Revenue Finds Crushing Limestone a Change in Product; but Denies Exemption to Equipment Used in Taxpayer's Blending Operation

The taxpayer operated a stone crusher at his business location [] during the audit year of 2007. The crusher processed "raw" limestone delivered (purchased) from a nearby quarry (unrelated entity) to produce various sized crushed stone materials that was then sold to customers. The actual process consisted of large pieces of limestone (up to 3ft x 3ft x 3ft in size) being placed into the hopper which was the starting point of the crushing process. From there, the stone was then crushed into much smaller crushed stone products which could then be sold to customers for various economic uses. Depending on the settings for a particular run, the stone could even be reduced to lime dust. Once the stone was crushed it was then conveyed across one of the various conveyor belts and accumulated into piles at the end of the conveyor. For some of the products, this was the final step in the manufacturing process and from this point the finished product was moved by a loader to its respective stockpile to be available for sale to customers. However, some of the products required a further processing step after coming off the conveyor. This process, referred to as blending, was required in order for the final product to meet certain specifications as required by some customer orders. The blending process involved the use of a loader to take the applicable materials piled at the end of the conveyors and turn/mix it until the desired "consistency" was achieved. The blended product was then tested through labs to ensure compliance with the required specifications. If the testing showed that the required specifications had not been met, then further blending and restating was required. Once the testing confirmed the product met the required specifications the product was then considered a finished product and stockpiled and made available for sale to the customer.

Taxpayer is protesting the assessment of tax on transactions relating to a crusher and one or more loaders used by Taxpayer in its operations. Taxpayer is also protesting equipment, tools and supplies relating to the crusher and loader(s). Taxpayer argues that the crusher and the items relating to the crusher are 100 percent exempt because they are subject to the industrial production exemptions. Taxpayer states that the loaders it is protesting are used in both exempt and non-exempt activities. Taxpayer states that the loader is being used in exempt fashion when it is "blending" aggregate and when it is being used to maintain the conveyor belts (see Taxpayer's above description of its protest), which add up to thirty-percent of its use. Therefore, Taxpayer requests thirty-percent exemption on the loader(s) and related equipment, tools and supplies.

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The process of producing Taxpayer's products is not complex. The limestone slabs are either broken up or crushed. Some of the products are tested to make sure they are appropriate for customer use. No other components are added to the single source products. However, the limestone slab clearly undergoes a physical change that results in products substantially different in character from the raw material and from each other. According to the Department's audit, Taxpayer's products are sold in the marketplace. Taxpayer has transformed overburden limestone slab with little or no value into particular stand-alone commodities of value. Weighing these factors, the Department is prepared to agree that Taxpayer's process qualified for the industrial production exemptions.

However, the industrial exemption statutes, as explained by 45 IAC 2.2-5-8 allow the taxpayer to purchase machinery, tools, and equipment without payment of the gross retail tax when the equipment is used directly in the direct production of tangible personal property. 45 IAC 2.2-5-8(a) specifies that the exemption is limited to that equipment "used by the purchaser in direct production." 45 IAC 2.2-5-8(c) specifies that "directly used" means that the equipment has "an immediate effect on the article being produced."

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45 IAC 2.2-5-8(d) excludes pre-production and post-production activities by providing that "'direct use in the production process' begins at the point of first operation or activity constituting part of the integrated production process and ends at the point that the production has altered the item to its complete form."

Therefore, based on all of the above and on Taxpayer's description of its process, Taxpayer's exempt process begins with the placement of materials into the crusher and ends with the various processed products that come out of the crusher. Therefore, items relating to the crusher qualify for exemption.

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The Department cannot agree that the loaders and related items are exempt. As described by Taxpayer, the "blending" process merely mixes already formed aggregate. This is a post-production activity as the aggregate has been formed. Neither the loaders nor the conveyor belts are exempt; nor are any items related to the loaders and/or conveyor belts exempt.

http://www.in.gov/legislative/iac/20120627-IR-045120351NRA.xml.html