Taxpayer's business consists of
taking slag from a steel mill, cooling the slag, and removing any iron from the
slag. Taxpayer returns the steel to the steel mill. With regard to the
remaining slag, Taxpayer sorts and sells the materials resulting from three
slag pits for various purposes. For a fourth slag pit, the steel mill retains
title to the slag and eventually sells the slag.
…
In Taxpayer's case, the application
of water to the slag begins a process of changing the molecular structure of
the slag, the end result of which is removal of certain chemicals and metals
from the slag that would render the slag (absent the active process)
commercially unusable. The cooling of the product is an active first step in
Taxpayer's production of finished aggregate products, similar to the active
step of adding ethylene to bananas in order to promote ripening in Indianapolis
Fruit. The application of water to the slag–an agent that promotes and
accelerates the transformation of slag from a molten liquid to a
commercially-usable solid product–is the first step of Taxpayer's process. The
issue is what remaining processes constitute manufacturing.
Taxpayer's process then requires
Taxpayer to transport the slag to a stockpile area. In the stockpiling area,
the slag is permitted to further cool and is manipulated to cool the slag, to
allow chemical changes and to permit further metal removal. The stockpiled slag
is loaded onto conveyors to crushing and screening equipment. The Department
did not assess items used at the crushing and sorting stage.
Taxpayer has provided sufficient
information to conclude that its process, up to and including crushing and
screening the slag, constituted an integrated process of transforming personal
property within the ordinary course of Taxpayer's business.
...
The slag is not in its final form
until enough of certain basic (high pH) chemicals have been removed from the
slag. Thus, under 45 IAC 2.2-5-8(d), Taxpayer's production process
includes the leaching of the crushed slag. The leaching of slag is the last step
in Taxpayer's production process of "air-cooled" slag.
Taxpayer also has a second line of
processes. Largely separate from its production of "air-cooled slag,"
Taxpayer processes "granulated slag." Taxpayer uses slag from one of
the steel mill's slag pits for the creation and production of "granulated
slag." The "granulated slag" is generally used in cement mixes.
The start of Taxpayer's process of
creating "granulated slag" is the addition of water, which is not
materially different than its production of the other slag. However, because of
the extra water and pressure that is required to be used in order to create
"granulated slag," Taxpayer must have excess water drained prior to
further transport. Once the "granulated slag" is sufficiently dry,
the slag is then moved to a separate stockpile for further removal of
impurities. Once the "granulated slag" has achieved the proper
chemical composition, the slag is delivered to the steel mill's customers. At
all times until sale of the slag to the end customer, the steel mill retains
title to the "granulated slag."
…
In this case, Taxpayer has
demonstrated that its process changes the slag from a molten material to a
granular solid material usable in cement and other applications. This end
product is "substantially different" than the slag acquired by
Taxpayer. The steel mill from whom the slag is acquired sells the
"granulated slag." Thus, Taxpayer has established that it is an
"industrial processor" of the steel mill's slag pursuant to IC §
6-2.5-4-2(c). Further, Taxpayer has established that the "integrated
series of operations" begins when the slag is cooled with water in the
steel mill's pits and ends when the slag is rendered commercially usable by the
steel mill's customers.
…
The Bulldozer is used at an
intermediate stage of the process, after the initial application of water that
begins the process and stockpiling but before crushing and screening of the
slag. The Bulldozer also assists in metal removal necessary to produce the
final, usable product. Further, the blending and manipulation of slag assists
in the crushing and sorting portions of Taxpayer's process.
Accordingly, with regard to the
Bulldozer, Taxpayer has provided sufficient information that the Bulldozer is
used after the point where production begins but before production ends.
…
Taxpayer states that the skid steer
loader is "used in and around the slag separator equipment to clean
buildup of material and to allow processing to carry on continuously."
Taxpayer explains that the skid steer loader prevents buildup of material
around Taxpayer's crushing and screening equipment. If excess materials build
up, the crushing and screening equipment would break down and/or present
potential safety issues.
With regard to this item, Taxpayer
has not provided sufficient information to conclude that the skid steer loader
is used to manipulate, change, or otherwise transport slag during the
production process. In other words, the skid steer loader does not have a
direct effect on the slag.
