposes of calculating the cost of production for the
statutory energy exemption when there is only one plant facility and operation.
38
Recent Rulings and Cases
Louisiana - State High Ct. Reverses Ruling re: Limestone
Purchases & Manufacturing Exclusion
Department v. Nelson Industrial Steam Co., La. (3/8/13). The Louisiana Supreme Court has
reversed the Louisiana Court of Appeals 2012 ruling, which previously held summary judgment
for the department that an electricity/steam company's limestone purchases were not exempt
from Louisiana sales/use tax under the “further processing exclusion.” The Louisiana Court of
Appeal had reasoned that the purpose of the limestone was to comply with federal regulations
and allow the company to generate electricity for sale, rather than for further processing. The
Louisiana Supreme Court has now vacated this previous summary judgment ruling, explaining
that “genuine issues of material fact exist.” Accordingly, the case has been remanded to the trial
court for further proceedings pursuant to this order.
39
Recent Rulings and Cases
Massachusetts - Wind Turbine/Equipment Providing
Electricity to Manufacturing Facility is Exempt
Letter Ruling 12-7, Mass. Dept. of Rev. (7/2/12). The department held that because i) all of a
semiconductor manufacturer's electricity generated by its wind project will be used solely to
provide power to its manufacturing facility, and ii) it will not otherwise sell any of the electricity to
any third party, the manufacturer's purchase of a wind turbine is exempt from Massachusetts
sales/use tax as machinery that is used directly and exclusively in furnishing power to an
industrial manufacturing plant. Additionally, purchases of materials, tools, fuel, and machinery
that become part of the electricity furnishing apparatus (i.e., the wind turbine) fall under this
exemption. Accordingly, the manufacturer's contractor may give "Form ST-12" to its vendor
when purchasing these items in order to claim the exemption. However, purchases of materials,
tools, fuels and machinery that do not become part of the electricity furnishing apparatus, or
that are consumed and used before the wind project is actually generating and furnishing
electricity to the facility are subject to Massachusetts sales/use tax.
40
Recent Rulings and Cases
Mississippi - New Law Clarifies Application of Manufacturing
Exemption to Scrap Metal Recyclers
H.B. 1680, signed by gov. 3/27/13. Effective from and after July 1, 2013, new law clarifies that
"to manufacture" and "manufacturing" for purposes of Mississippi's sales/use tax manufacturing
exemption include activities of scrap metal recyclers that primarily convert material into a more
useful product such as a specification-grade commodity, by processing the metal into separate
types, removing waste material, and/or cutting, chipping, sorting, sizing or shaping the material
into a usable product for sale. These terms do not include activities of scrap metal recyclers that
involve the gathering of recycled material and flattening, sorting, bundling or performing some
other similar function solely to allow ease of transportation or storage and not to produce
specification-grade commodities and/or the removal of parts for resale.
41
Recent Rulings and Cases
Missouri - Compressors Used in Services are Nontaxable;
Gas Compression is "Manufacturing"
Letter Ruling No. LR 7210, Mo. Dept. of Rev. (2/19/13). The department held that an out-of-
state business renting natural gas compressors with an operator to natural gas producers is not
subject to state sales/use tax on these "rentals," because the company is in fact providing the
nontaxable service of removing impurities and compressing the well gas head to discharge
through gas lines for commercial and residential use, rather than merely renting tangible
personal property. This compression service is performed by the company's personnel
operating the compressors for gas producers; the tangible compressors are simply a necessary
part of the service. Additionally, the department held that the company's purchases of natural
gas compressors, parts, and oil filters to perform these nontaxable services falls under
Missouri's sales/use tax manufacturing exemption, because the compressor is used directly in
the production of natural gas – i.e., in removing impurities and compressing the non-marketable
natural gas to discharge through gas lines for marketable commercial and residential use.
