Taxpayer is a business which has one Indiana location and which manufactures plastic containers and accessories. Taxpayer makes plastic containers primarily for the food industry. Taxpayer provides design, engineering, prototyping, packaging, and printing services.
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Taxpayer prints both designs and text on its plastic containers. Taxpayer prints the designs and words by means of an offset printing process in which the inked design is transferred from a printing plate to a "rubber blanket" and then to the printed surface. According to Taxpayer's representative, the "rubber blanket" is used because it most effectively prints irregular, plastic surfaces.
The Department's audit report explains further:
If the [rubber] blankets are not cleaned regularly the print on the container is not clear. The [T]axpayer stops the printer, removes the printing blanket then manually cleans the blanket with a pad or b[r]ush and acetone then places the blanket back into printer. This cleaning activity takes place on the line and production is stopped while they clean the blanket. The [T]axpayer states it takes about 5 minutes to clean a printing blanket on line and return to the machine for production. The [T]axpayer believes that the acetone, pads, and brushes to clean the blankets along with the gloves to handle the acetone are exempt. This acetone was purchased from Sherwin-Williams and sales tax was paid at the time of purchase, no credit was given in the [audit] sample for the sales tax paid to [] this vendor.
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The issue is whether the acetone consumed in cleaning Taxpayer's printing blankets "has an immediate effect on the article produced" and if the acetone "is an essential and integral part of an integrated process which produces tangible personal property." 45 IAC 2.2-5-12(d)(1). In arriving at a decision, it should be noted that 45 IAC 2.2-5-10(g) states in part:
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, of itself, mean that the property "acts upon and has an immediate effect on the tangible personal property being processed or refined". Instead, in addition to being essential for one of the above reasons, the property must also be an integral part of an integrated process which produces tangible personal property.
The Department agrees that use of the acetone to clean the printing blankets is "essential to the conduct of the manufacturing," but whether or not the acetone is "necessary" does not resolve the issue of whether or not the acetone is subject to tax. As stated in 45 IAC 2.2-5-10(g), in order to determine that the acetone is exempt "the property must also be an integral part of an integrated process which produces tangible personal property."
Taxpayer argues that its use of the acetone in its printing process is identical to the use of the acetone in Guardian Automotive. In that case, the petitioner processed the paint masks "in synchronization with the manufacturing process. Guardian, 811 N.E.2d at 981. Taxpayer explains that "[d]uring the printing process it is necessary to clean the printing blankets from time to time depending on several process factors."
Starting with the premise that all tax exemption provisions, is strictly construed against exemption from the tax, Tri-States, 706 N.E.2d at 283, but that an exemption must "not be construed so narrowly that it does not give effect to legislative intent," General Motors, 578 N.E.2d at 404, the Department is prepared to agree that Taxpayer has sufficiently established that the acetone is an "integral part of an integrated process which produces tangible personal property." 45 IAC 2.2-5-10(g). See also Letter of Findings 05-0321 (December 28, 2006). In Taxpayer's case, the use of the acetone is sufficiently distinguished from the routine use of cleaning supplies commonly found and used during various manufacturing processes to permit a conclusion that the acetone falls under the exemption set out at IC 6-2.5-5-5.1(b); the acetone is acquired and directly consumed in the direct production of Taxpayer's plastic products.