…
Taxpayer explains that it uses WA500
loaders and bucket scales … for multiple purposes in its operations. For one
thing, the loaders are used to bale slag "after it has moved from the
crushing and screening equipment." The baling of slag is done in order to
prevent larger pieces of slag from settling to the bottom of piles and also to
promote leaching of the slag. The baling also prevents commingling of different
slag varieties. Further, the balers are used to weigh slag for customers'
requirements.
With regard to the WA500 loaders,
the baling serves the purpose of enhancing the leaching process. The leaching
of slag is a necessary step in producing the end product. Thus, the baling
process during the leaching process and prior to sale is part of Taxpayer's
"integrated process which produces tangible personal property." To
the extent the WA500 loaders are used in the baling process, Taxpayer uses the
WA500 loaders in production and is sustained to the extent of that usage.
However, the portion of Taxpayer's
use of the WA500 loaders for loading slag for sale after the slag has reached
its final, marketable form is not exempt. Thus, Taxpayer's use of the WA500
loaders in the loading and weighing process is denied.
…
In Taxpayer's case, proper roadways
are necessary for Taxpayer's production process. However, the roadways do not
have an "immediate effect" on the slag. Taxpayer's grader, water
truck, and water wagon serve a necessary maintenance function; however, they
are not part of the "integrated process" of producing slag, and thus
Taxpayer's protest is denied on these items.
…
With regard to the water truck and
water wagon, Taxpayer also has asserted that these items qualify for exemption
under IC § 6-2.5-5-30.
…
In this case, Taxpayer is engaged in
manufacturing. Taxpayer's operations produce particulate matter which requires
Taxpayer to control the release thereof under state and federal environmental
regulations and standards. Taxpayer has provided information related to state
enforcement of these regulations and standards for Taxpayer's operations.
However, Taxpayer has not established that the water truck and water wagon are
predominantly used for "the purpose of complying with any state, local, or
federal environmental quality statutes, regulations, or standards." Thus,
Taxpayer's protest is denied with regard to its exemption arguments under IC §
6-2.5-5-30.
…
Taxpayer states its purchases of
pick-up trucks and yard trucks should be exempt as directly used in the direct
production of slag. Taxpayer argues that it uses the trucks to carry supplies, equipment,
and repair and replacement parts in order to avoid or minimize manufacturing
interruptions.
With regard to these vehicles, 45 IAC 2.2-5-8(c) provides that property for which
the exemption applies must "have an immediate effect on the article being
produced." Notwithstanding the fact that the trucks have a vital role in
ensuring Taxpayer's efficient operations, the trucks themselves do not
"have an immediate effect on" the slag. As such, the trucks are not
exempt from use tax under IC § 6-2.5-5-3, and thus Taxpayer's protest is denied
on these items.
…
Taxpayer explains that it uses Mack
tractors, side-dump-trailers, and a semi-tractor trailer to transport
in-process "granulated slag" from the steel mill's holding bins to
Taxpayer's separator facilities. These items are referenced by Taxpayer only in
Taxpayer's discussion of the "granulated slag" process.
…Taxpayer has established that these
items are directly used in Taxpayer's process of industrial processing. Under 45 IAC 2.2-5-10(f)(3), "Transportation
equipment used to transport work in process or semi-finished material to or
from storage is not subject to tax if such equipment is used to transport
work-in-process or semi-finished materials within the production process."
These items are used to transport slag during the production process. Thus, the
items qualify as "transportation equipment used to transport work in
process" within the meaning of 45 IAC 2.2-5-10(f)(3).
…
Taxpayer states that it purchases
repair and replacement parts for its equipment. Taxpayer argues that these
parts should be exempt as being used in direct production because it uses the
parts on exempt equipment. Under 45 IAC 2.2-5-8 (h)(2), "Replacement parts,
used to replace worn, broken, inoperative, or missing parts on exempt machinery
and equipment, are exempt from tax." See also 45 IAC 2.2-5-10(h)(2). Taxpayer has not provided a
specific breakdown of parts and their use on potentially exempt equipment.
However, the Department finds that Taxpayer has provided sufficient information
to conclude that a supplemental audit is justified. Taxpayer shall provide a
listing of the parts and the equipment on which the parts are used. Taxpayer
shall be permitted an exemption for each part based on the equipment's exempt
use. For instance, if equipment is used ninety percent of the time for an
exempt function, the replacement parts for that equipment are ninety percent
exempt.