42
Recent Rulings and Cases
Missouri - DOR Says Software Sold to Manufacturers is Not
Exempt, Unless Delivered Electronically
Letter Ruling No. 7201, Mo. Dept. of Rev. (12/19/12). An out-of-state software developer
making sales to Missouri customers of software programs which assist purchasers in making
their manufacturing and administration processes more efficient do not qualify for Missouri's
manufacturing exemption, because this software is not directly used in the manufacturing
process since the software programs do not operate manufacturing equipment and are not
used in producing any product. The department does note that the company's sales of software
delivered electronically through the Internet are not subject to state sales/use tax, while its sales
of software delivered by tangible medium are subject to state sales/use tax. Additionally, the
company's sales of mandatory software maintenance and support delivered electronically
through the Internet are not subject to state sales/use tax if delivery of the initial software
occurred electronically through the Internet. However, the company's sales of mandatory
software and support delivered electronically through the Internet are subject to state sales/use
tax if delivery of the initial software occurred via tangible medium.
43
Recent Rulings and Cases
Missouri - New/Replacement Two-Way Radios Used in Amino
Acid Production are Exempt
Letter Ruling No. 7158, Mo. Dept. of Rev. (10/1/12). The department held that a
company’s purchases of new and replacement two-way radios used during the
production of amino acids qualified for Missouri’s manufacturing sales/use tax
exemption as machinery, equipment, and materials used/consumed in the
manufacturing, processing, compounding, or producing of any product, or
used/consumed in the processing of recovered materials. Under the facts, the
company had used the two-way radios to immediately transfer information in the
production process of amino acids and during the reclamation of waste materials.
44
Recent Rulings and Cases
New Mexico - Dep't Issues Proposed Changes to Rules
Involving Manufacturing Exemption
Proposed Repeal NMAC 3.2.204.10; Proposed Amended NMAC 3.2.204.13 - 3.2.204.16, 3.2.204.18;
Proposed New NMAC 3.2.204.19 - 3.2.204.22, N.M. Tax. & Rev. Dept. (2/28/13). The department has issued
proposed changes to administrative rules involving manufacturing-related exemptions under New Mexico's
gross receipts and compensating use tax. Among various other changes, the proposals provide that, beginning
January 1, 2013, receipts from selling tangible personal property to a manufacturer are deductible if the
property is consumed in the manufacturing process. Such property would include, but would not be limited to: i)
lubricants; ii) electricity; iii) water; iv) fuel/energy; v) chemicals used to produce reactions in the manufacturing
process, even though the chemicals do not become part of the manufactured product; vi) materials used to
prepare the manufactured product for sale, shipment or use; vii) cleaning solvents and materials used to keep
the manufacturing equipment sanitary and functional; and viii) light bulbs or filaments for the facility's lighting
system; replaceable air filters, seals, gaskets, hoses and similar items for any air purification system or heating
and cooling system; and similar items necessary to keep the manufacturing equipment operational. Tangible
personal property used in administrative, personnel, security, inventory control, record keeping, ordering, billing
or similar functions would not be considered consumed in the manufacturing process and would not be
deductible.
45
Recent Rulings and Cases
Pennsylvania - State High Court Affirms Manufacturer's
Pallets are Exempt Wrapping Supplies
Proctor & Gamble Paper Products Co. v. Commonwealth, Pa. (10/16/12). The Pennsylvania
Supreme Court has affirmed, without opinion, that an in-state manufacturer did not owe state
sales/use tax on its rental and use of wooden pallets, which aid in its transport of finished paper
products to its clients, because the pallets qualified for Pennsylvania's wrapping supply
exemption and did not constitute taxable returnable containers. The earlier commonwealth
court had held that the wooden pallets by themselves – apart from the slip sheet, corner posts
and stretch wrap – were not "containers." Alone, the wooden pallets were only part of the
"containers," i.e., the flooring. Accordingly, the commonwealth court had held that the pallets
qualified for the wrapping supply exemption.
