Taxpayer is an Indiana corporation that specializes in fibercoating (flocking and coating) plastic, metal, paper and rubber substrates for various industries, including glove boxes and window trim for the automotive industry.
The Indiana Department of State Revenue ("Department") conducted a sales and use tax audit of Taxpayer for the years 2009 through 2011. As a result of the audit, Taxpayer was assessed additional use tax and interest on several items. Taxpayer protested one category of items – gloves – it claims are used in its production process.
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The Department's audit assessed use tax on gloves Taxpayer had purchased without paying sales tax on the presumption that these gloves qualified for the industrial production exemption. The Department's audit summary describes that "most employees did not wear these items all the time," which led to the conclusion that "whether or not the items were worn did not appear to have an effect on the product or the employees' safety." Various types of gloves were included in the assessment of use tax: nitrile medical gloves, brown jersey gloves, and gripped cotton gloves. Taxpayer protested that these gloves were used by employees to protect their hands from chemical adhesives and heat, and to protect the parts being produced from being marred and that the gloves therefore qualified for the industrial production exemptions.
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Taxpayer protested that its employees were required to wear the gloves for several reasons directly related to its direct integrated production process. The nitrile gloves protected its employees' hands from the adhesive used in its flocking process which if unprotected over time causes skin irritations. The brown jersey gloves are worn by certain employees to also protect their hands from 180 degree to 220 degree part temperatures and also because they do not mar the surfaces of the finished product. The gripped cotton gloves are worn by employees when handling tooling or materials with metal inners, fixtures, tooling and bands where the temperatures again vary between 180 and 220 degrees.
Taxpayer provided documentation including its company manual, material safety data and requirements, and visuals of its production process demonstrating the use of the gloves.
Taxpayer has presented sufficient documentation to show that the gloves are used in an exempt manner, and therefore the Department's audit incorrectly assessed use tax on the use of the gloves in Taxpayer's industrial production process.
