Aug 22, 2016
From KPMG TaxWatch
Recently, the Indiana Tax Court addressed whether a taxpayer was entitled to a refund of sales and use taxes remitted on certain purchases of equipment. The taxpayer at issue processed and sold scrap metal to steel manufacturers throughout the U.S. The taxpayer acquired metal by either purchasing retired assets, or performing services through related businesses, such as building demolition or environmental remediation, in exchange for the metal. The metal was processed using a seven-step process, which included such steps as identifying the location and chemical content of the metal, removing it from the asset in which it was originally used, removing contaminants such as concrete, brick and wood, and cutting, sorting and preparing the scrap to meet specifications of the customer. The taxpayer filed refund claims alleging that several items it used in the process were exempt from sales and use tax. The Department of Revenue eventually denied all the claims and the matter came before the tax court.
The taxpayer’s refunds were based on two exemptions- an exemption for equipment used in the “direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property” and an exemption for certain materials consumed in the direct production of other tangible personal property in a person’s business of manufacturing, processing, refining, etc. The two main issues before the court were whether (1) the taxpayer’s seven-step process came within the scope of the exemptions and (2) the taxpayer substantially transformed raw materials into new marketable products. The Department argued that because the taxpayer’s demolition activities were not specifically listed in the exemption statutes and were “inextricable” from its seven-step process, it was not engaged in production within the meaning or scope of either exemption as a matter of law. The court rejected this argument, noting that the lists of activities set forth in the exemption statute were illustrative, rather than exhaustive, and that it has always looked at a taxpayer’s entire process, rather than each individual activity, in determining whether an activity qualifies for the exemptions at issue. The court also rejected the Department’s position that no substantial transformation into a new marketable product occurred because the metal had the same intrinsic value and specific alloy content when it was part of a structure as it had after the taxpayer processed it. Based on expert testimony, the court concluded that the extracted metal was obsolete, valueless, and unmarketable until the taxpayer transformed it into scrap steel— a new marketable product— through its seven-step process. Accordingly, the court ruled in the taxpayer’s favor. Please contact Dave Perry at 513-763-2402 with questions on Brandenburg Industrial Service Co. v. Indiana State Department of Revenue.
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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.