46
Recent Rulings and Cases
Tennessee - Equipment for EPA Water Pollution Control
Qualifies for Manufacturing Exemption
Letter Ruling No. 13-06, Tenn. Dept. of Rev. (2/25/13).The department held that a
company partnering with municipalities to design, construct, and manage solid
waste landfills in Tennessee qualified for Tennessee's industrial machinery
exemption on purchased materials and/or equipment to construct and/or operate a
solid waste disposal landfill that were used primarily for water pollution control as
required by the United States Environmental Protection Agency's rules and
regulations promulgated under the Clean Water Act. However, no other materials
or equipment purchased by the company to construct and/or operate a solid waste
disposal landfill would qualify as exempt industrial machinery.
47
Recent Rulings and Cases
Tennessee - Purchased & Installed Freezer Rack System
Qualifies for Manufacturing Exemption
Letter Ruling No. 13-02, Tenn. Dept. of Rev. (1/9/13). A food products producer qualified for
Tennessee's industrial machinery exemption on its freezer rack system because the freezing
and maintenance of its manufactured food products in a frozen state was deemed part of the
"fabrication or processing" of those products. The rack system was installed in the freezer area
of the company's facility, bolted to the freezer area floor, and was not used in any other part of
the facility. The department reasoned that the facts showed that these freezer racks: i) were
properly considered "machinery, apparatus, and/or equipment, or their associated parts,
appurtenances or accessories," ii) were necessary to the fabrication or processing of the
products sold by the manufacturer, and iii) were primarily for the fabrication of the products sold
by the manufacturer. The maintenance of the food products in a frozen state – and thus the
manufacturing process – continued until the products were removed from the freezer racks. In
this respect, use of the freezer racks could not be characterized as being for storage, as the
racks were used at least 90% of the time during the manufacturing process.
48
Recent Rulings and Cases
Tennessee - Reusable Specialty Containers Qualify for
Machinery/Manufacturing Exemption
Letter Ruling No. 12-16, Tenn. Dept. of Rev. (8/2/12). The department
held that a manufacturer could claim Tennessee’s industrial machinery
exemption on certain reusable specialty containers, because the
containers were never used for storing raw materials or for moving raw
materials around the storage facility but solely to protect parts from
damage during transportation from storage to the manufacturer’s
production and assembly line. Under the facts, each assembly part was
transported in a container that had been specifically designed for that part.
49
Recent Rulings and Cases
Texas - Refinery Qualifies for Manufacturing Exemption on
Purchased Component Parts/Valves
Hearing No. 103,679, Tex. Comptroller of Public Accounts. (12/1/12). Regarding a refinery’s
purchase of various component parts of pumps used at its alumina refinery and valves for its
rod mill, the department agreed with an administrative law judge that such purchases qualified
as exempt parts for manufacturing equipment. More specifically, the department held that
purchased digester feed pumps and lime injection pumps were exempt because they directly
supplied the digester vessels, which are qualified exempt manufacturing equipment under
statute. Additionally, purchased calciner feed pumps were exempt because they supplied the
gas suspension calciner, which is exempt manufacturing equipment under statute. Lastly, the
purchased valves were exempt, because they were not part of a non-manufacturing pump but
instead were part of the computerized system for controlling the density of the product stream in
the rod mill.
50
Recent Rulings and Cases
Texas - Oil & Gas Company Fails to Show Purchases
Qualified for Manufacturing Exemption
Hearing No. 100,249, Tex. Comptroller of Public Accounts. (10/26/12). Regarding certain
purchases related to compressor equipment made by an Oklahoma-based oil and gas company
with operations in Texas, the department held that these purchases failed to qualify for Texas‘
manufacturing exemption because the company did not provide adequate documentation to
show how the compressors were used in its operations – i.e., whether they dehydrated the
natural gas or increased its pressure. The company claimed that its purchases related to the
compressors qualified for the exemption on the grounds that i) they directly caused a physical
change to the natural gas by dehydrating it, and ii) they directly caused a physical change to the
natural gas by increasing the pressure to improve its marketability.
