United States

Indiana: Equipment Used in Manufacturing Bottles Not Directly Used in Production

Oct 12, 2015
From KPMG TaxWatch

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In a recent Letter of Findings, the Indiana Department of Revenue determined that a taxpayer was not entitled to a manufacturing exemption for certain items purchased for use in producing glass containers. The taxpayer, an out-of-state glass manufacturer, produced and sold glass containers.  The Department audited the taxpayer and assessed additional gross retail tax (sales tax) and use tax. The taxpayer protested a portion of the assessment, arguing that it incorrectly paid sales tax on purchases and rentals of certain equipment used in the facility. These items included forklifts, diesel fuel for the forklifts, a back-up generator installed in a cooling tower, and repair parts and supplies.

Under Indiana law, machinery, equipment, and tools acquired for direct use in the direct production or manufacture of tangible personal property are exempt from sales tax. A departmental regulation clarifies that, to qualify for the exemption, a taxpayer must use the item during the production process, the equipment must have an immediate effect on the product, and the tangible personal property must undergo a substantial change due to the machinery or equipment. On review, the Department determined that forklifts used in the taxpayer’s facility were not exempt from tax because they were used to gather and move recycled glass from one area to another for use in a new round of production. In the Department’s view, this was a pre-production process, and therefore, the forklift was not directly used in production. Based on this determination, diesel fuel used to operate the forklift was also taxable. Similarly, the Department concluded that the back-up generator and repair parts were not essential and integral parts of the production process. The Department noted that the various items may very well be necessary, but that the taxpayer did not clearly establish that the items were directly used in the production of the taxpayer's glass products. Next, the Department addressed the taxpayer’s use of pollution control chemicals to treat water. Indiana law exempts items purchased for the purpose of complying with environmental quality standards. The taxpayer used the purchased chemicals to treat discharged cooling water at the manufacturing facility, and therefore, these items qualified for the environmental exemption. Please contact Alana Purvis at 612-305-5387 with questions on this Indiana Letter of Findings. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.