Sales, Use and International Tax Activity Update - January 2012

Indiana "Chutes" Down Manufacturer's Claim to Exemption

The taxpayer claimed they were entitled to the manufacturing exemption on the purchases of "conveyor systems, chutes and repair parts used to move parts from one work station to another."

The taxpayer maintains that "off-fall" (scrap material) that results from its production process and which is moved via conveyers and chutes to hoppers where it is stored and eventually transported to shipping is itself a finished product.

In their request for rehearing, the taxpayer reiterates that it makes two types of products for sale, the scrap being one of them. Therefore, the taxpayer argues the conveyors and chutes used to move the scrap should be exempt because they are directly used in the direct production of scrap.

In addition to a DVD that depicted the process the taxpayer describes, they also presented sample customer quotes that show that some customers receive "scrap credits" as reduction in the price quoted to their customers. The taxpayer also showed that in an industry with very small margins, a significant percentage of its small profit margin comes from selling the "off-fall."

The DOR opinion is that while the taxpayer may sell the scrap, it is not a "product" manufactured by the taxpayer. The scrap is a by-product of the taxpayer's manufacturing process that is then sold in secondary markets -- however, the scrap is not an item that is manufactured by the transformation of component raw materials into a distinct product. Therefore, in this instance, the conveyor systems and chutes that are used to transport the scrap do not qualify for exemption.

Letter of Findings No. 04-20091023; Indiana Department of Revenue, December 28, 2011

Letter of Findings No. 04-20091023 can be found on the Indiana General Assembly website.

---

Subscribe to CyberTax News and receive the latest indirect tax news, including rate changes, rule updates, compliance issues, and more, delivered directly to your email.

Email Address