51
Recent Rulings and Cases
Virginia - Execution System/Software and Wireless Gun Fail
to Qualify for Manufacturing Exemption
Public Document No. 12-118, Va. Dept. of Tax. (7/23/12). The department held
that a paper towel/tissue products manufacturer could not claim Virginia's
manufacturing exemption on its manufacturing execution system (MES) software
because the equipment/software did not ensure the integrity of the products being
produced and thus was not directly used in production line quality control, or in a
production process. A wireless gun system used in internal tracking and inventory
control was also deemed taxable because it was not an immediate part of the
company's production process but merely used in a taxable administrative activity.
52
Recent Rulings and Cases
Washington - Prototypes & Related Materials Don't Qualify for
Manufacturing Exemption
Tax Determination No. 11-0052, Wash. Dept. of Rev. (2/27/13). The department held that a
Washington company developing a complex medical device did not qualify for the state
sales/use tax manufacturing machinery & equipment (M&E) exemption on the materials it used
to build the prototypes it had used for product development, because even though the
prototypes may have been "integral" in the development of a new product, the ingredients and
components of prototypes do not qualify as M&E under the exemption statute and/or its
underlying legislative intent. The department also held that the prototypes that the company had
developed and used for testing did not qualify for the M&E exemption, as the system did not
qualify as a tool that produced another item of tangible property. That is, merely testing and
improving one or more of the prototype components using the rest of the system did not qualify
as "testing another item of tangible personal property" for exemption purposes.
53
Audits
54
Audit Preparation
Initial Contact and Scheduling
– Appointments usually should be 3 to 6 months out
from first contact.
– Request from the auditor an audit plan and
summary, preferably with a timeline as well.
– Request all contact information of the auditor
including his supervisor and manager.
– Make sure a taxpayer bill of rights is delivered
and discussed
55
Audit Preparation
Points of discussion with the auditor – Clearly define the scope of the audit! - No fishing
expeditions.
– Audit period – End date should allow time for data
preparation.
– Waivers – Be strict on signing waivers when it is obvious
that delays are the result of auditor lack of preparation and
diligence.
– Keep detailed audit and email logs to track the audit
timeline in case you need to push back on signing waivers.
56
Audit Preparation
Points of discussion (continued)
– Consider the benefits and drawbacks of a
managed audit arrangement.
– Discuss plant visits - sometimes it is beneficial to
do before the audit if the auditor is unfamiliar with
your processes, otherwise it may be better to wait
until there are specific items to look at.
Prepare the plant tour guide for what to say or not…..
57
Audit Preparation
Points of discussion (continued)
– Audit methodology – Sample/No Sample, Block,
detail…If you know your data (and you should),
you will have the upper hand in these choices. Go
to the audit sampling class.
– Chart of Accounts – discuss with auditor, only
provide after the data is pulled and reconciled.
– Systems – if you have multiple systems and are
sampling, be careful to pull to samples if needed.
58
Audit Preparation
Data Preparation
– This will be specific to your system.
– Check for reversed documents.
– Remove documents with credit/debit offsets.
– Be careful only to pull that particular state’s data.
– If you are working the audit with an electronic file,
try to make sure you and the auditor work in the
same file.
59
Auditor Fieldwork
Discuss your tax auditor policy with the
auditor
– If you don’t have one, develop one
– Work hours
– Dress code
– Entry and exit from the building
– Do not allow the auditor to wander through the
department asking questions, strictly control who
disseminates information to the auditor
60
Audit Preliminary Listings
Establish whether or not the auditor will be
including overpayments, if not prepare any
overpayments to net into the audit.
For any listings that need to be looked at in
the plant, prepare a schedule of questions for
the plant as soon as possible and if possible
rehearse with plant before auditor gets there.
61
Final Assessment
Clearly communicate disagreed items.
Verify the final audit work papers agree with
the assessment summary.
For sample audits, review projection
methodology again.
Make sure you understand the appeal
process.
62
Post Audit
Make sure you make needed changes to
your system based on the audit results
– System updates refinements, and enhancements
– Process improvement
– Training
63