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From cement to furniture manufacturers, following is a summary of September final determinations from the Indiana Department of Revenue regarding application of sales and use tax to various items of tangible personal property acquired and used as part of the production process.  The central questions often are (a) whether the items were used during production (as opposed to pre- and post-production) of tangible personal property or (b) whether the items had an “immediate effect” on the property being manufactured.

Concrete rulings:  misc. items acquired by a cement manufacturer – Letter of Findings No. 04-20130070 (2009-2011 tax years) (posted Sept. 25, 2013).  In a lengthy ruling, the Department addressed several issues raised by a cement manufacturer.  The Department explained:  “Taxpayer has two manufacturing locations, one that uses a dry kiln process . . . and one using a wet kiln process . . . .  These locations consist of quarries where stone is mined, delivered to the production areas, and through their kiln process is manufactured into cement.”  The Department observed that in creating the manufacturing exemption, see Ind. Code § 6-2.5-5-3, which applies the “double direct” test, the General Assembly “clearly did not intend to create a global exemption for any and all equipment which a manufacturer purchases for use within its manufacturing facility.”  The exemption “applies to manufacturing machinery, tools, and equipment directly used by the purchaser in direct production.”  (citing 45 IAC 2.2-5-8(a).)  The property must have an “immediate effect” on the item being produced. (citing 45 IAC 2.2-5-8(c).)   And property has an “immediate effect” when it becomes “an essential and integral part of the integrated process which produces tangible personal property.”  Id.  Property acquired for use in pre- and post-production activities is not exempt.  (citing 45 IAC 2.2-5-8(d).)  With this background, the Department concluded:

Contractor Services – The Department ruled that Taxpayer was not liable for sales tax on two transactions with a contractor for the installation of “heat detection systems,” because the contractor was liable for paying the tax on materials used in the lump sum contracts.  (citing 45 IAC 2.2-4-1, 45 IAC 2.2-3-7, 45 IAC 2.2-4-22(d)-(e), Sales Tax Bulletin 60.)  But Taxpayer was responsible for tax on the cost of materials furnished under a time and materials contract for the installation of smoke/heat detectors. (citing 45 IAC 2.2-4-22(d)(1).)

Jamming a printer?  Delivery charges, maintenance agreement, forklift, waste toner cartridges, and dehumidifier – Letter of Findings No. 04-20120284 (2008-2010 tax years) (posted September 25, 2013).  Taxpayer is a commercial printer.  The Department found:

Not digging the assessment – Letter of Findings No. 04-20130165 (2009-2011 tax years) (posted Sept. 25, 2013).  The Department ruled in part that equipment and machinery “used to construct or prepare a manufacturing site are not used in the actual production process.”  Consequently, Taxpayer’s rental of a digger to prepare a site for the eventual placement of exempt equipment and machinery was taxable.

No evidence, no exemptions – Letter of Findings No. 04-20130289 (2009-2011 tax years) (posted Sept. 25, 2013).  Taxpayer operated an Indiana manufacturing facility.  The Department observed that various protested items such as pallets, a machining/coolant system, propane, and “modular plug-in lighting” may have qualified for the manufacturing exemption.  However, there was “no independent documentation, explanation, or confirmation for Taxpayer’s position.”  Where support was lacking, Taxpayer’s protest was rejected.

Natural gas used for air makeup units by furniture manufacturer taxable –  Letter of Findings No. 04-20120432 (2009-2011 tax years) (posted September 25, 2013).  Taxpayer challenged the assessment of sales tax for purchases of natural gas, which Taxpayer asserted was used for air makeup units (AMUs). A 2011 study showed that 71% of the gas was used to heat the air being brought into the building by the AMUs.  Gas used for that purpose was taxable, the Department’s audit concluded.  Taxpayer responded:

The [AMUs] are responsible for maintaining the finishing room’s positive air pressure, which prevents dust and other particles from entering the rooms and settling on the freshly applied finish. The [AMUs] also control the temperature and humidity in the room, which increases the air’s capacity to absorb excess solvents. Without the temperature and humidity controls a condition called “blushing” would occur where the finish becomes cloudy and the product un-saleable.

Moreover, Taxpayer contended that it must “adhere within the finish manufacturer’s temperature requirements.”  Not exactly, the Department observed; the “Finishing Schedule” provides a temperature recommendation – not a requirement.  And the AMUs were not located in a closed room environment.  Air could travel from the finishing room to other parts of the plant.  Accordingly, “Taxpayer has not established that without the [AMUs] a final marketable product could not be produced.

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