United States

Arkansas: Blast Freezing Not Manufacturing for Purposes of Reduced Sales Tax Rate for Electricity

Feb 29, 2016
From KPMG TaxWatch

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Recently, the Arkansas Department of Administration and Finance issued a legal opinion addressing whether a taxpayer qualified for the reduced sales tax rate for electricity purchased by a manufacturer. The taxpayer at issue, the operator of a cold storage and blast freezing facility in Arkansas, asserted that it was engaged in the final step of manufacturing its customer’s food products. Specifically, the taxpayer asserted that the manufacturing process was not complete until food products were blast frozen because federal USDA regulations required ready-to-cook products undergo blast freezing before they can be sold. This process stops microbial growth ensuring wholesomeness and adding shelf life to the product. Under Arkansas law, a reduced sales tax rate applies to electricity purchased and used by a manufacturer directly in the actual manufacturing process. Manufacturer is defined, in part, as someone engaging in an activity that falls within the North American Industry Classification System (NAICS) manufacturing classification. The taxpayer argued that it qualified for the reduced rate because it fell within the requisite NAICS code. The taxpayer also noted that other cold storage facilities were approved for the reduced rate on electricity.

The Office of Revenue Legal Counsel disagreed with the taxpayer’s position.   Although the taxpayer appeared to qualify as a manufacturer based on its NAICS code, in the Legal Counsel’s view, the electricity used in the blast freezing process was not used “directly” in manufacturing. Notably, the taxpayer’s blast freezing services were used to preserve and prevent spoilage of already finished food products. Thus, the Legal Counsel concluded that manufacturing process was complete by the time the products were blast frozen by the taxpayer. For more information on this Office of Revenue Legal Counsel opinion, please contact Brandon Fulmer at 214-840-2497.

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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.