Revenue Finds Storage Racks Not Eligible for Manufacturing Exemption But Finds Replacement Parts Not Subject to Tax

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Taxpayer asserts that since it uses the "Pro-Lift racks" to store work-in-process, the racks qualify for the manufacturing equipment exemption. Specifically, Taxpayer states:

Taxpayer uses the racks to store all parts that [Taxpayer] has inspected to meet their customer's specifications. If the product does not meet specifications, [Taxpayer] either reworks the parts or must scrap the parts. The parts that [Taxpayer] inspects are not finished goods as they have not been packaged as required by [Taxpayer's] customers.

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In the instant case, Taxpayer is inspecting its product after production is complete. This is not the type of testing and inspecting that is considered part of the manufacturing process. Testing and inspecting completed products to see if it meets customer specifications is a marketing activity. Unlike the "quality control testing equipment" in the example, provided in the regulation, that has a functional interrelationship with the machinery on the product line and the product flowing in production; Taxpayer's production process is not changed as a result of the testing. In fact, as a result of the testing, Taxpayer's product is either shipped to the customer or rejected. Therefore, the storage of the product after production to be tested for marketing purposes is not the storage of work-in-process.
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Taxpayer asserts that various items purchased from "Columbus Industrial Equipment," "Arrow Industries," and numerous other vendors are all "repair parts" used to repair production equipment. Taxpayer maintains, "[it] purchased the parts and charged them to an account that [it] uses to track [its] space parts inventory." Taxpayer states that the Department's audit most likely subjected these items to tax because the items were in an account entitled "Maintenance–Tool Crib."

Pursuant to 45 IAC 2.2-5-8(h)(2), "[r]eplacement parts, used to replace worn, broken, inoperative, or missing parts or accessories on exempt machinery and equipment, are exempt from tax." Accordingly, a part purchased for the equipment would be tax exempt to the extent that the equipment is exempt.

Therefore, Taxpayer's protest to the imposition of use tax on "repair parts" is sustained in part subject to the results of a supplemental audit.

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Taxpayer asserts that the payments made for the quarterly service contract covering the coolant water system and the boiler water system qualify for exemption under 45 IAC 2.2-5-8. In effect, Taxpayer asserts that the property furnished under the maintenance agreement would be considered a repair or replacement part for the coolant water system and/or boiler water system.

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Taxpayer has provided sufficient information to establish the maintenance agreement would be exempt to the extent that the "Coolant Water System and Boiler Water System" are exempt from sales and use tax.

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http://www.in.gov/legislative/iac/20120425-IR-045120175NRA.xml.html