Friday, July 18, 2014

Revenue Finds Purge Materials are Integral Part of Taxpayer's Production Process

Excerpts of Revenue's Determination follow:

Taxpayer is a manufacturer with operations in Indiana and other states. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not properly reported its sales and use taxes for the tax years 2010, 2011, and 2012. Therefore, the Department issued proposed assessments for use tax and interest for those years.

Taxpayer protests the imposition of use tax on its purchases of "purge materials" during the tax years 2010-12. Initially, Taxpayer had also protested its purchases of two other categories of items, but subsequently withdrew its protests on those two categories. The Department considered the purge materials to be consumed in maintenance activities and therefore subject to sales and use tax. Taxpayer protests that the purge material is not like normal maintenance materials because it is required to assure that the next parts made on the particular machines are not defective.

The Indiana Tax Court has addressed this situation in Guardian Automotive Trim, Inc. v. Ind. Dep't of State Revenue, 811 N.E.2d 979, 984-85 (Ind. Tax Ct. 2004), when it stated:

The evidence in this case shows that Guardian's production process begins with the melting of the plastic pellets, and ends when the completed automotive trim parts have been packaged for shipment to Guardian's customers. See IND. ADMIN. CODE tit. 45, r. 2.2–5–8(d) (1992 & 1996) (stating that production "begins at the point of the 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 completed form, including packaging, if required" (emphasis added)). It is indisputable that the painting of the molded plastic parts is an integral part of Guardian's manufacture of the automotive trim parts: it is part of a continuous process by which the plastic is placed in its finished form as automotive trim components, ready for delivery to Guardian's customers. Accordingly, the masks–which are used to paint the plastic parts–are exempt. (See Trial Tr. at 83 (where the Department concedes that the masks are exempt).) In a similar vein, the process of cleaning the masks is an integral part of Guardian's manufacture of the automotive trim parts: the cleaning of the masks is done specifically for the purpose of properly applying electroplate to the parts. If Guardian did not "clean" its masks, Guardian would only be able to produce 15 to 50 marketable automotive trim components; the rest would be rejected by Guardian's customers and therefore rendered worthless. Simply put, the masks cannot be used continuously without cleaning. Thus, the mask processing equipment, essential and integral to the overall production of Guardian's automotive trim components, is exempt under Indiana Code § 6–2.5–5–3.
(Emphasis added).

Finally, the court provided:

Guardian acquired equipment and chemicals for direct use in its manufacture of automotive trim parts. As a result, it is entitled to claim an exemption from sales and use taxes under both the equipment exemption and the consumption exemption. See IND.CODE ANN. §§ 6–2.5–5–3 and 6–2.5–5–5.1.
Id. at 985.

In the course of the protest process, Taxpayer was able to provide sufficient documentation and analysis to establish that its purge materials serve the same function as the cleaning materials used in Guardian. Therefore, as provided by the tax court in Guardian, the purge materials are an integral part of Taxpayer's continuous production process and so are exempt under IC § 6-2.5-5-3 and IC § 6-2.5-5-5.1. With regards to the purge materials, Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c).